Discussions about choice of captive domicile often leave out a crucial element – the people who will manage the business day-to-day, suggests Callum Beaton.
It is all too easy to read any number of articles about captive domiciles: which territory is best and why; how many captive formations occurred last year; why was there a reduction on in numbers over the previous year and is full support being given by the captive management community?The protagonists in the field are well known, be they brokers, management companies or regulators but broadly speaking a greater split falls on geographic regions. In the Americas there is Bermuda, Cayman, Vermont and a whole host of states offering homes to captives. In Europe – Dublin,Guernsey, Gibraltar, Isle of Man, Liechtenstein, Luxembourg, Sweden and various other territories. Then travelling east, Singapore, Hong Kong,Labuan, Mauritius and, again, further territories known to greater andlesser extent.
On the face of it, each of these territories is competing for a fairly small market. I do not wish to suggest that the captive arena has in any way gone into decline, but in recent years the appearance of new captive domiciles has verged on disproportionate to the activity of the market they wish to serve. Is anyone to blame?Consultants, prior to the establishment of a captive, must ensure that at all times best advice is given, and this means that from time to time new locations will need to be considered. Does such consideration require the manager to endorse a new, unproven territory? Certainly not, but the key issue is that the consultant, broker, manager or whomever is charged with the review must be able to provide an objective view as to the suitability of territories to the needs or demands of the client.
It is straightforward to identify key issues of accessibility, regulationand quality of resource in a feasibility study, and these do remain key to any decision. Arguably, the greatest difficulty faced by a new jurisdiction on the block is not the existence or quality of its regulation, but how that regulation is applied.
Regulators worldwide strive to ensure that their own approach is well understood: the open door policy is greatly to be admired and leads not only to confidence in their ability, but inherent support from the captive management community. The regulator who interprets the law and applies it in an equitable fashion is the one who will win through. But the real winner is the client whose captive is managed in a territory that not only meets his requirements but positively seeks to tailor its response to the needs of the client.
How is the response provided? It is, if anything, the development of niche sectors and services that has in recent months begun to set apart the “men from the boys”. What do you do if the captive clearly is now in the wrong place? Redomiciling legislation, once the preserve of the tax gypsy, has come of age and provides a bona fide route for the captive.
As mergers and acquisitions continue seemingly unabated, the same has come true of the captive sector. The result is the need to merge and redomicile captives, where once their position was guaranteed for life. The painful, time consuming and costly exercise of re-incorporation, portfolio transfer and ultimate one captive from two can now largely be consigned to the scrap-heap. The key requisites are that the ceding territory and the receiving territory both have the appropriate legislation to permit this activity. As to why a company may wish to redomicile, this could be due to any number of things but the least likely to have a bearing on the situation is a general malaise with the existing territory.
There is no doubt that the choice of territory is taken seriously, as the wrong decision will be costly in any number of ways: a 12 hour time difference is not exactly condusive to business, so there are not to many Japanese parented captives in Bermuda.
If 10% tax is an option then frequently it is persuasive, but home territory controlled foreign company (CFC) legislation can again have a bearing. Sometimes the option to pay tax can truly be attractive.
What really is being sought by the captive? If it is access to catastrophe markets, notwithstanding comments about time zone, an awful lot points to Bermuda before any other territory. Guernsey, on the other hand, has stolena lead with its protected cell company legislation, but none of these subjects touches on the item crucial and essential to the captive world. Here we have a micro-climate of full employment and limited resource.
The crucial factor
The captive manager is not one's average insurance professional, but theproverbial “Jack of all trades”. One moment, perhaps, he or she is considering the reinsurance programme of an airline captive, the next addressing taxation issues of a company which would be faced with a punitive tax bill back home, and the next providing corporate secretarial services to a client company board meeting. The very fact that the captive employment market place is a limiting environment creates its own set of problems when it comes to selecting a domicile. Captive managers worldwide are faced with a particular set of problems. Invariably, captives are established in location with a limited unemployment problem. To be faced with regulatory issues, often requiring not only management and control to be shown to be in the territory, but the physical existence of files and all supporting documentation to be there also, is a complete anathema in the days of developing e-commerce. For the industry to remain competitive and to move forward cost-effectively into the 21st century, a change in approach will have to come about.
We then stand to have an industry of well qualified individuals able to deliver central management and control of captives in top quality jurisdictions at favourable cost. This also serves to open the way for the newly emerging domiciles. Do they in reality wish to encumber themselves with the start up costs of a new industry sector? I venture to suggest not, but a combination of established high quality domiciles, backed up by low cost offshore emerging territories can deliver a highly competitive edge to the captive sector as long as the opportunity will be granted.
For the moment, the edge has to be achieved on a near level playing field between territories of very nearly equal standing. Key issues boil down to the insurance market place and territorial infrastructure; evolving legislation and tax.
For the consultant eager to promote the concept of captives in a competitive environment, undoubtedly top of the list is protected cell company legislation. A refinement from the standard cell company or rent-a-captive concept, this has the ability to deliver a vehicle without risk of contagion between cells. It has introduced two distinct camps of the followers and the adversaries. On the one hand, there are those who consider the legislation to be innovative and a cost saving vehicle to those who prefer not to incorporate their own captive, whereas the adversaries see the legislation as flawed and a route to disaster. Individual views aside, it has been well endorsed in the captive community and Guernsey, in particular, has benefitted from very considerable commitment to the facility. It is worth noting that many newer jurisdictions in their earliest press releases state that protected celllegislation is being drafted.
Number two on the list is the international company. Once again a facility unique to the offshore environment. Choose your own tax rate! Once dismissed as a gimmick, it is now seen as a valuable tool both to theterritories which can offer the facility and also to companies parented in higher rate tax jurisdictions. Here, multi rate jurisdictions can deliver the edge from a fiscal standpoint.
In third place is the (frequently overplayed) direct writing hand. Yes, captives can enjoy the ability to write direct business throughout the European Union, but you only need to look at the disappointing developmentof Gibraltar to see that this ticket is not all its cracked up to be. Conversely, trans-Atlantic cousins have utilised the advantages of direct writing to facilitate European coverage directly from captives domiciled in Dublin. The ability to write directly without a fronting insurer is certainly valuable, but the need to provide policies in local language and to back this up with local servicing often tends to erode many of the benefits on offer.
Redomiciling legislation will neither make or break a decision to establishin a given territory. However, in the basket of goodies available in theoffshore environment it has its place and should not be ignored.
Star prize in all territories goes to professionalism and commitment to thecaptive cause. With very few exceptions, indeed, in any examination of captive jurisdictions, you will find long term commitment from highly experienced individuals eager to deliver optimum levels of advice and service.
So where does all this leave us in the search for the perfect captivedomicile? The answer, I hope, is clear. Look at the legislation and convenience of the environment. Go and visit the domiciles highlighted in any study and seek to understand the levels of commitment not just of regulators and senior management, but also those who will handle the business on a day to day basis. If you are comfortable with what you see and what you experience, that ultimately will be the decision maker. Why?
Quite simply, because the professional adviser you have entrusted to guide,you will already have evaluated and guided you on all aspects oflegislation, regulation and taxation. The decision is all that is required.
Callum Beaton is managing director of SINSER (Guernsey) Limited and isresponsible also for the group's activities in Dublin, Gibraltar and The Isle of Man. Tel: +44 (0) 1481 710502; fax: +44 (0) 1481 710524.