Jersey is a major international finance centre and has more than 50 years' experience in structuring, managing and administering funds. It is one of the premier offshore jurisdictions for the establishment of investment funds and other investment structures.
Jersey offers an attractive combination of stability, effective but proportionate regulation, and tax neutrality. Jersey is also highly regarded for its exceptionally high standards of service and governance, and the quality of its legal, administrative and other service providers.
Alternative investment funds activity forms a significant part of Jersey's finance industry and a range of products and structures are available to suit all types of investor and promoter.
Although all types of funds are established in Jersey, in more recent years it has built a leading reputation as a specialist centre for the alternative asset classes, including in particular, private equity, real estate, debt, infrastructure and hedge funds. Alternative funds currently account for just under 85% of Jersey's overall funds business.
Alternative investment funds are generally formed as limited partnerships, companies (including cellular companies) or unit trusts, or some combination of these.
Private equity and infrastructure funds are typically established as Jersey limited partnerships, often with a Jersey company as the general partner (or alternatively, a further Jersey limited partnership acting as a general partnership/limited partnership – GPLP).
Real estate funds are often structured as Jersey companies or Jersey unit trusts, but may also be structured as limited partnerships.
Hedge funds tend to be structured as Jersey companies or unit trusts.
There is no typical structure used for debt funds; they may be structured as Jersey companies, unit trusts or limited partnerships, depending on what best suits the fund's intended characteristics.
Jersey's regulator, the Jersey Financial Services Commission (JFSC), has a strong international reputation as a reliable, effective and proportionate regulator.
The regulatory regime for alternative funds in Jersey aims to meet all relevant international standards and provide simplicity and certainty, whilst also allowing for flexibility. The regime provides a variety of options for alternative funds, allowing for investment and operational flexibility, and avoiding any need for complex tax structuring.
The main regulatory distinction for Jersey alternative funds is between those categorised as Private Funds (50 or fewer investors) and those categorised as Public Funds (more than 50 investors). There are then different "product classifications" of Public Funds. A separate regime also exists for non-fund investment vehicles, which often form part of alternative investment structuring.
All Private Funds are subject to the regime set out in the Jersey Private Fund Guide issued by the JFSC, which includes "fast-track" approval via a self-certification process led by the fund administrator.
The Jersey Private Funds regime can accommodate vehicles formed for a small number of co-investors (including "club" arrangements) as well as funds marketed to a wider group (typically by private placement) – up to a maximum of 50 investors.
There is considerable flexibility in the way such funds can be structured and operated.
Jersey Private Funds can be established as any type of vehicle (companies, partnerships, unit trusts), as Jersey or non-Jersey vehicles (eg, as an English limited partnership for which a Jersey company acts as general partner), and can be closed-end or open-end funds.
No offering document is required, but one may be produced if desired. An investment warning must be provided to and acknowledged by investors (typically in subscription documentation).
There are no restrictions on investment or borrowing, a Jersey-based governing body is not required, and audited accounts are not required.
A Jersey Private Fund cannot be listed on a stock exchange.
Non-fund Investment Vehicles
The scope of Jersey's regulatory regime is such that certain investment vehicles fall outside the scope of funds regulation, allowing them to be established as non-fund investment vehicles. Application must be made to the JFSC to establish such vehicles, as is the case for all incorporations in Jersey, and information must be provided on the activities of the vehicles and their beneficial ownership, but they are not subject to active ongoing regulatory supervision. Such vehicles can include proprietary or holding vehicles, joint ventures, or securitisation vehicles. Family arrangements and employee incentive arrangements are also outside the scope of the funds regime.
Public Funds are typically used where more than 50 investors are anticipated. The regulatory regime for Public Funds is sub-divided into various classifications, ranging from those which are lightly regulated to those which are highly regulated, as described below.
Notification Only Eligible Investor Funds
Notification Only Eligible Investor Funds (Notification Only EIFs) are funds that would be categorised and regulated as Public Funds, but for the fact that they fall entirely outside the regulatory regime applicable to Public Funds on the basis that they are reserved for "eligible investors" which, among other things, includes those who agree to contribute not less than USD1 million, or its currency equivalent, for securities in the fund.
Prior approval from the JFSC is not required in respect of Notification Only EIFs, with the JFSC requiring only to be notified of the establishment of the fund.
Such funds may be open or closed-end and may be structured as a Jersey company, a Jersey registered limited partnership or a unit trust. There are no requirements to appoint a Jersey-based manager or administrator, or Jersey-resident directors.
