Seychelles comes in a close third place and, some might say, is closing the gap on the Caribbean big boys. The island has been aggressively marketing itself in China, and benefits from a strong relationship with the Chinese government and an exceptionally favorable double taxation agreement (DTA).
New Kids This has not stopped the lesser known jurisdictions for making inroads into China, and those in the offshore industry in HongKong or Shanghai are unlikely to have missed the marketing efforts of Jersey and Guernsey. Unfortunately for the new kids on the block, their efforts have come at a difficult time for the offshore industry. John Gu, tax principal at KPMG in Hong Kong, explained that while Beijing's Enterprise Income Tax (EIT) Law - introduced early 2009 - has not yet been tested in terms of offshore finance, it is just a matter of time. This is bad news for any jurisdiction targeting China's lucrative offshore market, but will particularly impact jurisdictions like the Channel Islands. "The tax authorities have stepped up their efforts to prevent individuals and companies from siphoning their profits, or their assets, out of China.
These sectors are under increasing scrutiny," Gu said. The EIT law redefined how China's tax authorities viewed companies that operated in China but kept assets offshore, and all but destroyed the practice of round-tripping, where a Chinese company siphons its profits to an offshore finance center and then re-invests in China. They did this by stating that if a company was operated in China, employed people in China, or was effectively based in China, it would be taxed like a Chinese company. And it is not just offshore companies that are under threat by the new law. Individual wealth in China, one of the targets of Jersey's foundation structure and Guernsey's trusts, is not escaping the eyes of the tax authorities in Beijing. "If a Chinese individual puts their money in an offshore structure and the tax authorities believe that the main purpose is avoiding tax, they could treat the offshore product as taxable," Gu said.
But putting tax law aside, Andrew McGinty, a partner at Lovell's law firm in Shanghai, said that new jurisdictions such as Jersey and Guernsey also face a more tangible problem - namely that investing in the Channel Islands still does not make financial sense. Hong Kong and Singapore both recently signed favorable double taxation treaties with China, attracting even more business from the mainland. "If I earn £100 and remit it to Hong Kong I am going to give £5 back to China, if I remit it to Jersey or Guernsey, I'm going to lose £10," he said. On the other hand, McGinty points out that Jersey and Guernsey have their selling points, namely that they are that are well regulated and well established - they have also been cleared by international bodies, such as the OECD and the IMF.
Much respect.
Gu said that while new jurisdictions have their benefits, Chinese investors will always opt for a system that they are already familiar with. It remains true that the BVI and Cayman are well established offshore centers, and Seychelles' increasing relations with the Chinese government give an image of respectability. "In my experience there's a consensus favoring BVI and Cayman, as many wealthy Chinese individuals still believe that Jersey and Guernsey are not tried and tested jurisdictions yet," he says. Hong Kong is also a major factor. The booming finance center on China's doorstep has gone from strength to strength in 2010, and a run of IPOs in 2009 saw it overtake New York and London as the biggest IPO market in the world. The links between firms in Hong Kong and those in BVI and Cayman are strong, and have been built up over many years of working together. Law firms, corporate service providers in Hong Kong, BVI and Cayman are well versed in structuring investments between the three jurisdictions. Hong Kong and Singapore are also in the same time zone, which makes business in Asia simpler. Both jurisdictions have simple dispute mediation methods, in Mandarin and English, as well as a regulatory framework in a familiar language. The links between Cayman, BVI and, increasingly, the Seychelles, has seen Mandarin speaking representatives employed at many CSPs in these centers. It is often claimed by the marketing arms of Jersey and Guernsey that access to London, and Europe, are a major benefit of incorporation in the islands. But in Hong Kong, both Gu and Mc- Ginty were skeptical. "The AIM (London's Stock Exchange) thing is a positive, but then how many Chinese companies want to invest on the AIM?" McGinty said. "The fact is that London is not as important as Hong Kong and Singapore in terms of Chinese investors. Hong Kong and Singapore still remain the two countries of choice in Asia. I think Jersey and Guernsey have got a fair bit of work ahead of them."
Counting blessings.
While the lack of relationship between the OFCs of Europe, the Pacific and South America, all of which are increasingly focused on China, could be a blessing - in that it allows distance between the Chinese government and its companies investments - the new emphasis on regulation and transparency is likely to put an end to the days where companies could hide their true wealth from their respective governments. In light of this, the OFCs with existing links to China could continue to reap the benefits of their "guanxi" for quite some time.
