Published in Global Assets - July 2007

The past 12 months have been very active in terms of new developments and new initiatives implemented or proposed by the Jersey government, States of Jersey (the "States") and the regulator, the Jersey Financial Services Commission (the "Commission").

This Article merely seeks to provide a summary of the main developments and initiatives and should not be taken as constituting detailed advice on any of these developments or initiatives.

Taxation

The Zero/Ten Tax Design Proposals were presented to the States on 10 October 2006 and the relevant legislation was lodged in December. It is intended that the new corporate tax regime should be implemented and effective from 1 January 2009. The most important of the proposed changes is the introduction of a standard rate of income tax for companies at zero per cent. This zero rate will be the general and standard rate of tax applied to all companies, whether the company is owned by Jersey residents or by individual residents abroad.

There will, however, be exceptions to the general zero rate of tax applied to companies and, in particular, those companies having an office and/or staff in Jersey engaged in providing financial services, in particular, banks, trust companies and certain categories of company licensed under the Financial Services (Jersey) Law 1998 (the "Financial Services Law") will pay corporate income tax at the rate of 10 per cent.

As a whole, it is intended that the financial services industry in Jersey should continue to pay a substantial amount of tax, but that there is no discrimination applied in respect of Jersey companies whether owned by Jersey residents or those resident elsewhere and this treatment has been accepted as meeting the EU Code of Conduct on Business Taxation and the EU's objective of removing harmful tax practices. The removal of corporate income tax altogether from most areas of business carried on in Jersey should attract or enhance the attractiveness of the Island as a location for various new types of non-financial services business, such as film production and IT services

Residency Developments

Proposals for the reform of the Jersey Housing Laws, so as to make the position clearer both as regards existing Jersey residents and potential new residents, should be introduced shortly. Jersey has, to some extent, already relaxed its Housing policies as regards economic migration to the Island and the government is now actively seeking to encourage new "high value residents" who wish to establish residence in Jersey. Moreover, there has been a recognition that business, particularly, financial services businesses, need to be able to import key staff without too much regulatory bureaucracy. In general, Housing licences are granted for limited periods for such key staff, although there are situations in which permanent residency rights can be obtained. It is also worth noting that it has been made considerably easier for such key members of staff who move to Jersey to buy property for the duration of their stay, rather than having to occupy a property owned or rented by their employer.

These proposed changes to the corporate tax rules and the Housing rules and regulations show that Jersey is very much "open for business" and is taking active steps to encourage new business to locate to Jersey.

These changes at the macro level of government policy as regards taxation and housing are being supported at the micro level by considerable activity as regards new legislation covering trusts, companies, mutual funds and partnerships (all of which constitute the building blocks of the finance industry in Jersey).

Trusts

The Trusts (Amendment No. 4) (Jersey) Law 2006 came into force on 27 October 2006 and introduced several important amendments as regards trust law in Jersey. Among these are the following:

• Settlor Reserved Powers. There is now a statutory authority for the creation of trusts in Jersey with Settlor Reserved Powers allowing a settlor a degree of control over assets placed in trust.
• Foreign Laws. Once again, the amending legislation minimises the impact of any of Foreign Law upon the creation or operation of a Jersey trust.
• Foreign Judgments. A new Article provides that no Foreign Judgment may be enforced by the Jersey Court if it is inconsistent with the previous Article regarding the impact of Foreign Law upon the operation of a Jersey trust.
• Disclaiming Interests by Beneficiaries. There is now statutory provision allowing the beneficiaries of a Jersey trust to disclaim in whole or in part their interest in such trust, regardless of the terms of the trust.
• Trust Period. The statutory Trust Period of 100 years, which previously existed in Jersey, has now been removed, so that Jersey trusts may continue for an unlimited period with no rules against perpetuity applying to Jersey trusts.

There are other detailed changes regarding the administration of trusts, including the ability to delegate powers and clarify the position where trustees are dealing with third parties in relation to trust assets.

