Sanne's Mark Grenyer featured in the latest edition of The Hedge Fund Journal, with other industry experts discussing tax, pragmatic regulation and lifestyle sought after to uncover some of the criteria being considered by global asset managers.
Since Elliot Refson, Head of Funds at Jersey Finance, arrived there in 2006, Jersey has grown from being home to three hedge fund managers to roughly forty.
Leading hedge fund managers with a base in Jersey include Brevan Howard and Systematica. More than 90% of Jersey’s 280 fund promoters are managing alternative strategies, which include real estate and private equity. The island continues to attract a steady flow of asset managers, mainly from the UK and Switzerland, but also from further afield; there is growing interest from the US. Relocations range from wholesale transplants and fresh launches of corporate and/or investment vehicles, to partial relocations, and sometimes even migrations of existing structures where this is feasible.
Thanks to investment in technology and platforms, Jersey adapted well to the Covid crisis as its fast broadband internet speeds allowed for home working. There were some temporary concessions on company meeting locations, though the strong roster of seasoned local directors often meant that requirements for a majority to be physically present were met anyway. Additionally, private aviation facilities serving private and charter jets allowed for some air travel even when commercial aviation ceased. In common with other countries, Jersey is now moving towards a hybrid model mixing home and office working while most company meetings are now expected to be on the island.
Jersey’s government offers competitive and predictable taxation: “There has been a political desire within Jersey to diversify Jersey’s economy, which has resulted in the introduction of tax regimes and policies which have had the effect of encouraging high value industries, such as the fund management industry, into the island,” says Hughes.
Increases in corporate and income tax rates elsewhere – and the potential for carried interest or performance fees to be taxed as income rather than capital gains – are pushing some asset managers to consider their options. “Jersey classifies carry as capital gains, which are not taxable. Nor is there any inheritance or gift tax,” says Bell. “Jersey has had a 20% income tax rate since 1943, has very little government debt, meaning there are currently no plans to raise tax rates,” says Refson.
There is also an incentive program that allows some “high value resident” individuals moving to the island to pay only 20% on their first GBP725,000 of global income and 1% thereafter. “They need to meet certain wealth and income thresholds. The target is to attract 15 such people per year, and the five-year average has been around 20, which is a small part of overall net migration of around 1,000 per year. They cannot pass the tax incentive onto children, who would pay 20% on all income,” points out Lemasney.
Most OECD countries are moving towards a headline minimum corporate tax rate of 15%. “In Jersey, company taxation is either 0% or 10% with most asset management companies benefiting from the 0% rate, meaning that capital can compound up tax free within the company before it is extracted as dividends, taxed at no more than 20%. In the UK, some individuals may pay 38.1% dividend tax after corporation tax has already been paid,” says Bell. “In Jersey, companies are often also used as a form of pension, because pension funds can face taxes on unrealized capital gains and are not tax efficient for those earning above GBP150,000. There are also ways to export pensions out of the UK,” adds Bell. Employer levies are also competitive: “Social Security taxes are capped at around GBP12,000 in Jersey, whereas they are uncapped in the UK,” Bell adds.
Individuals and companies need some presence or substance to avail of the tax regime. “The criteria for tax residence in Jersey are being revised and are expected to require 35-50 nights of residence. This does not preclude someone from also being resident in another jurisdiction, such as the UK, based on its rules,” says Bell. “Companies also need to demonstrate substance, via living here and making critical business decisions here,” says Hughes.
Lemasney cautions that the government is not so keen on people who want to spend as little time as possible on the island. “We want to attract those who have worthwhile private sector experience and contribute entrepreneurial and intellectual capital. We are a relatively difficult location to get permission for residence and business.”
Those relocating could set up companies, partnerships, foundations and trusts for corporate and personal purposes. “If people are physically relocating, we tend to use companies rather than limited partnerships. We put people into a fresh corporate structure to show control on the island whereas partnerships are more used for non-resident owners. We also try to take them out of a UK partnership to avoid tax liability and being taxed on an arising basis. We create a structure where they can choose when they are taxed,” says Bell.
