Despite the recent turmoil in global crypto markets, investors continue to invest in digital assets in hopes of chasing better returns than traditional asset classes. Many managers suggest that crypto should make up at least 5% of investors’ portfolios.
With this continued interest, a number of Singapore managers are using Jersey as the jurisdiction in which to domicile their funds. This choice is motivated by several factors.
Tax treatment of digital assets in Singapore. Digital assets do not fall under the definition of a “designated investment” for the purposes of Singapore tax law. This means that a fund domiciled in Singapore will be subject to tax in the country, and such tax avoidance is extremely unattractive to investors.
Tax neutrality. Funds that are structured as Jersey companies and are Jersey tax residents are subject to tax at a rate of 0% on income derived from their investments. Jersey does not impose withholding tax on dividend or interest income paid by Jersey tax resident companies. There is also no gift tax, inheritance tax, debt duty or capital gains tax in Jersey.
Double taxation agreement. Jersey and Singapore have entered into a Double Taxation Agreement (DTA) which provides Jersey-domiciled digital asset funds that are Jersey tax residents with potential relief or exemption from tax exposure on any resulting tax-related gain of the sale of crypto-currencies in Singapore.
The DTA between the two countries is designed to:
- Help determine the tax residency status of a person or business;
- Protect against the risk of double taxation, where the same income is taxable in two countries; and
- Ensure certainty of treatment for cross-border trade and investment.
The availability of relief under a Jersey or Singapore CDI is subject to conditions and anti-abuse rules, so professional tax advice should be sought.
It should be noted that Jersey also has comprehensive DTAs in place with other jurisdictions, including the United Arab Emirates, Qatar, Luxembourg and Hong Kong.
Regulatory security. Jersey is a well-established international financial centre, and is known as a home for funds, including the world’s largest fund, Softbank Vision Fund, with $93 billion in committed capital. Unlike some other jurisdictions, Jersey is not free-for-all crypto, and the Jersey Financial Services Commission (JFSC) reviews funds that invest in digital assets to ensure that the sponsor, structure, and operation of the fund are credible.
JERSEY FUNDS SCHEMES
Jersey has two main fund regulatory regimes, the Jersey Private Fund and the Jersey Regulated Expert Fund. A key distinction between the two is that a private Jersey fund cannot have more than 50 investors or make more than 50 formal offers to investors (the so-called “50 or less test”).
In contrast, a Jersey expert fund can make an unlimited number of offers and have an unlimited number of “expert investors”, but is subject to a formal regulatory approval process.
The most popular regulatory regime for Asia-based fund managers launching their digital asset funds is the Jersey Private Fund. Indeed, recent experience has shown that a Singaporean manager wishing to launch a fund outside of Jersey should start the life of the fund as a private Jersey fund and, if the manager is building a track record, then move on to an expert fund in Jersey. The main characteristics of a Jersey private fund are:
- Maximum of 50 investors at any time and maximum of 50 initial offers;
- Must not be listed on a stock exchange. It can be open or closed to redemptions by investors;
- Investors must qualify as professional investors and/or subscribe for interest worth at least 250,000 GBP (300,000 USD);
- No fund size limits, investment or borrowing restrictions (other than those agreed with investors);
- Simple consent is required from the JFSC under local law;
- A non-Jersey director may be appointed;
- Must have a Jersey Designated Service Provider, or DSP (i.e. Jersey Regulated Administrator);
- No audit requirements (although this is generally expected for a digital asset fund);
- No custodian requirements (although typically expected for a digital asset fund); and
- No requirement for any fund official (eg manager or investment adviser) to be regulated in Jersey.
Some additional requirements apply if the fund is actively marketed in the EU or European Economic Area (EEA), but it is possible to “upgrade” a private Jersey fund so that it can be marketed in the EU. EU or EEA at a later stage, and this process is a relatively simple and well-trodden path.
LESSONS LEARNED SO FAR
Since Jersey was first identified last July as the home of Singapore fund managers, a number of digital asset funds have been launched and some very valuable lessons have been learned, which are summarized below.
Structuring. Using a Jersey company as a fund vehicle offers great flexibility, with recent Jersey fund structures for Singapore managers including:
- The fund as a stand-alone Jersey company;
- A Jersey master or feeder (similar to the traditional hedge fund structure);
- A Jersey company as a sub-fund of a Singapore Variable Capital Company (VCC), which accommodates certain types of investors who need to invest through the VCC; and
- A Jersey company under a separate Cayman Islands holding company.
Administrative arrangements. The Jersey private fund regime requires the fund to appoint a Jersey-regulated administrator as DSP. The role of the DSP is to confirm the promoter’s credentials with the JFSC and ensure that the fund meets the requirements of the Jersey Private Funds Guide (including that all investors have been subject to anti-money laundering checks in accordance Jersey law).
For obvious reasons, many Singaporean fund managers want the actual administration of their fund (including calculation of net asset value, processing of subscriptions and redemptions, fund accounting, etc.) to be performed in the same time zone as the fund manager.
Therefore, any Singapore manager wishing to launch a Jersey-domiciled digital asset fund should ensure that the roles and responsibilities of the Jersey DSP and the Singapore administrator are carefully delineated so that there is no no overlap but also that nothing slips through the cracks. both from an operational and regulatory point of view.
JFSC interaction and approval schedule. Since cryptography is a sensitive activity for the JFSC, the normal 48-hour approval timeframe does not apply. Instead, a Singapore manager should expect regulatory approval to take between eight and 10 weeks from the date of submission of Jersey’s private fund application.
The JFSC will want to see a copy of the fund’s offering memorandum and some information about the promoter and its officers. The JFSC will focus in particular on the fund’s custodial arrangements to ensure that investors are properly protected when investing in an asset class that has historically been vulnerable to hacking and asset misappropriation.
Number of investors. The test of 50 or less mentioned above applies on a “transparency” basis, so managers cannot put a number of different feeders into Jersey’s private fund and claim that the total number of investors in the Jersey fund does not exceed 50.
There is a useful exception for any discretionary investment manager investing on behalf of retail investors, where the discretionary investment manager counts as one investor.
The original version of this article was published by Review of business law in AsiaSeptember 2022.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.