China’s capital markets investors are increasingly recognizing the attractions of Jersey, taking advantage in particular of its funds regime. In this feature, Carey Olsen partner Guy Coltman examines why Jersey is the jurisdiction of choice for many Chinese clients.

The tax advantages of using an offshore jurisdiction tend to be accepted as the main reason for going offshore. However, reputation and regulation are equally important.  More and more China's capital market investors and financiers are recognising that Jersey is the place to do business from incorporating investment vehicles as well as utilising Jersey's fund regime which provides the full suite of options, from very private structures to full retail funds, meeting most promoters' and investors' requirements. Carey Olsen partner Guy Coltman examines why Jersey is ideally positioned to continue as an offshore jurisdiction of choice with Chinese clients.

It is now six years since Goldman Sachs coined the term BRIC ( Brazil, Russia, India and China) in its Building Better Global Economic BRICs report. In its 2007 report, the investment bank stated that the BRIC countries’ combined weight is already 15 per cent of the global economy and according to last year’s figures China has overtaken Germany to become the third-largest economy in the world.

As China’s success continues to grow, the appetite from China’s private and corporate wealth sectors for sophisticated financial solutions has also increased. For over 16 years Jersey has had business links with China. Indeed the first Chinese company was registered in Jersey in 1994 and China’s economy has nearly quadrupled in value since then. To date, a quarter of the Chinese companies listed in London have done so through Jersey.

Industry professionals have also welcomed the 2009 decision by the Hong Kong Stock Exchange to allow the listing of Jersey companies. Carey Olsen advised on the “in principle” application by Jersey Finance for the admission of Jersey companies to the Hong Kong Stock Exchange.

Jersey has also seen a rise in banking deposits from China and the surrounding region. Total banking deposits at 31 March 2010 in Jersey were £177.6 billion (around $263.5 billion); 8.9 per cent were from the Far East compared to 3.5 per cent at the end of last quarter December 2009.

Jersey Finance opened a representative office in Hong Kong in October 2009 to strengthen the ties further between the two countries. With the increasing expertise in Jersey it is obvious as to why Jersey is becoming a jurisdiction of choice for China.

Reputation, reputation, reputation

Jersey has an excellent reputation globally in respect of its professional expertise and the service levels delivered within the island. It is a prime jurisdiction within which to establish offshore companies whether they are group holding companies with the intention of seeking foreign investment or listings, asset holding companies, investment funds or debt issuing vehicles.

Jersey is the highest ranking offshore international financial centre (IFC) in the Global Financial Centres Index (GFCI) and the only offshore financial centre in the top 20. It is also one of the first IFCs to be placed on the Organisation for Economic Cooperation and Development’s “white list”, having implemented internationally-agreed tax standards and it is rated as one of the best IFCs globally by the International Monetary Fund in relation to its regulatory regime.  Jersey is recognised as the IFC of the Year by the Society of Trust and Estate Practitioners for 2009/2010.

The Jersey Financial Services Commission (JFSC) is the island's regulatory body and is a signatory with China and Hong Kong to the International Organisation of Securities Commissions (IOSCO’s) Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information, which means that Jersey already has an established framework for working with both China and Hong Kong.

Regulation

An important factor in choosing an offshore jurisdiction in relation to a listing is the local corporate law.  Jersey's corporate law is based on English corporate law, something that might already be familiar to certain Chinese-based investors.  However, Jersey corporate law also offers greater flexibility compared to its English equivalent.

The JFSC is a responsive regulator and the Jersey listings approval process does not generally affect the timing of an admission to listing.  The Jersey prospectus requirements for holding companies, and most types of funds, which are listed will tend to fit in with disclosure and prospectus requirements in the relevant market in which the company is seeking to list.

The JFSC is also seeking to adapt to the requirements of the Chinese market and we have recently seen an example of a Jersey company where the Chinese characters are printed alongside the English on its certificate of incorporation.

Listings

A key driver for Chinese clients in using Jersey as a jurisdiction is the access that Jersey vehicles can offer to European and other international investment markets.  Offshore listings on international exchanges, for example on London’s Alternative Investment Market (AIM), offer Chinese groups access to liquidity that might not otherwise be available in their domestic market. 

Using a Jersey company can help to ensure a faster listing on the relevant international exchange whether on London’s main market, AIM, PLUS Markets, Euronext or New York markets.  Jersey has the further advantage of allowing Jersey entities to list on the Channel Islands Stock Exchange (CISX), which is a specialist market designed for operating companies, funds and specialist debt issuers in Jersey and the other Channel Islands.

The Takeover Code is a comprehensive list of principles and rules which is administered by the Takeover Panel and applies in the London markets.  It is designed and generally accepted to achieve fair dealing for shareholders of a takeover target and for this reason is highly valued by investors.  If a Jersey company is listed in London on the main market the Takeover Code will apply in the same way as for UK companies.

In the event it is listed on AIM (being an unregulated market), the Takeover Code will apply if the target has its place of central management and control in the UK, Jersey, Guernsey or the Isle of Man. This is a significant advantage over other jurisdictions in the context of a London listing. In the event of listing in other jurisdictions, typically Jersey companies’ constitutions can be structured so as to facilitate market standard protection (including where the company is listed on AIM but is not centrally managed and controlled in the UK, Jersey, Guernsey or the Isle of Man).

Unlike other offshore jurisdictions such as Bermuda, the Cayman Islands and the British Virgin Islands, Jersey shares, which are admitted to trading on a market, can be settled through CREST/Euroclear in exactly the same manner as shares in UK companies. This avoids the need for, and the costs of, a depository receipt programme and such settlement options can be especially attractive to European investors who will be used to dealing through these settlement systems.

Each of London, Frankfurt, Paris, Tokyo and New York are open for some period during a Jersey business day making Jersey a suitable jurisdiction of incorporation for a company listing on any of those exchanges.  Due to the proximity of Jersey to Europe, Jersey companies are seen as particularly attractive to Chinese businesses seeking European investment. 

Clearly a significant driver in using a Jersey company is the tax neutrality that is available in Jersey.  There is no stamp duty payable in Jersey on share transfers, no capital gains or capital transfer tax and most Jersey companies are subject to a standard 0 per cent rate of income tax.

Carey Olsen has advised on a number of listings of Chinese businesses using Jersey companies over the past few years and, despite recent market turmoil, has continued to receive new listing instructions from China during the course of this year.  As global economic conditions improve China’s use of Jersey companies for capital raising and listings is also likely to increase.

China is one of the most attractive target markets for institutions seeking equity investment opportunities. This is due in part to the long term growth prospects for China and the huge export potential, to markets including the US and Europe which exist in many industries. In addition, Jersey has already been a popular choice for the establishment of private and consortium acquisition vehicles.

As China’s economy continues to flourish and a growing number of promoters and investors look to the best run, most innovative jurisdictions with which to do business, Jersey’s own expertise in dealing with China continues to outstrip many of its competitors. Everything rests on the reputation, flexibility and service available and Jersey is ideally placed to continue to build on its burgeoning relationships in the region.