Exclusive Q&A on Offshore Industries and Markets with Daniel Cann
Posted: 20th January 2016 11:42Are you noticing any new trends in offshoring strategies?
I’ve been a director of a BVI based fund administrator for 12 years and now operate out of Panama. The 2 trends that I am seeing specific to us are:
(a) In what was a reluctant market has been sparked into life by the introduction of the new Approved Funds and Incubator Funds legislation in the BVI. The BVI has traditionally been, along with Cayman, one of the most respected jurisdictions to establish Funds. However, the barriers to entry slowed down the establishing of small Funds over the past few years. With the new legislation small Fund Manager can set-up relatively cheaply and timely and operate on lower fees to allow them the opportunity to establish and grow without constraint.
(b) LATAM Managers and Managers wishing to tap into the LATAM markets are utilising vehicles in LATAM more such as Panamanian Private Funds. Also, the new REIT legislation in Panama is proving very popular.
Have there been any recent regulatory changes or interesting developments?
As mentioned above, the Securities and Investment Business (Incubator and Approved Funds) Regulations 2015 (the Regulations), is the most interesting development in the industry in recent years. It has been how the BVI has been able to set itself apart from other jurisdictions like Cayman. They offer immediate entry to market by allowing trading after 2 days of lodging the application with FSC.
Specifically, an Incubator Fund does not require an Offering Memorandum (the Fund will prepare some sort of term sheet instead), can have up to 20 investors and $20m in assets, with a minimum investment of $20,000. It can operate for 2 years (with an option to extend for an additional 1 year) at which point it needs to convert to another type of Fund. In addition, there is no requirement for an administrator or an auditor. An Approved Fund can also only have up to 20 investors but the maximum amount of assets is $100m and there are no minimum investment amount. The life of the Fund is unlimited and it also does not require an Offering Memorandum. An auditor is not required but an administrator is.
What are the main factors when deciding offshore location?
The major reason for establishing an offshore Fund is tax efficiency. Offshore Funds are established in jurisdictions where little or no tax is paid on the revenues generated within the Fund. However, there are a lot of jurisdictions that fulfill this requirement. Therefore, Fund Managers specifically look at factors like;
1. Investor protection. This can be achieved by establishing a Fund in a strongly regulated center like the BVI, a member of IOSCO.
2. Regulatory controls. For instance, if they wish to market to LATAM then they need to investigate which countries blacklist certain jurisdictions and which jurisdictions have double tax treaties.
3. Flexibility. If the Fund Manager wishes to trade sophisticated instruments or is arbitraging between stocks and options, for example, then the Fund is more likely to be marketed towards sophisticated and institutional investors. This lends itself more to a jurisdiction like the BVI or Cayman where the legislation is less rigid.
4. Service Providers. Again, jurisdictions like the BVI or Cayman remain much more flexible when it comes to appointing investment managers/ advisors, brokers, custodians, auditors, administrators so long as those service providers meet their standards. The jurisdiction will then approve the Fund and allow the investor to make their minds up on investment strategy and risk.
5. Costs. Last but not least are barriers to entry. New legislation in the BVI, for instance, has led to a large number of new enquiries.
What tax considerations need to be accounted for?
Investors that invest into a Fund established in a zero tax or low tax jurisdiction, are not liable to taxation on their investments or can defer meeting such tax liabilities until they realise their profits. Offshore Funds are, therefore, attractive to the investors because of tax planning considerations. The fund itself may suffer withholding tax on its revenue earned in some countries.
What challenges and opportunities exist in your jurisdiction?
I reside now in Panama. Therefore, it is fitting to discuss Panamanian Funds and the opportunities here. Panama is one of world’s fastest growing countries and has an excellent banking and international financial services center with a strong economy and growing infrastructure. A Fondo Privado is lightly regulated. There is no restriction on the type of investment it can make. The directors do not need to be based in Panama and they are exempt from tax on income received overseas and so can be structured so as to have a zero rate of tax in Panama. A Fondo Privado of less than 20 investors does not need to register with the Superintendency of the Securities Market (SSM) and, therefore, can be established relatively quickly and cost efficiently. A Fondo Privado of up to 50 investors operates similar to a Professional Fund in the BVI or a Sophisticated Fund in Cayman in that the minimum investment is $100,000 with a net worth of $1m.
What we are seeing is more and more enquiries of these types of Funds as Fund Managers try to access new markets and new investors in LATAM utilising a structure more familiar to the region, in a jurisdiction better recognised and with documents written in Spanish.
What key trends do you expect to see over the coming year and in an ideal world what would you like to see implemented or changed?
Those jurisdictions that recognise the increasing international regulatory obligations coupled with understanding commercial reality with thrive in the coming years.
The BVI, in particular, is focused, as can be seen by the recent introduction of the Incubator and Approved Funds and, last year, the Approved Manager, in creating substance products. It’s also adopting international regulatory standards and is one of the most well respected offshore jurisdictions because of it.
In Panama, economic growth has topped 8% in the last 5 years. Much of this is due to the prosperous financial sector, a well educated workforce, a currency pegged to the dollar and a country that is both safe and stable which has attracted people and investment from throughout the world. The economy will continue to grow and Panama should become the financial focus point for investment into, out of and within the LATAM region.
Daniel Cann has been a Director of the Folio Group since 2003. Now residing in Panama and acting as the Managing Director to Folio Administrators (Panama) SA, our fund administration operations office, Daniel is an expert in the establishment and formation of Funds and related vehicles. Daniel qualified as a Chartered Accountant in London and has worked for several large financial services groups in both the UK and the British Virgin Islands.
Daniel can be contacted on +1 (284) 494 7065 or by email at email@example.com