The Financial Puzzle

As we approach the middle of the final quarter of 2012, one has to say that the economic outlook is still a gloomy one - even for a born optimist such as myself. In fact as far back as July 2009, my Gibraltar Magazine column article was titled Green Shoots. Had I known three years ago what we all know now, maybe I wouldn’t have been so keen to call time on the crisis, but life seldom turns out quite as we expect, does it? And in the financial world, that has never been truer than today.
But given my "glass is half full, not half empty" sense of optimism, are there any signs of recovery one can point to as 2012 races towards 2013? Firstly, I should acknowledge that for many, including here in Gibraltar, the year could end badly as more jobs losses are announced and companies continue to struggle or even fail altogether. This is especially true across the border in Spain where many Gibraltarians have been left nursing hefty mortgage payments on property worth considerably less than when purchased.

Sad to report, negative equity - once a peculiarly British phenomenon - has become far too common in Spain. The new government is struggling with an ever deepening recession and chronic unemployment. It ends 2012 faced with providing financial aid not just to its heavily indebted banking sector but to the autonomous regions themselves. The second half of the year has been dominated by talk of an EU bailout and we have seen some civil disorder in the streets.

But away from Spain, are there genuine reasons to be hopeful? I suggest that there are - in certain specific areas - and the hope has to be that these early signs will prove to be long lasting and will manifest themselves in other parts of the economy, leading to an overall change of mood and ultimately recovery.

Consider the situation in the place where it all started to go wrong - the US. There are some real signs of progress and not just anecdotal ones or hyperbole in advance of November’s presidential election. The overall unemployment numbers, whilst still far too high, have recently stabilised. More and more listed companies have been reporting good year-end figures and, as a result, some elements of the stock market are testing levels not seen for several years.

All well and good but the US is such a vast economy and is still the only true global superpower in financial terms. What happens across the Atlantic certainly affects us here but we must face the fact that it’s the situation in Europe that should concern us most. It is upon Europe’s recovery, or at least partial recovery, that we all depend.

Of course in Gibraltar we rely on the financial health of two entirely separate economies for our well-being. I touched on the situation in Spain earlier, but let’s now turn to the UK because, for many Gibraltarians, the state of the British economy has a more significant effect on their daily lives. As part of the sterling area, we are dependent on Britain when considering the all-important exchange rate, especially against the euro. Price rises on imported goods such as fuel and, of course, food, are all largely out of our control.

UK government policy is currently focused on reducing the eye-popping deficit while at the same time attempting to stimulate growth and keep inflation under control. It is a very tricky balancing act. The deficit is still huge but is moving on a positive track. Inflation is now line with expectations and whilst GDP, my favourite measure, is still negative (i.e. in recession), it is marginal and in fact the figure was recently revised in the right direction. All this is somewhat academic but the hope is that by stimulating growth, more jobs will be created leading to higher tax receipts and eventually a permanent reduction to the huge deficit.

In the real economy, companies are still laying off staff and stories of this or that high profile corporate failure still appear in the news with gruesome regularity. At the same time however, others are taking on staff. The motor and retail industries are prime examples recently. There are also real signs that banks are starting to lend again, even if very selectively, which is long overdue given the lengths to which the government has gone to persuade or cajole banks to lend - from quantitative easing and maintaining interest rates at very low levels through to threats of punitive action.

It’s in the UK property market that we can see real, tangible, signs of recovery - fragile though any upturn may be. The truth is that some property sectors are booming; the smarter areas in central London are still doing as well as ever but most British people don’t live in Knightsbridge or Mayfair. What about the rest of the country?

Several major house building firms have recently announced good year-end figures. Considering the reasons why, leads us to one of the easiest comparisons one can make between the UK and Spain - one of great interest to us here in Gibraltar. The two countries differ markedly when considering residential property. Put simply, in the UK there are just not enough houses to go round. Net immigration and constantly increasing demand from the young and first-time buyers mean that this sector is relatively buoyant. Moreover, a number of the house builders are sitting on undeveloped land. Given the chance of increasing bank lending - both to the developers to build houses and to the individuals who want to buy them, the position is likely to become ever more sustainable. And this leads to other forms of spending such as expenditure on white goods, furniture and so on.

In Spain - and indeed many other countries in Europe - the opposite applies. There is chronic over supply combined with no appetite from the banks to lend to the property market. Hence demand is drying up. The situation in both countries could hardly be more different but of course Britain is a nation of home owners - certainly there has been a massive jolt in the last few years but has the national psyche really be changed for ever? I doubt it.

Some consider it a pity then that the UK government is planning such sweeping changes from next year relating to British residential properties that are owned by offshore companies. Aimed at clamping down on what they see as abuse of favourable tax treatment, increased stamp duty has been announced where property is valued at £2m or more and for the first time capital gains tax will apply to properties owned by such companies. We await final details but anyone in this position should seek advice urgently to see whether they are affected.