Except in the case of general partners of Jersey limited partnerships or trustees of Jersey unit trusts, any Jersey-resident services provider to the fund must be licensed by the JFSC to conduct fund services business in relation to the fund. There is no requirement to appoint a custodian in relation to the assets of a Notification Only EIF.
The offering document must contain a prescribed investment warning to investors, but no other disclosure is required.
As this type of fund is not subject to the prior approval of the JFSC, the offering of securities in the fund may commence immediately upon the execution of the fund documents. The timing for the launch of the fund is, therefore, entirely in the hands of the fund's sponsor.
Notification Only EIFs are not compliant with the Alternative Investment Fund Managers Directive (AIFMD). As such, they avoid the regulatory overlay imposed by AIFMD-compliance, but cannot be marketed to investors in the EU.
Jersey Eligible Investor Funds
A Jersey Eligible Investor Fund is one which complies with the requirements of the Jersey Eligible Investor Fund Guide issued by the JFSC.
Jersey Eligible Investor Funds can only be marketed to "eligible investors". Among other things, this includes any person committing to invest at least USD1 million (or its currency equivalent) in the fund.
Jersey Eligible Investor Funds are regulated by the JFSC, but are subject to fewer constraints than other regulated Public Funds (see below).
There are limited disclosure requirements in respect of offering documents and Jersey Eligible Investor Funds are established on the basis of 'self-certification' by the Jersey-based administrator or manager (the 'monitoring service provider') that the fund qualifies as a Jersey Eligible Investor Fund.
The monitoring service provider will be responsible for monitoring the fund's compliance with the requirements of the Jersey Eligible Investor Fund Guide and the fund's investment and borrowing restrictions.
An Expert Fund is one which complies with the requirements of the Jersey Expert Fund Guide issued by the JFSC.
An Expert Fund can only be marketed to "expert investors". Among other things, this includes any person committing to invest at least US$100,000 (or its currency equivalent) in the fund.
Expert Funds are regulated by the JFSC, but are subject to fewer constraints than Unclassified Collective Investment Funds (see below).
There are limited disclosure requirements for Expert Fund offering documents and they are also subject to "self-certification" by the Jersey-based administrator or manager (the "monitoring service provider") that the fund qualifies as an Expert Fund.
The monitoring service provider is responsible for monitoring the fund's compliance with the requirements of the Jersey Expert Fund Guide and the fund's investment and borrowing restrictions.
A Listed Fund is one which complies with the requirements of the Jersey Listed Fund Guide issued by the JFSC.
The fund must be a closed-end corporate fund, listed on one of the recognised stock exchanges or markets set out in the Jersey Listed Fund Guide.
Unlike Expert Funds, there are no investor eligibility criteria attached to Listed Funds, but they are otherwise identical to Expert Funds in terms of structural requirements.
Listed Funds are regulated but are subject to fewer constraints than Unclassified Collective Investment Funds (see below).
Unclassified Collective Investment Funds
Where a Public Fund does not qualify under one of the other regulatory classifications for Public Funds (as described here), the fund will be subject to standard supervision by the JFSC.
This means that, at the time of application for regulatory approval, the JFSC will undertake a detailed assessment of the suitability of both:
Unclassified Collective Investment Funds are also subject to additional ongoing obligations in terms of JFSC notifications and consents. For example, there may be no material change to the fund or its constitutive documents or material agreements without the prior consent of the JFSC.
Jersey Private and Public Funds Marketed in the EU
Jersey Private Funds to which the AIFMD regime applies and which are to be marketed to investors in the EU (via the national private placement regimes) must, in addition to the usual regulatory approval required by Jersey Private Funds, seek an AIFMD-specific approval from the JFSC, which takes 10 days.
Jersey Public Funds to which the AIFMD regime applies and which are marketed to investors in the EU (via the national private placement regimes) are exempt from the requirement to seek an AIFMD-specific approval from the JFSC on the basis that, as a Public Fund, they are already regulated by the JFSC to the required standard.
Jersey funds can originate loans, without any restrictions.
There are generally no restrictions on the assets that a Jersey fund may invest in, and a number of Jersey funds invest in cryptocurrencies and other non-traditional assets such as works of art, classic cars or fine wines.
The JFSC authorised the world's first regulated Bitcoin investment fund. Early on, the JFSC identified that involvement in initial coin offerings or crypto exchanges, or providing other services relating to cryptocurrencies, presented both opportunity and risk to managers, investors and service providers. Accordingly, a specific set of regulatory rules in relation to cryptocurrencies has been developed, in order to provide a well-regulated environment and offer quality assurance for both managers and investors.
Pursuant to the policy, the JFSC will seek to fully understand any risk factors associated with a fund that will be involved with cryptocurrencies and will undertake a process of assessment before the fund can be established.
