Jersey Finance, the body that represents and promotes the award-winning Jersey IFC, recently hosted an event at the British Consulate in Jeddah as part of its efforts to broaden and deepen its relationships with key stakeholders and clients in the Kingdom of Saudi Arabia. During the event, Jersey Finance launched its latest whitepaper, in collaboration with law firm Hammad & Al-Mehdar, which investigates investors’ use of IFCs for structuring related to the Kingdom and their preference in using Jersey.
The whitepaper titled “Jersey – A Clear Choice for Saudi Investors” examined the various approaches sought by investors in structuring inbound and outbound investments, the factors behind such approaches, and the benefits of structuring Kingdom investments through IFCs such as the Channel Island of Jersey. In addition to compiling empirical data, the study was based on the views of family offices, high-net worth individuals, foreign companies and industry experts in relation to Jersey’s credentials, as well as quantitative data from the Kingdom’s Ministry of Finance.
Current Economic Climate in the Kingdom
Given the historical reliance on oil for economic growth, which makes up 44% of the Kingdom’s GDP, Saudi family offices and HNWIs have traditionally sought to diversify their portfolio through international investments. With the government focused on economic development through expansionary policies and record-setting budgets, ultra-high net worth individuals (UHNWIs) and family offices are looking to diversify their investments internationally and in a manner that is more immune to commodity and oil price fluctuations.
In order to achieve this, the government has put the Vision 2030 in motion; as a result, the country has seen both significant outflows of wealth seeking diversification, and major inflows of investments pursuing growth. In line with the diversification mission, the Kingdom has identified Foreign Direct Investment (FDI) as a main contributor to such economic development with an aim to increase FDI from nearly $8 billion to $18 billion by 2020.
To do so, KSA has embarked on an economic reform programme including loosening the restrictions on foreign ownership of companies listed on the Saudi Stock Exchange (Tadawul), and allowing 100% ownership of retail businesses. In addition, the Saudi Arabian General Investment Authority (SAGIA) has significantly streamlined its requirements for licensing foreign investments into the Kingdom over the past two years, resulting in very significant reductions to investment execution timelines for foreign investments.
IFCs for Outbound and Inbound Investments
With this in mind, understanding investors’ attitudes towards structuring both inbound and outbound investments is key. According to the Jersey Finance research, the use of IFCs in structuring investments into the Kingdom is prevalent across large and mid-market corporations. The research finds that drivers behind inbound investment structuring vary significantly from the drivers behind outbound investments. In fact, structuring by corporations is commonly part of a larger tax efficiency analysis that is frequently tied to where the parent company is headquartered.
Abdulrahman Hammad, partner at Hammad & Al-Mehdar said: “The use of IFCs when structuring outbound investments is widely prevalent among family offices and HNWIs from the Kingdom. Our experience and discussions with stakeholders in the market show that Holding companies are the most preferred legal structure, due to the ease of incorporation and maintenance. Additionally, when looking at family office and HNWI investment holding structures, the main factor in the selection is cultural orientation between common law-based trusts and civil law-based foundations, in addition to others including tax efficiency, asset protection, jurisdictional stability, jurisdictional regulatory environment as well as reputation.”
Richard Nunn, Head of Business Development at Jersey Finance said: “Our research shows that tax efficiency is the key criteria behind the selection process for inbound investments, and this is mainly because companies need to repatriate profits to their parent entities and as such, companies will commonly seek to identify and use jurisdictions that will maximise tax efficiency of their investment. Companies headquartered in the EU commonly favour EU jurisdictions such as Cyprus, Ireland or the Netherlands, while those headquartered in the United States are likely to use the Cayman Islands or the Netherlands. UK clients lean towards the Channel Islands (Jersey and Guernsey), and Asian clients towards Singapore.”
The research also finds that the use of IFCs to pool foreign and Saudi investments into the Kingdom is hardly seen in structuring exercises. This is because foreign investments into the Kingdom are subject to an income tax regime, while Saudi investments are subject to a Zakat regime, generally perceived to be significantly lower than applicable income tax. The General Authority for Zakat and Tax treats foreign entities as subject to income tax irrespective of their ultimate shareholding.
Structures related to the Kingdom in IFCs
In terms of outbound investments, the holding structure most widely used by Saudi family offices and UHNWIs in an IFC is a simple holding company owning various investment special purpose vehicles (SPVs). The research finds that this is due to the simplicity of the structure, as most investors adopt it in a reactive manner, as opposed to being part of a planned process. Larger family offices, with dedicated management teams, resort to either trusts or foundations as their holding structure, suitable for succession planning and governance purposes.
Jersey – setting itself apart
With that being said, Jersey maintains a leading status amongst other jurisdictions as it complies with the highest international standards and has developed significant experience in over half a century of delivering private wealth management solutions. In addition to its strong reputation, Jersey’s attractive attributes include tax neutrality stemming from the 0% tax rate applicable to Jersey companies, the ease of administrative requirements for incorporating and maintaining holding company, jurisdictional stability, proximity to European centres, a robust and flexible regulatory framework, and an expert workforce of over 13,000 professionals.
Underpinning this ideal environment for Saudi investors, Jersey offers further advantages to international companies structuring inbound transactions. Its Companies Law offers flexibility in allowing the treatment of returns to investors to be structured as dividends, redemption of share capital, or share buy-back, and in permitting a wide range of funding sources for such returns.
“As the appetite for investing in the Kingdom increases, corporate holding structures that combine tax efficiency with additional valued attributes such as jurisdictional stability will hold merit. To that end, Jersey is in a leading position to leverage this growing appetite and the increased flow of funds into the Kingdom. With over 50 years of expertise in delivering private wealth management, trust, estate and succession planning and foundation structures, we are excited to play a pivotal role in the Kingdom’s growth story,” Nunn continued.