Many of these changes have been demanded by trust practitioners in Jersey for a considerable time, but they are now all fully in force and available in drafting trust documentation.

Jersey has a reputation as secure jurisdiction with a well-regulated trust industry and a highly regarded judiciary capable of dealing with any trust disputes which may arise. This reputation can only be enhanced by these amendments.

It is, perhaps, also worth noting that, as other jurisdictions, such as Switzerland, have given statutory recognition to foreign trusts, so the use and recognition of Jersey trusts worldwide is increasing.

Foundations

A working party is making good progress towards the introduction of a Foundations Law in Jersey which will "sit alongside" the Trust Law and allow an alternative method by which family assets and/or business assets can be held for the benefit of future generations.

Private Trust Companies and Family Offices

Another amendment introduced by the Trusts (Amendment No. 4) (Jersey) Law 2006 was the removal of the liability of directors of a corporate trustee for breaches of trust committed by that trustee. This was an important changes lobbied for intensively by the trust industry, as it had been felt that the previous position under Jersey law had discouraged the use of Jersey as a jurisdiction in which to incorporate a private trust company for use by a family office. There should now be no such disincentive to the creation of a private trust company in Jersey and this has been one of the areas of new business encouraged by the Jersey authorities. In many instances, the management of a family office through the use of a private trust company goes hand in hand with the establishment of a fund management activity, in order to supervise the management of the family assets. It should also be noted that another recent legal development, namely the introduction of protected cell companies ("PCCs") or incorporated cell companies ("ICCs") have a part to play in encouraging setting up of family offices and private trust companies, as it is now possible to have a single legal structure containing several "cells", each of which can act as the trustee of a separate family trust. A PCC, or perhaps more usually an ICC, is thus an ideal structure to create a multi family office.

Investment Funds

As with trusts and family offices, there has been considerable activity regarding the regulation of investment funds over the past 12 months building on the momentum provided by the introduction of the Expert Fund Regime in Spring 2004.

The Jersey Expert Fund Guide

In November 2006, the Commission produced an updated Jersey Expert Fund Guide which made a number of minor enhancements to further improve the Experts Funds Regime. These enhancements included clarification that expert funds may be listed on a stock exchange, subject to certain safeguards regarding the introduction of new investors through the Stock Exchange; the range of permissible jurisdictions in which the investment management of an expert fund may take place was extended, so as to include, as well as any OECD Member State, any other state or jurisdiction with which the Commission has entered into a Memorandum of Understanding on investment business. The Commission is actively seeking to extend the range of jurisdictions with which it does enter into such Memoranda of Understanding.

The Non-Jersey Domiciled Fund Guide

In February 2007, the Commission issued the revised Non-Jersey Domiciled Fund Guide which, again, made a number of enhancements as regards the Regime applying in Jersey for administration of non-Jersey domiciled funds. In general, several important clarifications were introduced including the fact that a non-Jersey domiciled fund does not need to hold a permit pursuant to the Collective Investment Funds (Jersey) Law 1988 (the "Collective Law"), provided that it does not have an established place of business in Jersey. The established place of business test was also clarified by an amending order under the Collective Law, meaning that a foreign company should not have an established place of business in Jersey by reason only that:

(1) the directors of the company meet in Jersey, or

(2) a manager, director or administrator of the company is ordinarily resident in Jersey.

This is a helpful clarification and allows greater scope and flexibility when administering foreign funds from Jersey without requiring detailed regulatory approval. It should also encourage the use of Jersey as a jurisdiction for the holding of board meetings by foreign funds.

The Jersey Listed Fund Guide

A new guide as regards Jersey incorporated funds, which are intended to be listed on a stock exchange, was introduced in January 2007. This new guide is designed to provide a fast track procedure for the establishment of closed end collective investment funds which are to be listed on certain well regulated stock exchanges or markets. The main advantage of using the listed fund procedure is that the regulatory authorities have stated that such funds should be capable of being approved within three working days and such funds will not be restricted only to expert investors, being those able to invest more than US$100,000.