Jersey's most commonly used fund products are those targeted at professional or experienced investors, or those who have invested with the benefit of professional advice. For those types of funds, the JFSC applies a streamlined regulatory approval process. For Jersey Private Funds the application timescale is two working days.
For most Public Funds (ie, Expert Funds, Listed Funds and Eligible Investor Funds) the timescale is three working days. For Unclassified Collective Investment Funds, the regulatory approval timescale is 20 working days.
Where an AIFMD-specific approval is also required from the JFSC (see 2.3 Regulatory Regime), the timescale for that approval is five working days.
In the case of a Notification Only EIF, no regulatory approval is required.
There is no requirement for a Jersey investment manager to be appointed to a Jersey fund.
For Jersey Private Funds there is no requirement for the fund's governing body to have Jersey-resident directors. That said, the JFSC would ordinarily expect, in the majority of cases, for one or more Jersey-resident directors to be appointed. Where the fund is marketed in the EU, there may be a requirement to have Jersey-resident directors in some instances.
For most Public Funds, the fund's governing body must have at least two Jersey-resident directors. If the fund is structured as a limited partnership it must have a Jersey-based general partner. If it is structured as a unit trust, it must have a Jersey-based trustee.
Jersey funds that are self-managed (ie, no separate investment manager is appointed) are subject to Jersey's economic substance requirements. Staff and physical premises form a part of those requirements, but the rules allow for this substance to be provided by a local corporate services provider. Otherwise, there is no requirement to maintain local premises or hire local employees.
All Jersey funds require the appointment of a Jersey-based administrator and a compliance officer, money-laundering compliance officer and money-laundering reporting officer (usually provided by the fund administrator).
A Jersey-based custodian is required for all open-end Jersey Public Funds. Jersey Private Funds are excluded from this requirement.
Non-Jersey fund service providers appointed by Jersey funds are generally not subject to any Jersey regulatory requirements. The Jersey regulatory regime only seeks to regulate service providers that are either incorporated in Jersey or provide their services in or from within Jersey.
Promoters of, and investment managers appointed to, Jersey funds are expected to meet certain minimum suitability criteria. For example, an investment manager should have a clean track record in terms of having had no disciplinary sanctions or relevant convictions.
For Jersey Private Funds no approval of the promoter/sponsor of the fund is required, but the "designated service provider" to the Jersey Private Fund (in practice, the administrator of the fund) is required to undertake due diligence on the promoter/sponsor.
For most Public Funds (Expert Funds, Listed Funds and Eligible Investor Funds) the investment manager must be:
For Public Funds offered to the general public, the promoter/sponsor needs to be approved by the JFSC based on considerations such as track record, reputation and financial resources.
Jersey offers tax neutrality for funds, without any necessity for complex tax structuring. All types of investment funds established in Jersey can benefit from the absence of any Jersey income tax on non-Jersey-source investment income and profits.
Jersey has a general zero corporate tax rate for funds. As a result, funds established as companies will pay no Jersey income tax and there is no requirement to withhold tax on interest or dividends payable by such corporate funds.
In relation to unit trusts established in Jersey, no assessment to Jersey income tax is raised in respect of investment income or profits arising from non-Jersey sources or from bank deposits held by such unit trusts in Jersey.
Limited partnerships are tax-transparent vehicles and are not, therefore, subject to Jersey income tax. Non-Jersey resident investors in a Jersey limited partnership do not pay any Jersey tax in respect of non-Jersey-source investment income or profits, or in respect of interest on bank deposits held by the partnership in Jersey.
Jersey's tax-neutral environment (see 2.11 Tax Regime) does not rely on tax rulings, exemptions and deductions, hybrid financing or double-tax agreement (DTA) networks.
However, Jersey has entered into approximately 15 full double-tax agreements with other countries and 12 partial double-tax agreements.
It is very common for Jersey funds to use subsidiaries for investment purposes. Investments are often held in separate special purpose vehicle (SPV) subsidiaries in order to:
Promoters/sponsors from around the world use Jersey as a centre for alternative investment funds.
Often, the promoters/sponsors of Jersey funds are based in jurisdictions such as the UK, mainland Europe, the Nordic countries, the Middle East and Far East, as well as the USA.
Jersey funds can work well for investors from many jurisdictions. Often the investors in Jersey funds are based in the same jurisdictions as mentioned for promoters/sponsors in 2.14 Origin of Promoters/Sponsors of Alternative Funds.
Jersey funds make investments in assets all over the world, both in mature jurisdictions and in emerging markets. Historically, UK and European investments have featured heavily (including real estate and private equity investments made by UK-based promoters and sponsors), but Jersey funds are used globally to invest in Asia, the USA, Africa, South America and others.