These new changes may impact negatively on foreign purchasers of UK property who might now think again if the previous fiscal benefits attached to such investment will no longer apply. I suggest though that looking at the wider picture, UK residential property for domestic use - that is where individuals are UK resident and looking to occupy the property themselves or for letting out to others - could well be one of the lynchpins of the putative economic recovery for which we are all so desperate.

Perhaps I might be allowed to misquote Winston Churchill. Are we seeing the end of the financial crisis? No. Not even the beginning of the end. But we might, just might, be witnessing the end of the beginning - at least in the UK. Let’s hope so for our all sakes

But let me end on a cheering note. Next month, the Gibraltar Magazine produces its festive edition. This column will be reporting on a now traditional seasonal visit to the Rock family to see how they are preparing in the run up to Christmas - don’t miss it.

Taming the Lion

Last month I discussed the “BRIC” countries and what makes that group of the four leading emerging economies (Brazil, Russia, India and China) so important to today’s world economy. I also touched on the admission of South Africa, despite its relatively small size, to the group in 2010 to create “BRICS”. Since completing that piece, I attended a dinner hosted by Barclays Wealth at which Henk Potts, the bank’s global investment strategy director and one its best-known personalities, was speaking. Confidently I prepared some deeply cerebral, meaningful questions on BRICS hoping that his responses would provide the basis for this month’s column. And so it did – but not in the way I had anticipated

Henk is known for his robust views but he surprised his audience when he asked us to name regions that were likely to be exciting from an investment point of view in the next few years. “Latin America” shouted one person. “The Middle East”, I spluttered. Someone even said “Singapore”. But no, Henk wasn’t having any of it. The area with most “upside potential”, he told us, was Africa – or the “lion economies”, as he terms them, as opposed to the “tiger economies” of Asia.

Currently these “lion economies” are responsible for only 2.5% of global output. This may not sound a lot, but the figures start from a very low base and should therefore go only one way – upwards. Henk’s thesis got me thinking and I decided to take a more serious look at the data. What I discovered simply astounded me. It turns out that several African economies are growing at the rate of 6% or more on an annual basis.

Regular readers will know that my favourite statistic is GDP – Gross Domestic Product. According to African Economic Outlook statistics, real GDP growth rates across the entire continent of Africa are all in positive territory. Not just a few countries mind you, but every country in Africa is growing. Even Zimbabwe is reporting growth, albeit after many years of decline.

As so often with statistics, the numbers disguise some special situations. For example, Libya is set to grow again this year after a near 40% fall in output the year before. But then it did have a revolution on its hands in 2011. Just compare this situation to Europe where several EU states, not just those inside the eurozone, are suffering badly. The UK and Spain are both experiencing negative GDP growth – or to use a stronger word, recession.

Perhaps it is unfair of me to remind readers of the text message allegedly sent by the current Prime Minister of Spain Mariano Rajoy to his finance minister in June, as the latter was about to go in to a last round of EU bank bailout negotiations. “España no es Uganda” (Spain is not Uganda), he is reported to have texted. That earned a rapid and stern rebuke from the authorities in Kampala, Uganda’s capital, as well it might given that African country’s GDP growth record over the last ten years – around 5% year on year and in seven of the last 10 years significantly above this impressive level.

OK so time for a pretty obvious health warning here before I get carried away. There is a massive disconnect between developed European economies such as Spain and Africa’s emerging economies. Growth is important as I have set out in many previous articles. But it is not the only issue and should be considered in isolation. Other factors such as political stability, the incidence of corruption, inflation, unemployment, poverty levels and so on, all play their part in assessing the real economic prospects for a country.

Nonetheless, the surprising fact remains that every single country in Africa is forecast to grow this year. Amongst other reasons, the impact on several African economies of the exponential growth of Chinese investment in the last decade cannot be overstated. The FT estimates that over US$10bn was invested by the Chinese in Africa last year alone, with the cumulative total now exceeding US$40bn. More than 2,000 Chinese companies from huge state-owned enterprises to small firms are now involved in Africa. Granted, much of this investment is focused on the natural resources so desperately needed by China for its development that it cannot source at home, Mining has continued to be massive business in many sub-Saharan countries and with such investment comes other spin off business. As one example, echoing China’s own recent “mineral rush” in various parts of Africa, expansion of corporate aviation is expected to grow alongside other heavy infrastructure improvements. Surface travel can be difficult, making corporate aircraft often the only option. Sovereign’s aviation division reports that Hawker Beechcraft has focused on Africa as a huge potential market for corporate jet and turboprop aircraft. A senior company executive was recently quoted as saying that growth in demand for mineral resources from emerging countries has transformed Africa and that it is fast becoming a preferred investment destination as African nations increasingly open their doors to foreign investors. None of this hides the awful truth that poverty in Africa remains a desperate problem and no amount of massaging GDP figures can disguise the facts. However as prosperity increases generally across the continent, more stable economic conditions should lead to improved government, and perhaps even this centuries-old scourge may begin to be expunged.