Though incorporation has historically been most common, recent legal changes have allowed for migration in some cases. “Migration is another option that can be more often used for fund structures. We would not want to migrate a management company to avoid triggering tax,” says Bell. Company law is advancing to harmonise with typical overseas structures. “In early 2022, Jersey expects to launch an LLC structure that will rank pari passu with a US LLC, to take our product offering to the US market. Our US representative, Philip Pirecki, has had 600 meetings with US lawyers,” says Refson.
“Not all relocations are lock, stock and barrel. One partner may come, and another may stay,” says Refson. “We see a full range of relocations. It may be just portfolio managers on the ground, or could be broader including back office, and some firms may retain footprints in other jurisdictions. There is no single model,” says Hughes. “Some firms may open a branch in Jersey as well as other locations, such as Dublin, Luxembourg or Switzerland,” says Lemasney.
And a Jersey company could run funds domiciled elsewhere. “Some asset managers may start off sticking with existing funds and vehicles domiciled elsewhere such as Cayman, and then set up a new Jersey vehicle later on for their next structure,” says Bell. Grenyer has seen a mix but has worked mainly on Jersey fund vehicles so far.
Jersey has welcomed the new global substance requirements. “The introduction, in response to the EU Code of Conduct Group’s ‘fair taxation’ requirements and the OECD’s BEPS initiative, of economic substance rules for fund management companies which are tax resident in Jersey, very much played to the island’s strengths because the governance model in Jersey has always been to have substance on the ground,” says Hughes.
“Jersey fund managers (but not most funds) need to demonstrate that all of their “core income-generating activities” (CIGAs) are carried out in Jersey and that they are “directed and managed” in Jersey, with adequate employees, expenditure and physical premises in Jersey,” says Hughes. The substance analysis will vary between types of companies and investment strategies. “Substance requirements will depend on a range of criteria, including senior staff location, transfer pricing issues, and value chain analysis. We try to get senior management and compliance resources out of high tax jurisdictions,” says Bell.
A business licence lets firms employ staff outside the high value residence scheme. “It is easy to relocate specialist staff who have the right qualifications and relationships. Accountants on the island may not have the same experience of a specific fund business and culture, or the same relationships. We can often relocate people from the UK to Jersey in three months or less. As companies grow, they are more likely to hire locally,” says Bell. “Salary costs for local staff are comparable to outer London,” according to Hughes.
UK or Irish citizens in the Common Travel Area need residence and work licences, and some without UK passports may have leave to remain as well. “Since Brexit on January 2021, EU citizens (Ireland apart) need a work permit in addition to residency and are in effect on a level playing field with the rest of the world such as those from the US, Australia, New Zealand, Russia or China,” says Lemasney.
“US citizens have the same visa requirements as for the Common Travel Area for immigration. There have been no issues with relocation work permits or visas,” says Hughes. “Some US nationals might renounce citizenship, while others retaining it benefit from a unilateral credit for Jersey taxes against their US tax bill,” says Bell. “It has sometimes taken some more effort to relocate domestic staff such as nannies from outside the EU,” says Bell. “There are also provisions in policies for family support teams to move with families,” points out Hughes.
The rules on substance allow for some outsourcing. Companies can be supported with a range of corporate services, from infrastructure to directors, regulatory and compliance support services. This lets them hit the ground running and services can also be flexibly contracted to allow new entrants to pare back these services as they increase their footprint. “We have grade A office facilities, and strong digital infrastructure for business continuity,” says Grenyer of Sanne Group, which provides MoME (Manager of a Managed Entity) services. “MoME is a regime provided by administrators as a platform of one, with services tailored to each individual manager,” says Refson. Providers such as Sanne, which is listed on the London Stock Exchange and globally administers over GBP55 billion of assets in 1,200 funds and other structures, can help with payroll and human resources, technology, compliance support, regulatory licence applications, company secretarial services, directors, accounting, tax and filings and other support. “Services such as legal, audit, administration, custody, depositary, technology, governance, and other services, should not be subject to the sales tax GST of 5%,” says Bell.
We have grade A office facilities, and strong digital infrastructure for business continuity.”