Jersey's alternative funds industry is evolving to respond to international trends. Headline trends for Jersey alternative funds are as follows:
The international growth of the alternative investment sector is reflected in Jersey, where assets under administration continue to increase.
Environmental, social and governance considerations are increasingly important. Jersey has been a leader as a governance jurisdiction, and is responding to the demand for the triumvirate of ESG with new and better-defined service offerings delivering ESG reporting to meet the demands of managers and investors.
Dealing with Complexity
Fund structures are becoming increasingly tailored to the specific requirements of fund promoters, and investors, and are being adapted to respond to the increasingly complex international tax, compliance and reporting environment. Jersey's ability to deal with complexity is one of its strengths.
There is a focus on transparency from both managers and investors, and for regulatory and tax purposes. As a stable jurisdiction which follows international standards, transparency is a key part of Jersey's alternative funds environment.
As funds and reporting have become increasingly complex, technology and digitisation have come to the fore. Many service providers now offer technology-based solutions, including automation and web-based platforms.
Change and Adaptation
Reflecting all of the above, legal, regulatory and operational innovation continues, with laws, regulations, structures and service offerings being adapted to respond to market needs.
Different levels of reporting to the local regulator (the JFSC) apply, depending on the level of regulation of the fund.
For Private Funds, the focus is on statistical reporting, along with fundamental requirements driven by anti-money laundering regulation, disclosure of ownership and tax reporting requirements.
For Public Funds, certain products have higher reporting requirements, and in some instances require regulatory approval in respect of material changes to the fund. The requirements depend on the nature of the product: eg, Expert Funds require notification of certain matters, whilst Public Funds offered to the general public have stricter requirements, including certain requirements for regulatory pre-approval.
As a responsible international finance centre, Jersey follows international rules. A number of international initiatives which have cross-border impact (eg, FATCA, CRS, AIFMD) have also led to reporting requirements. For example, Jersey funds which are marketed in the EU under the national private placement regime must follow the AIFMD Article 42 transparency reporting requirements (ie, annual reports, pre-investment disclosure and regulatory reporting on liquidity, risk management and leverage).
Jersey is contemplating introducing a new law which will put on a statutory footing the current obligation to provide (on a confidential basis) beneficial ownership information to the JFSC. The new law also envisages information in relation to significant persons (company officers) being made available on a public record.
Any anticipated changes are referred to in the previous sections.
Fund managers based in Jersey tend to structure themselves as Jersey companies or, less commonly, as limited partnerships or LLPs.
A number of Jersey funds are "self-managed" funds, with investment advisory services being provided to the fund from outside Jersey.
Managers of Private Funds
Jersey-based managers of Jersey Private Funds are often exempt from the need to be regulated in respect of their services to the fund, on the basis of statutory exemptions for funds where access is restricted to "professional investors".
However, where a Jersey-based manager acts as the alternative investment fund manager (AIFM) for a Jersey Private Fund that is marketed in the EU (as an alternative investment fund or AIF), the manager must be approved by the JFSC or, if the AUM of the AIFs managed exceeds EUR500 million (or EUR100 million where the AIFs use leveraging), licensed by the JFSC as a "manager of an AIF" and will be subject to additional AIFMD-specific regulatory requirements.
Managers of Public Funds
Jersey-based managers of Public Funds are required to hold a fund services business licence from the JFSC (see 3.7 Local Substance Requirements).
Jersey-based managers of Public Funds that are marketed in the EU are exempt from any additional AIFMD-specific JFSC approvals on the basis that they are already regulated by the JFSC for fund services business. They will, however, be subject to additional AIFMD-specific regulatory requirements.
Fund managers that are incorporated or tax-resident in Jersey are subject to a zero corporate tax rate. For individuals who are tax-resident in Jersey, there are low personal income tax rates (20%) and no capital or inheritance taxes.
Non-Jersey incorporated companies (including funds or fund managers) could become tax resident in Jersey if they are "managed and controlled" in Jersey, but a zero corporate tax rate applies in respect of funds and fund management activity, so there should be no tax payable in Jersey.
Accordingly, a fund, whether established in Jersey or in another jurisdiction, will not become liable to pay Jersey taxation simply by virtue of having appointed a Jersey-based manager, irrespective of whether the manager has a "permanent establishment" in Jersey.
Jersey applies the same principles of management and control as those applied in the UK, whereby an entity's central management and control is broadly determined by the location where high-level strategic decisions of the company are made.
A Jersey-based management entity will not pay tax in Jersey, whether in respect of investment management fee income, or carried interest.
