Offshore (English & Chinese)

Tim Prudhoe and Shaun Z Wu

Kobre & Kim

Chinese business has an increasingly global perspective. Companies such as Sinopec, Fosun and Anbang have received widespread coverage in Chinese and worldwide media by investing abroad and expanding business into overseas markets.

This phenomenon is not only the result of the macro-economic policy of the central government, but is also driven by the need of the Chinese investors themselves for extensive resources and capital, advanced technologies and management, broader (and more international) brand recognition and new business opportunities.

Statistics show China's current outbound investment is totalled at US$660 billion. A whopping 60% of that investment is concentrated across Hong Kong, the Cayman Islands and the British Virgin Islands (BVI). With COI expected to double to US$1.2 trillion within the next decade, these and other Caribbean jurisdictions will likely continue to be the favourite offshore financial centres for use by Chinese investors.

Although the benefits of investing abroad are widely perceived from within the PRC, an increasing number of Chinese investors now realise that specific Caribbean issues arise if and when an investor-related dispute evolves. As a result, an understanding of the Caribbean dynamics of these investments is more important than ever and, if properly managed, can retain many of the advantages of Caribbean business structuring.

Official statistics published by China's Ministry of Commerce (MOFCOM) show that between 2004 and 2014, non-financial outbound direct investment grew from US$3.62 billion to US$102.89 billion. China was ranked third in the world in terms of foreign direct investment (FDI) outflows by the United Nations Conference on Trade and Development for 2012 and 2013. The 2014 China Outbound Direct Investments Statistics Bulletin by MOFCOM, the National Statistics Bureau and the State Administration of Foreign Exchange is expected to be published in September this year, but the clear message is that China's investment outflows are expected to surpass its inflows for the first time.

To encourage and facilitate Chinese investors going overseas, the regulations on outbound direct investments in China have been updated since March 2009. In particular, the Measures for the Administration of Check and Approval, and Record Filing of Overseas Investment Projects promulgated by the National Development and Reform Commission (NDRC) came into effect in May 2014. This further streamlined and simplified the regulatory scheme for COI and delegated significant regulatory power to the NDRC's lower levels.

According to the World Resources Institute, 68% of China's outbound direct investment stock in 2013 was in Asia. If one extracted the potential flows to the offshore financial centres (OFCs), the geographical distribution of China's outbound foreign direct investments stock varied materially. This shows the significant role OFCs play in COI.

With the preferential treatment given under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) and various policies promulgated by the central government to facilitate communication with businesses in the mainland, Hong Kong is usually the home to many direct holding companies of mainland entities. However, Chinese investors' needs for flexibility and confidentiality cannot always be fully satisfied with the legal regime in Hong Kong. This is where the Caribbean jurisdictions step in and is why they have become such familiar aspects of doing business into and now out of China.

Of the several OFCs based within the Caribbean region, each is known to have a particular focus. The BVI, for instance, is the world's leading centre for company incorporations. According to the BVI Financial Commission's Statistical Bulletin for the third quarter of 2014, the BVI has over 480,000 active companies. It is also a leading domicile for offshore trusts and hedge funds. According to BVI authorities, more than 40% of the BVI's financial service business comes from China and other Asian countries. Such is the market penetration that “BVI” is a general term used to refer to the offshore companies in PRC and Hong Kong.

Bermuda's insurance and reinsurance business is highly regarded in the onshore world. Bermuda is the largest domicile in terms of active captive insurance companies with a total of 1,200 as of the end of 2014 and is continuing to see new captive insurance businesses relocating to the area. The Cayman Islands are known for investment funds and, according to the Cayman Islands Monetary Authority, have more than 11,000 registered mutual funds.

One of the main attractions of establishing investment vehicles in the Caribbean is the ease with which they can be set up and administered. A Cayman Islands or BVI company, for example, takes only a few days to incorporate. Cayman's laws allow investors to operate investment funds through a number of vehicles, the most commonly used being an exempted company, a segregated portfolio company, a unit trust or an exempted limited partnership.

In the Cayman Islands, exempted companies may redeem or purchase their own shares and operate as open-ended corporate funds. An exempted company can also be established as a segregated portfolio company, which makes it possible to provide a means for different groups to protect their assets when carrying on business through a single legal entity.

Many offshore jurisdictions are now recognised and approved as domiciles for major stock exchanges in the world, which gives Chinese investors access to capital markets in the US, UK and Hong Kong. The HKEx Fact Book for 2013 reports that, as of the end of 2013, Cayman companies represented 41% of companies listed on the Hong Kong Stock Exchange, while Bermudan companies represented 32%.

The use of offshore vehicles also introduces greater tax efficiencies when compared with onshore jurisdictions. In many instances, offshore jurisdictions are either tax neutral or have signed double taxation treaties with China.