Jersey financial regulation can be less onerous and may allow for faster company and investment vehicle approvals than in some other domiciles. Various structures include managed accounts: “Qualifying segregated managed accounts (QSMA) is one regime that can fast track the management of certain established investment strategies,” says Hughes.
Jersey managers and funds may avoid AIFMD-related disclosure requirements such as remuneration. Equally there is scope for dual, or indeed triple or multiple, regimes that are deemed equivalent to various onshore regulations. Jersey’s Investment Business regime is equivalent to MiFID and the island would hope to be a front runner for any third country AIFMD passports, based on ESMA’s assessment. “Jersey also meets a range of international standards set by the OECD, IMF and World Bank and is confident about staying on the FATF whitelist,” says Refson.
Few applications are declined by the regulator. “Reasons might include not being able to prove substance and financial means,” says Hughes. Some candidates might be discouraged from even applying to the regulator: “There is an element of self-policing. Nobody wants to waste time or client money, if clients are not transparent or do not have enough regulatory governance history,” says Bell.
For distribution into many countries in the European Economic Area, and the UK, most Jersey managers will continue to avail of the national private placement regimes, and Brexit has not changed that.
A few Jersey managers do also advise onshore or EU domiciled funds. They may have relationships with third party AIFM or UCITS platforms, in Ireland, Luxembourg, or elsewhere, which can use management company or fund passports for EU distribution even in countries where the private placement regimes are not accessible.
Some Jersey managers have launched ESG oriented strategies: “We see a growing trend of ESG advisory to assist with ESG fund launches,” says Hughes. The Jersey regulator will heed reports of “greenwashing”.
High value residents are expected to buy a property costing at least GBP2.5 million after two years, while others can choose to buy or rent. Jersey essentially has a single housing market for newcomers and natives. “Jersey has not had the housing shortages that have affected other locations,” says Bell. Prices are broadly comparable to a salubrious outer London borough, and therefore well below the priciest areas of major financial centres, or some city states such as Monaco or Hong Kong.
There is some variation in price trends between segments: “Anything up to one million is selling very fast and may be overpriced. The market is robust between GBP1 and 2 million and above GBP2.5 million there is quite a large supply with 25-35 deals per year,” says Lemasney. “Higher value deals are more often for cash, but mortgages can be obtained from leading UK high street banks and private banks. Interest rates will depend on the relationship with a private bank, but are usually higher than on portfolios of shares,” says Hughes.
Jersey is taking a long-term view. “Jersey is granting indefinite rights of residency after 10 years, in contrast to other countries offering 5- or 7-year residencies,” says Bell.
Jersey is a one-hour flight from several London airports: Heathrow, Gatwick, City and Luton. “However, some clients may avoid travelling via the UK due to sensitivity around their residency. They could use Shannon, Paris or Amsterdam instead. Another option is taking the boat to St Malo then train to Rennes, Nantes or Paris. I spend a lot of time planning flights. Some people have their own private jet and others use shared arrangements,” says Bell.
Jersey’s local private schools charge fees around GBP20,000 per year, roughly half the cost of leading UK boarding schools. The fee-paying state schools including grammar schools cost less than GBP10,000 a year, and there are also free state schools. The Jersey curriculum is aligned with England’s national curriculum, though other examinations such as the International Baccalaureate can also be taken.
"Primary care, GP services and Accident and Emergency are at least as good as in a UK town of 100,000 people,” says Refson. For some other procedures, patients may get referred to Southampton or London. Emergency treatment is free, but other care, GP visits and travel will initially need to be paid for in full. Those ordinarily resident (and their spouses and children who are resident) can also get most non-emergency hospital treatment free. There is also private healthcare and private insurance.
“Re-domiciling to Jersey is often also a lifestyle choice for many senior fund management professionals,” says Hughes. A shorter commute, that may be just a walk, jog, cycle or boat ride, can let people spend more time with their families. Some managers are attracted to the active outdoor lifestyle including golf, horse riding, water sports, sailing, running, cycling, and swimming, and the chance to compete in triathlons. Hughes even advises on relocating pets, who may also enjoy the outdoor life.
Within Jersey’s cosmopolitan and inclusive society, there are places of public worship and meeting places for multiple faiths available to Islanders.