A Jersey-based manager can outsource its investment functions and business operations, provided that the outsourcing complies with the JFSC's Outsourcing Policy. That policy is based on the fundamental premises that:
The JFSC does not expect a fund manager outsourcing to an investment manager to comply with the Outsourcing Policy if:
The disclosure must make the following clear and unequivocal, in a manner that is suitable to the level of the fund’s investors’ financial sophistication:
There are no substance requirements for a Jersey-based manager to Jersey Private Funds.
A Jersey-based fund manager that requires a licence from the JFSC (ie, where it is acting as a manager of Public Funds) may either be established with a "full presence" or, quite commonly, as a "managed entity".
A full presence manager will need to have fully staffed premises of its own in Jersey, whereas a managed entity operates in Jersey using the services of an administrative service provider that is physically located in Jersey and has been licensed by the JFSC to act in the capacity of manager of a managed entity.
In either case, the manager must maintain, and be able to demonstrate the existence of, both adequate financial resources and adequate insurance. Typically, this means having paid-up share capital and non-distributable reserves, and a minimum net assets position, of not less than GBP25,000 and professional indemnity insurance (PII) extended to include fidelity guarantee insurance and director’s and officer’s insurance.
Non-Jersey fund managers appointed by Jersey funds are generally not subject to any Jersey regulatory requirements. The Jersey regulatory regime only seeks to regulate service providers that are either incorporated in Jersey or provide their services in, or from within, Jersey.
Jersey funds are popular with many types of investors who typically invest in alternative funds, including:
A number of Jersey's fund products (eg, Jersey Private Funds, Expert Funds) are intended to be available only to professional or expert investors. Those products, and equivalent non-Jersey funds, may only be marketed in Jersey to the appropriate class of professional or experienced investors, or those who have taken appropriate professional advice.
Funds designed to be marketed to the general public may be marketed to the general public in Jersey, but non-Jersey funds may need to apply for regulatory consent in Jersey prior to commencing marketing in Jersey.
The consent of the JFSC may be required in order to market a non-Jersey alternative fund in Jersey. If so, the JFSC will want to satisfy itself that the fund and all other entities associated with the offer are acceptable to the JFSC.
The JFSC will require that the offering document meets generally accepted international practices in providing information to prospective investors.
The JFSC's consent is not required if:
Jersey-based investors can invest in alternative funds established in Jersey in exactly the same way as non-Jersey investors.
There may be an obligation to obtain the consent of the JFSC before marketing a non-Jersey alternative fund in Jersey (see 4.3 Rules Concerning Marketing of Alternative Funds).
There are no particular disclosure requirements with respect to Jersey investors. The expectation is that any offering document should meet generally accepted international practices in providing information to prospective investors.
In overview, individuals in Jersey generally pay tax at the rate of 20%, whilst most corporates pay tax at the rate of 0%. The Jersey tax regime does not confer any different treatment on Jersey tax-resident companies or individuals that invest in alternatives.
The United States has developed an intergovernmental approach to the implementation of FATCA. On 13 December 2013, Jersey and the United States signed an agreement to improve international tax compliance and to implement FATCA. The terms of the agreement were implemented in Jersey by local regulation which came into force on 18 June 2014.
Jersey has also signed, along with more than 100 other countries, a multilateral competent authority agreement to implement the OECD Standard for Automatic Exchange of Financial Account Information – the Common Reporting Standard (CRS).
The local regulations implementing the CRS in Jersey came into force on 1 January 2016.
All Jersey "Financial Institutions" are required to comply with the registration, due diligence and reporting requirements of the FATCA and CRS regulations, unless they have an exemption that allows them to become a "Non-Reporting Financial Institution".
Most Jersey funds do not have any reporting exemption and therefore comply with the requirements of the local FATCA and CRS regulations.
Those regulations require a Jersey fund to, amongst other things:
The Comptroller of Taxes in Jersey will transmit the information reported to it to the overseas fiscal authority relevant to a reportable account (ie, the IRS in the case of a US reportable account, HMRC in the case of a UK reportable account, etc) annually on an automatic basis.
What an extraordinary year 2020 has been, with the global COVID-19 pandemic overshadowing all usual activity in the alternative funds sector.
The two main trends at the start of the year were the continuing growth in the number of Jersey Private Funds (JPFs) – a fund regime for private funds with 50 or fewer investors – and the return of the popularity of the Jersey property unit structure (JPUT), a stalwart of the real estate investment scene.