All very interesting but how do European businesses exploit the new opportunities that are clearly there for the taking? After all corruption and fraud remain a real risk in several African countries; anyone in the finance sector will be familiar with the so called 419 Advance Fee scams that emanate with depressing regularity from Nigeria (the number comes from the Nigerian Criminal Code article dealing with fraud).

International groups often separate responsibility for managing different areas of Africa. In the case of the Sovereign Group, for instance, southern African states are dealt with by our South Africa hubs in Cape Town and Jo’burg, whilst north Africa business – broadly speaking the countries of the Maghreb and the Nile Valley – is generally managed from our offices in the Middle East.
But for us in Gibraltar, and indeed those local companies without an overseas office network, whilst it is clear there are vast swathes of Africa to consider, how on earth can we exploit these opportunities effectively and without incurring vastly inflated travel budgets?

Well of course the answer will depend on the type of business one is considering and its scope for African expansion. It may be that services can be offered directly to a new potential client base across the continent. Great care will be needed to insulate oneself as far as possible from the corruption risk or indeed the ever-present danger that one is simply going to be ripped off. But this can happen to the inexperienced when attempting market entry into any new country. Manufacturers or trading firms might be looking at Africa in quite a different light – perhaps by sourcing raw materials or partly-finished goods, or simply looking at new markets given the dire state of economy in Europe. .
Those of us who live in Gibraltar look across, on all but the foggiest days, to the northern-most tip of Africa. Indeed, there are several businesses in Gibraltar that have made their fortune over generations by doing business in Morocco and further afield – but there are many others that have yet to take the plunge.

Tangier itself isn’t a bad place to start in fact. After all it boasts a brand new port facility at Tanger-Med Port, directly opposite Algeciras and is also served by an international airport with adjacent free zone area. If you haven’t visited the town recently, you should pop over to see the dramatic changes to the port area itself. New marina and leisure facilities are being built at breakneck speed to rival those found in southern Spain – much of this the result of foreign inward investment from the Middle East.

But that is of course only the beginning. It’s all too easy to look at Tangier and, perhaps by citing negative experiences or simply by considering its rather colourful reputation, to write off the entire country – or worse still, the African continent as a whole. Further down the Atlantic coast, the commercial city that is Casablanca greets you. It’s certainly not all Humphrey Bogart and Ingrid Bergman – indeed if you have no business to do in the city, there is very little to detain you. But from here you can fly to many cities around Africa, the US, Middle East and beyond. It’s a great place to consider from a commercial perspective. From there, the world – or at least the African continent – is your oyster. With all that is going on in Europe maybe those of us in business here in Gibraltar could do worse than spend a little time and effort looking south – just 12 miles across the Straits – where a continent awaits.

Bric & Back

Anyone who knows me will tell you that I have eclectic tastes when it comes to travel. It has always been a passion of mine, and stems from the encouragement given by my parents back to when I was in short trousers. No matter how hard the times – and we’re going back to the early 1970’s here – a holiday was always on the agenda.

It might have been a camping trip in Brittany, just 30 miles from our home in Jersey, but it was abroad. We were taken everywhere and encouraged to speak the language, eat the food and interact with the locals. No namby-pambiness allowed in our household. You want to try an oyster? There’s a franc, go and ask the fisherman on the slipway. Imagine being allowed to do that now! Nevertheless, the training served me well and all these years later I have visited over 100 countries in total.

So in order to celebrate the significant birthday that has just befallen me, we were fortunate enough to spend a week in one of the most exciting, vibrant (and exhausting!) cities in the world – Hong Kong. It wasn’t my first visit but I saw more of the place this time than ever before and we met several friends who now live and work there. One of them goaded me. “So you’re planning to stay in Gibraltar, then, are you?” he said. “Are you sure Europe is really for you? I mean the old world’s finished really isn’t it? This is where you want to be. It’s all about BRIC countries now, well BRICS actually”.

The last point got me thinking. Europe is on its knees – and I imagine will be so for some considerable time. But are people in the so-called BRIC countries really so much better off than we are here in Europe? Are they so economically superior that we should all simply up sticks and emigrate. To borrow The Sun newspaper’s famous headline from Election Day 1992, “will the last person to leave please turn out the lights”.

Let’s pause for a moment to consider what BRIC (or BRICS) stands for and why the four countries concerned are grouped together in this way? It was the economist Jim O’Neill, chairman of Goldman Sachs Asset Management, who originally coined the term BRIC in 2001. Standing for Brazil, Russia, India and China, the acronym is used to describe the shift in global power and influence away from the old world economies – chiefly the G7 countries – toward the developing world. Some economists estimate that BRIC as a group will overtake G7 in less than 15 years. So what is that final capital “S” all about?