The key features of listed funds capable of using the Jersey Funds Guide are as follows:

• A listed fund must be listed on one of the stock exchanges or markets recognised by the Commission (a list of which is set out in the Jersey Listed Funds Guide);
• A listed fund must be a Jersey company, although, depending on the demand, it may be possible in future to use unit trusts and/or limited partnerships as listed funds;
• A listed fund must be closed ended (that is it cannot permit redemptions at the option of investors);
• There are not criteria for qualification as an investor in a listed fund beyond any required by the relevant stock exchange or markets.

As with all expert funds, the investment manager of a listed fund must be of good standing and established in an OECD Member State or in a jurisdiction with which the Commission has entered into a memorandum of understanding and all listed funds must have at least two Jersey resident directors and a Jersey based monitoring functionary to ensure due diligence and compliance with the Listed Funds Guide.

Future Regulation of Funds and Functionaries of Funds

In April 2007, the Commission issued its updated position paper relating to the implementation of the proposed change of regulation, so that fund functionaries will be licensed under the Financial Services Law, rather than under the Collective Law. This new method of regulating "Fund Services Businesses" is important and should simplify the procedure needing to be undertaken when setting up a new fund in Jersey. In particular, once a Jersey monitoring functionary has been licensed under the Financial Services Law as a Funds Service Business, it will be allowed to take on new fund administration business without acquiring an additional licence or permit (as is currently the case under the Collective Law). Although the fund itself will require a regulatory permit under the Collective Law, the majority of the requirements imposed by the Commission will be placed on the Jersey monitoring functionary, rather than on the fund itself. It should also be noted that it is the intention that all existing Fund Services Businesses in Jersey needing to be licensed under the Financial Services Law, will be "grandfathered" into such regime. There will then be a new Code of Practice for fund services business and, thus, in some instances, there will need to be compliance with higher regulatory standards in the conduct of all Funds Services Business in Jersey.

On the whole, these changes should simplify the Regime and make it easier to establish new funds in Jersey whilst safeguarding the reputation of the Island in terms of the services being provided from Jersey.

International Co-operation

As referred to above, the Commission is seeking bi-lateral agreement with other jurisdictions for regulatory purposes. In this respect, during the past year Memoranda of Understanding have been entered into with the Netherlands and Cyprus establishing a formal framework for mutual assistance and exchange of information between regulators and to facilitate the enforcement and compliance with laws in each jurisdiction so as to protect investors and depositors in such jurisdictions.

In the case of the Netherlands, this is an important development, as it permits Jersey listed funds to be recognised as an appropriate vehicle for listing on EURONEXT I Amsterdam. The use of a EURONEXT listing for Permanent Capital Vehicles in connection with property funds, private equity funds and hedge funds has been an area of growth in the past 12 months for the Channel Islands.

Update of Anti-Money Laundering legislation and regulations

The Commission has published a position paper on its website on 3 April 2007 dealing with the implementation of the updated Handbook for Prevention and Detection of Money Laundering and Terrorist Financing (the "Handbook"). It is anticipated that the final version of the Handbook will be released very shortly, with a view to providing business with a six month implementation period, so that this is in force before the end of 2007. The new Handbook contains many detailed changes regarding the policies and procedures which the Jersey businesses have to have in place to prevent and detect money laundering and terrorist financing. These changes have been introduced following fairly lengthy period of consultation with industry and, although the burden on business in this area is only ever likely to increase, there is a recognition by the Jersey authorities that, in line with worldwide practice, a risk based system of assessment should be introduced by all businesses which handle client monies.

Conclusion

Taking all of the foregoing into account, it can be seen that Jersey business, in conjunction with the Jersey regulatory authorities and Jersey government, has been very active over the past 12 months in ensuring that legislation and policies are kept fully up-to-date and are, wherever possible and consistent with international best practice, made "business friendly".