The JPF is without doubt the first choice for many fund managers intending to domicile their funds in Jersey. The success of the JPF regime is down to an appropriate level of regulation linked to the requirement to have a Jersey-designated service provider who is responsible for ensuring Jersey regulatory compliance. The growth in JPFs has been offset by the relative decline in the number of public funds (offered to more than 50 investors) regulated under the Collective Investment Funds (Jersey) Law 1988. This is not surprising, as the versatility of the JPF regime attracts sponsors looking to raise funds of all sizes – from those raising very large amounts of capital from a smaller investor group, to small and medium-sized funds with a greater number of investors.
Likewise, changes to the UK Non Resident Capital Gains Tax Regime implemented by HMRC in the UK from April 2019, which clarified how the regime would be applied to non-UK investment vehicles and permitted tax transparency elections, reaffirmed the use of JPUTs as a popular and familiar vehicle for investing in UK real estate and resulted in a resurgence in the use of this type of vehicle.
There is much that could be said about the impact of the pandemic on the alternative funds sector but two trends in particular were accentuated by the arrival of the pandemic. The first was the bifurcation in the market between sponsors with a strong track record and an established investor base ready to invest in their next fund, and sponsors without either of those advantages. Larger sponsors with an existing track record managed to close very large funds during the pandemic at a much quicker pace than usual with the press reporting, for example, that CVC Capital Partners closed its latest European-focused buyout fund during the pandemic with commitments over EUR21 billion. On the other hand, the COVID-19-induced lockdown had a more significant impact on fundraising by managers who were newer to the market, who found it difficult to arrange the face-to-face meetings and facilitate the investor due diligence necessary for their fundraising. We did, however, still continue to see a steady pipeline of smaller funds, including from first-time sponsors, coming to the market with success, often in niche and opportunistic areas, and using the JPF regime.
Another trend accelerated by the pandemic was the focus on sustainable finance and environmental, social and governance (ESG) factors in investment. The focus on ESG factors has manifested itself in various ways with private equity funds (including funds managed from Jersey), supporting and giving back to the communities through their portfolio companies as well as investing in portfolio companies with a sustainability focus. Jersey is home to a number of sustainable or ESG-focused funds, particularly low carbon and renewable energy funds, and is also in the process of developing its own sustainable finance strategy, as well as carbon-neutral strategy, for Jersey as a whole.
As economies reopen, we have seen a number of sponsors seeking to raise additional capital for their portfolio companies that have suffered as a result of the COVID-19 lockdowns. Initially, this has been portfolio company-specific, either through accessing available government support schemes or from raising additional private capital through preferred equity-type investments. Structures established to facilitate investment into a particular portfolio company can rely on regulatory exemptions in Jersey and so we have seen these being established quickly and cost-efficiently in Jersey even if the relevant fund is domiciled elsewhere.
As sponsors continue to evaluate the capital needs of their portfolio companies and their portfolios as a whole, as they emerge from COVID-19 lockdowns, those who are managing funds that are substantially fully deployed and/or approaching the expiry of their term have been exploring other solutions such as GP-led secondaries. In a cost-conscious environment, where speed to market may prove important, we are expecting this type of transaction to be prevalent in Jersey in the coming months.
Limited Partnerships (Continuance) (Jersey) Regulations 2020 (the Continuance Regulations)
On 16 July 2020, the government of Jersey passed the Continuance Regulations, which expressly permit non-Jersey limited partnerships without legal personality to migrate to Jersey and to continue as Jersey limited partnerships under the Limited Partnerships (Jersey) Law 1994 (the Partnerships Law).
This is a welcome addition to the scope of the Partnerships Law and gives a clear statutory route for partnerships that wish to migrate into Jersey. If a migrating limited partnership meets the eligibility criteria (which are not onerous but which do include a confirmation of solvency), the Jersey Financial Services Commission (the Commission) will issue a certificate of continuance to the partnership. This certificate is considered to be conclusive evidence that the migrating partnership has continued as a limited partnership within Jersey from the date in the certificate.
The key principle is that continuance does not create a new limited partnership and, apart from the change of jurisdiction and governing law of the partnership and any necessary adjustments to the partnership agreement to align with the Partnerships Law, all other aspects of the partnership should therefore remain unaffected by the continuance. All existing assets of the migrating partnership (including any right to make capital calls) are taken to be its property, upon continuance, for the purposes of the Partnerships Law. Continuance does not affect any partnership interest, anything agreed before the continuance or any rights, powers, authorities, functions or obligations of the migrating partnership, any partner or any other person before continuance. Likewise, all civil and criminal proceedings pending at the time of continuance continue unabated and claims, debts, liabilities, judgments etc are not released or impaired by the continuance.
