Japanese investors: How to choose the right jurisdiction for fund structures

Deciding where to locate an offshore fund is similar in many ways to deciding which restaurant to go to for a special occasion. The final experience being made all the better by doing your research first. To guarantee the best experience consideration should be given to how long the establishment has been in business, their reputation and location. A similar thought process is needed when deciding on an appropriate jurisdiction for an offshore fund. Giving due consideration to the question of jurisdiction is key as this may well affect a number of fundamental matters related to the fund, such as the level of regulation, the tax position, the choice of service provider and importantly, the ability to attract investors into the fund.

Stable governments usually lead to strong local economics

Typically fund structures have an average lifetime of between three and 20 years which makes choosing a suitable jurisdiction with a stable government all the more critical.  A strong, stable local government has an important role to play. Not only does it support the regulator and sets the environment for the tax and fees due on the offshore investment vehicles but it also plays a key role in building relationships with the financial world in terms of information exchange, best practices and signing up to relevant tax treaties. 

For many offshore jurisdictions the financial services sector is seen as a major contributor to GDP and a significant factor in their ongoing economic health and well-being. Stability is therefore key as changes in government can bring uncertainty for the offshore structure. For its part, the local government not only needs to ensure the jurisdiction has the expertise to meet the growing number of international regulatory and tax protocols that are becoming increasingly more complex but also keeping the level of annual filing fees competitive lest they risk making themselves less attractive. 

Different locations offer different types of assets

Offshore finance centres very often have close ties with mainland jurisdictions with many having historical links spanning hundreds of years.  In this instance, it’s a case of the well-trodden path being the most beneficial all round. For example, buying property in the United Kingdom has long been considered a popular asset class.  Investors buying property from overseas will typically use an offshore structure to hold the assets.  In theory, the jurisdiction of the offshore structure could be in any number of locations however in practice, the majority of UK properties, purchased from overseas, are held in Jersey and Guernsey structures both of which are considered efficient in terms of tax and fees.

Both jurisdictions boast stable governments and strong regulators but in our experience it is largely the practicalities associated with these jurisdictions that make setting up structures quick and efficient to do. Another advantage is the fact that UK based lawyers, who traditionally advise on the purchase of these properties, are accustomed to working with their Jersey and Guernsey counterparts with all parties familiar with the template documents required by the relevant legislation, reducing the time and cost associated in drafting the various documents required. The local service providers, such as administrators, bankers and auditors, have an extensive history working on these particular asset-classes and they have staff with the expertise to understand the specific requirements.

For similar reasons of historical familiarity, when buying assets in North America, Delaware or indeed many Caribbean jurisdictions are amongst the most frequently used.  Some of these offshore jurisdictions specialise in particular sectors. For example, Bermuda is considered an offshore hub for insurance structures and has extensive knowledge with both the local service providers and the regulator.

For publically offered funds in Japan, both Cayman and Bermuda have included rules in their local funds legislation that include the main requirements of the Japanese Securities Dealers Association (the “JSDA Regulations”) allowing funds domiciled in these jurisdictions, that comply with the local legislation, be made available for sale to the Japanese public.  It is also not by chance that the main Cayman and Bermudan law firms have a local presence in Asia and are familiar with working with Japanese law firms.

Similarly, European assets are increasingly being held in Luxembourg or Irish structures.  These European structures usually bring with them the regulatory requirements of the Alternative Investment Fund Managers Directive (AIFMD).  A fully AIFMD compliant fund can be attractive, however, there is a cost for servicing the fund with increased complexity.

The structure – tax and fees

  • Tax - A benefit of an offshore fund is that the pooling of assets is itself not a taxable event.  The aim of the fund is to be as near to tax neutral as possible, with the relevant taxes settled in the country where the assets are located and the tax paid by the investor upon return of income on their capital.  To achieve this aim, the offshore jurisdiction needs to have the applicable taxation agreements in place to reduce withholding tax that may be applied.
  • Annual filings fees - The major offshore financial centres derive a large portion of their income from the financial sector.  Their income is both from local filing fees and the employment of many residents in the financial service. 

Investor preference

In 2016, for publicly offered funds in Japan using offshore structures, circa 94% of the total assets under management were invested in Cayman domiciled funds.  The Japanese market is familiar and clearly comfortable with Cayman as a preferred offshore jurisdiction and sees little reason to choose an alternative place to domicile such funds. Ultimately, investors need to be comfortable with the offshore jurisdiction selected for the relevant fund and this is fueled largely by investor-familiarity, stability, flexibility, cost and operational advantages.

Expect Moore

At Moore we service structures in most offshore jurisdictions.   If you’d like to discuss further, please do not hesitate to contact me:

E: andrew.pittom@mooremanagement.com

T: +81 3 6441 0570

 

 

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