Offshore direct

An agreement between the EU and offshore jurisdictions provides a firm framework for developing future offshore business,says Anthony Dessain


Senior UK lawyers who may require the structures and specialist skills supplied through leading offshore jurisdictions have to remain vigilant to keep up to speed with the developments offshore. The volume of legislative changes is significant and never ending. The speed of change, meanwhile, has been accentuated by the pressure from Western governments and international bodies on the regulation of the global financial services industry, together with the increasing competition for business offshore.

In addition, legislative changes, such as the Companies Amendment (No 6) (Jersey) Law 2000, not only enhance the regulatory armoury in Jersey, but make the jurisdiction a more competitive place for attracting quality institutional and private client business. Similar revised legislation of the funds industry is imminent.

The moves that have taken place in the Channel Islands have helped to secure their long-term future as jurisdictions of choice for investors. But for practitioners already needing to keep abreast with developments in financial services legislation affecting the onshore environment, the offshore changes must also be absorbed.

One of the most important developments this year has been the signing of the EU Tax Package by the EU member states. Concurrent with this agreement in the EU, an accord was reached with a number of offshore dependent territories, including the Channel Islands and the Isle of Man.

It is important that this agreement is clearly understood by the many UK professionals that turn to offshore jurisdictions in support of some of their work. For example, if one relied on the report that followed in the national media, one might be under the impression that the agreement involves the implementation of a withholding tax on the savings of all offshore clients in centres such as Jersey and Guernsey. A report in one of the newspaper broadsheets failed to make it clear that this measure applied speci- fically to the savings of EU residents only.

To summarise the developments with the EU this year in respect of the offshore jurisdictions and their impact on financial services, it is first necessary to examine the actual agreement that has been struck.

On 3 June, EU Finance Ministers (Ecofin) announced an agreement on an EU-wide tax package comprising a new directive on taxation of savings income and the Code of Conduct on Business Taxation. The new savings directive aims to ensure taxation of interest payments made in one EU member state to individuals tax-resident in another EU member state. It proposes to do this by a system of automatic exchange of information between member states. Austria, Belgium and Luxembourg have agreed to delay application of the exchange of information provisions and apply a withholding tax instead – at a rate rising to 35 per cent over time – during a transitional period. Switzerland and some other non-EU states seem set to follow this approach.

Jersey and the other British Crown Dependencies of Guernsey and the Isle of Man are not part of the EU, nor are they subject to its fiscal legislation, so the new directive does not apply in these islands. However, the islands have reached agreement with the EU on this matter.

As part of its policy of constructive international engagement, the Jersey government has agreed in principle – subject to certain conditions and from 2005 – to track the Luxembourg and Switzerland approach. This means that from 2005 a natural person tax-resident in an EU member state wishing to receive interest from a Jersey resident paying agent will need to agree to an information exchange between Jersey tax authorities and the tax authorities of their member state (the term ‘paying agent’ is defined in the directive, and may include the debtor itself). If such an individual does not agree to this information exchange, the Jersey paying agent will be required to withhold an amount at the set rate from any interest payment to the individual. It is, of course, crucial to stress that these proposals do not apply to interest payments to corporate bodies or non-EU resident individuals.

In the context of structured finance transactions, it is important to note that, even in the relatively rare instances where an EU tax-resident natural person will receive an interest payment from a Jersey paying agent, the applicability of a withholding tax is, in effect, optional. Moreover, in many structures the paying agent will be outside Jersey and there will be no withholding applicable to the payment to a paying agent by the Jersey debtor in any event.

The second limb of the tax package is the Code of Conduct. Through this code, the EU seeks to roll back tax measures that may be perceived as discriminatory. The Jersey government – which has a firm commitment to sustaining and promoting Jersey as a pre-eminent financial jurisdiction – has agreed to cooperate and the EU has supported the island’s timetable for implementing changes. The key aspects are that Jersey will, by 2008, remove certain tax treatments perceived as discriminatory, in particular, by reducing the general rate of corporate tax to zero and closing the exempt company regime, so preserving its benefits under a revised fiscal structure.

Companies will be permitted to apply for exempt category status until the end of 2008. Thereafter, the exempt company regime will be abolished and replaced by the general zero rate of corporate tax, with a higher but competitive rate for certain companies, such as those in financial services. The overall effect of this move will be to preserve the tax neutral platform associated with exempt companies. The International Business Company (IBC) regime is also to be phased out by 2011. Companies may continue to apply for IBC status until the end of 2005. Thereafter no new applicants will be permitted.

The EU agreement followed just over a year after the islands reached a similar accord with the Organisation for Economic Cooperation and Development (OECD). Under this agreement, Jersey and other jurisdictions have provided a commitment to exchange information on tax matters, but once again, subject to the level playing field principle.

Clients’ financial affairs will remain confidential under the arrangement, which will involve the Jersey authorities providing other tax authorities with specific information in accordance with separately negotiated agreements with individual countries if those details are relevant to civil tax matters. In addition to these agreements, regulators in offshore jurisdictions are reaching agreement with other regulators in the global fight to root out the perpetrators of financial crime.

These developments reflect a sea change in the relationship between international bodies, Western governments and the authorities of the leading offshore jurisdictions. Whereas a few years ago, we would be reflecting on issues that had to be resolved and uncertainties about the future direction of the offshore finance industry, the recent agreements with most of the major centres have provided a solid framework for the future of the offshore business. Equally important, there is a greater realisation of the high standards that exist already in centres such as Jersey and a willingness to involve senior offshore practitioners, at the OECD for example, in the practicalities of measures designed to eradicate harmful tax practices.

These developments have also increased the status of the island in that traditionally, the island authorities have communicated with or through the UK Government whereas they are now exercising direct access with other sovereign states for the purpose of reaching appropriate arrangements. This gives Jersey an enhanced political and economic advantage, a seat at the table and an ability to put forward a case. At the same time, the traditional links with the UK remain in place.

Anthony Dessain is senior partner at Bedell Cristin, Jersey