Jersey law already provides for the continuance of non-Jersey companies into Jersey, so promoters can also migrate their general partner companies into Jersey alongside their limited partnership. Promoters wishing to migrate their fund limited partnerships into Jersey would need to obtain additional approvals from the Commission but these can be obtained as part of the continuance application.
Introduction of Limited Liability Companies
Jersey has a variety of corporate, partnership and trust vehicles but does not currently have an equivalent to the US/Cayman-style limited liability company (LLC). However, this is expected to change imminently as the Limited Liability (Companies) Jersey Law 2018 (the LLC Law) is expected to come into force in December 2020. The LLC Law was significantly influenced by existing legislation for equivalent vehicles in Delaware and the Cayman Islands so the LLC it creates will be familiar to users of those vehicles.
The LLC will be a hybrid between a company and a partnership, incorporating many of the desirable features of each. For example, LLCs will have legal personality and the liability of members will be limited, but LLCs will not be body corporates. It is currently anticipated that LLCs will be regarded as transparent for purposes of Jersey taxation.
The members' agreement, which will govern the LLC, will be closer to a partnership agreement or a shareholders' agreement than to articles of association. It will not be publicly available and its contents will not be subject to the wider companies law framework. Members of an LLC will have the option of running the LLC themselves, or appointing one or more managers who will perform a similar role to directors of a company or an externally appointed manager. An LLC will also have the ability to create "series" within itself, each of which will have its own legal personality separate from the LLC itself.
An LLC will not be able to serve as a fund vehicle and there is uncertainty about whether LLCs will be able to get approval to carry out regulated financial services activities.
Financial Services (Disclosure and Provision of Information) (Jersey) Law 202– (the Registry Law)
The government of Jersey has adopted a new law known colloquially as the Registry Law which seeks to implement requirements set out by the Financial Action Task Force (FATF), in particular, putting the requirements in relation to collection of information on beneficial ownership on a statutory footing, allowing the Jersey Registrar of Companies (the Registrar) to collect more information for its existing central registers and to establish a public register of "significant persons" in Jersey.
The Registry Law therefore requires, on the formation of an entity, that certain information be provided to the Registrar, including information about the beneficial owners and "significant persons" of the entity and the identity of any nominee shareholders and their nominator, unless the nominee shareholder is a person registered under the Financial Services (Jersey) Law 1998. The requirements only apply to entities with separate legal personality and therefore do not apply to trusts or ordinary limited partnerships under the Partnerships Law.
The required information is collected on formation of the entities and must be updated within 21 days whenever the entity becomes aware of any change, error or inaccuracy in the information. The annual return currently provided by Jersey entities will also be replaced by an annual confirmation statement.
"Significant person" is the term adopted in the Registry Law to refer to those persons occupying roles equivalent to a director or officer of a company and includes, in addition to company directors and officers, the general partners of separate limited partnerships and incorporated limited partnerships, managers of limited liability partnerships or LLCs and council members of foundations.
Once the Registry Law comes into force, applications to establish entities will also have to specify a "nominated person" to act for the entity from a specified range of eligible persons. A nominated person is authorised to supply the beneficial owner or significant person information required to be provided under the Registry Law.
These changes are occurring alongside the introduction of a new digital Registry which is intended to go live on 1 December 2020 and which will create new streamlined systems and generally modernise the operation of the Registry.
This law leaves a significant amount of information and the rules for its disclosure to be determined by orders and regulations, to allow flexibility to update information and disclosure requirements in line with changing international standards. At the date of submission of this paper, the government had circulated a draft order and draft regulations for consultation. The draft order sets out the information which must be provided to the Commission about the beneficial owners and significant persons of entities. The draft regulations set out the information about an entity's significant persons which will appear on the public register and the process of appeal for preventing information from being made public.
The Registry Law is not yet in force and is awaiting approval by the Privy Council. Once in force, there are transitional provisions for existing entities to give them sufficient time to submit the necessary information.
Jersey Financial Services Commission Focus on AML/CFT, Financial Crime and Related Compliance
The Commission has recently introduced a new examinations unit, the Financial Crime Examinations Unit (FCEU) which focuses on examinations of the implementation of systems and controls by Jersey financial services businesses to prevent and detect financial crime and to comply with the related legislation. The FCEU carried out its first examinations in Q4 2019 and in June 2020 issued its key findings. This report is essential reading for senior management of all businesses within the scope of the Money Laundering (Jersey) Order 2008.
International Tax Compliance
In response to reviews into international tax practices by the EU Code of Conduct Group on Business Taxation and the OECD, Jersey introduced economic substance requirements effective for any financial periods starting on or after 1 January 2019. Broadly speaking, the requirements are that relevant companies must be "directed and managed" in Jersey and must have adequate activities and resources in Jersey relevant to their income. Jersey's substance requirements, and tax regime more generally, received approval from the EU and the OECD in March and July 2019 respectively.
