Unique route for offshore vehicles
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24 February 2014
The use of Isle of Man vehicles in international business is becoming increasingly popular. Richard Vanderplank reports. Richard Vanderplank is a partner at law firm Cains.
Over the past few years, the Isle of Man has seen a steady growth in the number and value of international financing transactions that use corporate and other vehicles.
The Isle of Man has for some time had a track record in aircraft and vessel leasing. Now, not only has this type of work expanded further, but new areas have developed.
Manx companies are regularly used by international concerns as holding vehicles through which to structure financing transactions, whether for asset acquisitions (such as aircraft or vessels), or for complex securitisations.
A full range of asset financing arrangements are undertaken through the Isle of Man, including debt and equity offerings in capital markets around the world, most notably in the US.
The growth in the volume of this sort of sophisticated corporate-based financing work confirms the emergence of the Isle of Man as a leading jurisdiction for the conduct of international business.
The reasons for this development are numerous and reflect the flexible approach of the Manx authorities to the use of corporate vehicles.
A theme running through recent developments is the attempt to correct some of the myths surrounding credible offshore jurisdictions such as the Isle of Man.
The island belies traditional misconceptions of what constitutes and characterises "offshore". And, although tax neutrality is a feature of most financing transactions on the Isle of Man, the island is not a tax haven but rather a jurisdiction and financial centre; it differs significantly from centres like London in scale rather than in quality.
The Isle of Man is not just socially, culturally and economically diverse. It can take advantage of its size to offer a comprehensive, flexible, commercially aware regulatory environment, with a sound professional infrastructure which offers a range of high-quality services at a competitive cost.
Its financial sector has strength in the depth of its international firms of accountants.
The diverse Manx legal profession, strengthened by the import of expertise from other jurisdictions, has been able to respond to the challenge of international business while retaining its integrity as an indigenous profession.
Overseas banks and investment houses are also well represented in the island.
The similarity between the laws of the Isle of Man and those of England and Wales means that professionals especially those from other common law jurisdictions feel comfortable dealing with Manx structures.
Essentially, Manx law is creditor-friendly and affords rights on insolvency similar to those available in England, particularly in relation to set off. It recognises the concept of a trust and the gamut of common law security interests, including, for example, floating charges.
The recent clarification of the Chargecard ruling in England has been noted with interest in the Isle of Man. English case law is considered highly authoritative in the Isle of Man, so it was felt that the Chargecard ruling cast too much doubt on an important security instrument for use in international financing transactions.
Accordingly, the Law Reform (Miscellaneous Provisions) Act 1996 was passed by Tynwald (the Manx parliament) to make it clear that charge-back arrangements in relation to bank accounts were valid security interests.
This is another manifestation of the flexibility of the Isle of Man authorities. Not only are they helpful on a micro level, offering guidance and assistance on a case-by-case basis, but on a macro level they are willing, in particular, to pass facilitative legislation where this is felt to assist in attracting high-quality international business to the island.
They are prepared to introduce wholly new types of structure and they are willing to adapt and develop existing structures to encourage their use in new situations.
An example of the former is the Limited Liability Companies Act 1996. This Act introduced a new type of corporate vehicle the limited liability company (LLC). An LLC is a separate legal entity which can sue and be sued in its own name, in the same manner as a regular limited company.
The liability of the members of an LLC is limited to the amount of capital each has agreed to contribute. However, the membership interests and capital structure of an LLC are more akin to those of a partnership than those of a company in particular, an LLC is fiscally transparent, the profits of the LLC being treated as the income of the members for the purposes of income tax.
The LLC was originally aimed at the US market (hence the particular nature of its tax treatment) and transatlantic business has duly grown, but the flexibility of the LLC has proven advantageous in other circumstances.
LLCs have been useful in aircraft financing transactions where they can be used to acquire and lease a plane, the lenders taking membership interests in the LLC. A membership interest can, of course, be charged.
An LLC may either be managed by the members themselves, in the manner of a partnership, or by means of delegation to a manager.
This offers flexibility of decision-making, but professionals have discovered that the legislation requires careful consideration to ensure that due corporate authority and execution subsist in all cases.
The availability of local legal advice is essential, both in this regard and also in order to ensure the validity and the enforceability of the complex sale, leasing, lending and security documents underlying a transaction.
Although the Act is modelled on equivalent legislation found in the US state of Wyoming, LLCs have their origins in continental Europe.
This serves to emphasise that new vehicles such as LLCs are not merely obscure, quirky offshore structures. While the Isle of Man remains a resolutely common law jurisdiction, it is also an eclectic one and, in the interests of facilitating new business and being competitive, it has shown itself to be prepared to draw on the experiences of a range of jurisdictions.
This is further illustrated by the development of laws to facilitate the redomiciliation of companies to and from the Isle of Man.
Legislation already exists in respect of captive insurance companies and provisions are in the pipeline in relation to listed companies. Redomiciliation cuts across common law principles, but is a concept that already exists on the continent.
The flexibility of the Isle of Man is further illustrated by the enactment of the Purpose Trusts Act 1996. The options available when choosing a single purpose vehicle are not restricted to corporate and partnership-type entities.
Previously, Manx law mirrored that of England: only charitable purpose trusts were possible. However, following the introduction of the 1996 legislation, trusts can now be created to fulfil a specified commercial purpose as well as to benefit a traditional beneficiary or class of beneficiaries.
A purpose trust is established when a trustee receives property from a person and holds and distributes the property in accordance with a fiduciary obligation to administer the trust property in fulfilment of the stated purposes. These trusts have been popular in relation to off-balance-sheet financing, among other things.
The aforementioned willingness of the Isle of Man authorities to introduce new angles on existing structures to make them more attractive is illustrated by the use of limited partnerships as joint ventures and asset financing vehicles.
Their use in these ways has been promoted as a result of the willingness of the Manx authorities to provide a neutral tax environment in cases where the limited partners, assets and income of an international limited partnership are all (subject to a few limited exceptions) located outside the Isle of Man but the business is managed by a general partner on the island.
It is worth noting that under Manx law, it is possible for a limited partner to withdraw or redeem his interest during the life of the partnership, without exposing himself to unlimited liability (subject to compliance with certain procedures designed to establish the solvency of the partnership at the same time).
In addition, the extent to which a limited partner can participate in the partnership business without losing his limited liability status is clarified in the recently amended Manx legislation.
By communicating with local businesses and professionals who are in tune with the needs of the international business community, the Manx authorities have been able to respond to legitimate, commercial demands and help provide flexible vehicles for use in international financing.
The small scale of the island means that attracting good quality, high-value work has a proportionately large benefit, hence the willingness of the Manx authorities to consider new ideas and to co-operate with businesses on an individual basis.
Together with with the high-quality professional advice and assistance which is available locally, this all means that the Isle of Man is fast gaining a reputation as one of the best jurisdictions in which to establish vehicles for international transactions.