As corporate tax returns in Jersey are filed for the previous year, those subject to the requirements have, in 2020, been focusing on some of the practical measures needed to record their activities and substance in Jersey in a way that evidences their compliance with the substance requirements.
The framework of the substance requirements is set out in law but much of the detail is contained in guidance notes published by the Jersey Comptroller of Taxes (the Taxes Office). Revised guidance notes were issued in November 2019 and provided two important confirmations. Firstly, it was confirmed that collective investment vehicles (CIVs) subject to regulation in Jersey are not required to comply with the substance requirements – although this may be revisited for self-managed CIVs in the future. Secondly, it has been clarified that a company subject to the requirements does not need to hold each and every board meeting in Jersey in order to satisfy the substance requirements.
Mandatory disclosure rules
The Taxation (Implementation) (International Tax Compliance) (Mandatory Disclosure Rules for CRS Avoidance and Opaque Offshore Structures) (Jersey) Regulations 202– (the MDR Regulations) are expected to take effect in the fourth quarter of 2020. The MDR Regulations will ensure Jersey's compliance with Action 12 of the OECD's Action Plan for Base Erosion and Profit Shifting and are broadly consistent with similar rules being introduced across Europe and the UK, although the MDR Regulations closely follow the international standard published by the OECD rather than the EU's equivalent DAC6 model.
The MDR Regulations create an obligation to provide information about CRS avoidance arrangements and opaque offshore structures (Reportable Arrangements) to the Taxes Office. Any information reported to the Taxes Office may be exchanged with tax authorities in other jurisdictions. The obligation to provide information primarily applies to "promoters" and "service providers" (such as those responsible for the design or marketing of a Reportable Arrangement as well as lawyers, accountants and tax advisers), although there are circumstances where end-users will have responsibility to report.
A CRS avoidance arrangement is any arrangement which it is "reasonable to conclude" is designed to circumvent, or is marketed as, or has the effect of, circumventing the OECD's Common Reporting Standard (as implemented in relevant jurisdictions). An opaque offshore structure is a legal person or legal arrangement that:
Whilst the MDR Regulations do provide some detail in order to determine whether an arrangement is a Reportable Arrangement, the intention is that the MDR Regulations will be supplemented by further guidance from the Taxes Office, which will include guidance on the "reasonable to conclude" decision to be made by those subject to the MDR Regulations.
AIFMD – National Private Placement Rules
The EU marketing passport introduced by the Alternative Investment Fund Managers Directive (AIFMD) remains unavailable to non-EU entities. Sponsors wishing to market Jersey funds to prospective European investors therefore need to use the pre-existing national private placement regimes (NPPRs). When the AIFMD was introduced, the expectation was that the marketing passport would, in time, be opened up to non-EU entities and the NPPRs would be gradually phased out.
As required by the AIFMD, the European Commission published a report addressed to the European Parliament and Council on 10 June 2020 assessing the application and scope of the AIFMD (the Report). The European Commission noted that it was unable to assess the functioning of the passport in respect of non-EU entities on the basis that it has not yet been activated. The Report also presented mixed views on the current operation of the NPPRs with no consensus on how marketing by non-EU entities should be carried out in the future. As a result, it appears that marketing under the NPPRs is set to continue in its current form for some time.
Continuity During the COVID-19 Pandemic
Jersey's funds industry was, and remains, well placed to deal with many of the issues presented by COVID-19. For example, electronic signatures have been recognised in Jersey as legal, valid and binding for some time and this position was confirmed by recent, helpful clarifications to the Electronic Communications (Jersey) Law 2000.
In addition, the Jersey courts issued a direction (the Direction) relating to the execution of certain documents (such as powers of attorney) which, under Jersey law, ordinarily require execution in the presence of a witness. The Direction provides that such documents may be executed and witnessed remotely through a videoconferencing system. This has been vitally important in allowing parties to conclude contracts in the context of widespread remote working, and particularly for those with signatories who have been required to self-isolate for any period of time.
The Taxes Office also issued a statement that it will not treat a company as ceasing to be tax resident in Jersey, or as having failed to meet the economic substance requirements described above, because of temporary adjustments to normal operating practices to the extent that those adjustments are required to mitigate the threat of COVID-19. Those companies whose boards have needed to meet when a quorum or majority (as appropriate) of their directors have not been able to travel to Jersey because of the pandemic, still need to consider their tax position in other jurisdictions, but their position in Jersey at least is clear.