I should say at this point that my Hong Kong-based friend was born in Jo’burg so perhaps it should not come as too much of a surprise that the “S” stands for South Africa. Economists at a Reuters’ summit two years ago decided against BRICS – Jim O’Neill himself said South Africa’s economy was simply not large enough to be included – but, despite this, the political association formed by the four BRIC countries in 2008 invited South Africa to join them in 2010. So BRICS does now exist as a real body representing almost three billion people (some 40% of the world’s population) and 25% of the world’s land surface. But let’s return to the original four BRIC nations.

The idea then is that these massive economies are showing the Old World the way forward, right? Well maybe – but surprisingly perhaps, it’s not all unadulterated good news. Despite the undoubted influence that BRIC now exerts over the rest of the world, all four countries rely on exports and these have been falling due to the their exposure to markets in the “Old World”, the eurozone in particular. Put simply, we are no longer buying as many of their goods. For example some 30% of total BRIC exports are to EU countries; in the case of Russia (which relies heavily on fuel exports) this figure is closer to 50%. Clearly then the on-going European financial crisis continues to exert a negative effect on these BRIC countries and indeed elsewhere.

At the same time, the BRIC countries are experiencing a reduction in domestic demand that is in large measure due to stubbornly high inflation rates. When combined with rising interest rates, it is not surprising that their economies have slowed as a result. In order to stimulate demand, interest rates have been cut in Brazil and more recently in China. The hope is that this should translate into healthier domestic figures during the second half of 2012 and into next year.

The stark contrast between the “Old” and “New” worlds is perhaps best illustrated in terms of my favourite statistic – Gross Domestic Product or GDP. Regular readers may recall that GDP is defined as the market value of goods and services produced in a country over any given period. Normally expressed quarterly as a percentage increase on the previous three months’ numbers, a positive figure indicates a country’s growth rate whilst a negative figure indicates a decline. Two successive quarters of negative numbers is deemed to be a recession. This is the unfortunate position in which the UK and several other European countries now find themselves and, of course, a shrinking economy makes it even harder to turn things around again.

Contrast the gloomy European position with that in the BRIC states. Leading business commentators focussed on the fall in the Chinese growth rate for the first quarter of this year. At 8.1% it was the slowest growth rate in three years. In India, which posted a “mere” 5.3%, one has to go back to 2003 to find such a “low” growth rate. Although not of the same magnitude, strong positive growth rates of 5% and 3.5% are also forecast for 2012 in Russia and Brazil, so one can understand why inflation – always the scourge of booming economies – is such a real concern.

So let us return to my South African friend’s advice that I should be moving to live somewhere in the BRIC(S) bloc. As I have written many times previously, although Gibraltar has been able to insulate itself from the worst effects of the crisis the economic outlook is not exactly rosy in our region – and no doubt there is more pain to come. So as I returned home to Gibraltar from the other side of the globe was I tempted to head straight back?

Perhaps, if I were 20 years younger, I mused. But then as I stared up at our Rock of Gibraltar , I knew immediately where I’d prefer to be. BRIC or even BRICS might represent the new exciting global financial order but I am a passionate supporter of Gibraltar so give me my little corner of the Mediterranean anytime.

None of this is meant to minimise Europe’s problems but it’s disingenuous to write the continent off entirely. We can’t all live in new uber cool cities such as Hong Kong, – or come to that Shanghai, Delhi, Sao Paulo or Moscow – although many of my colleagues at Sovereign choose to do so and it’s often part of my job to persuade – or encourage – yet another to make such a move. Of course, BRIC countries are great to visit (and I have been to them all) but the Rock, and all it has to offer, suits me very well indeed, thank you very much. Not everyone has such a choice of course but I know many people living in this region who think as I do and wouldn’t change it for the world – no matter how much greener the grass might seem to be.

Are you aware of the role of offshore companies in property investment?

Introduction:

Dubai Land Department have recently announced, (as of January 1st, 2011) that it is has banned the registration of Dubai property in the name of virtually all "offshore companies" or companies not registered onshore in Dubai. The one exception to this "offshore company ban" is the Jebel Ali Offshore Company. This new rule does not affect individuals, only foreign or "offshore" companies looking to purchase property.

The following Q&A is to inform non GCC purchasers and investors, of the implications of the Land Department’s new rules, and how the recent changes will affect foreign companies purchasing and registering property in Dubai:

Why would one use a company to purchase a property in Dubai:

There are a number of good reasons why the use of Offshore Companies has become so popular when buying local Dubai property. The most obvious reason would be the avoidance of complicated inheritance procedures. A company does not die. If your property is held in a low cost offshore company, you (and your partner or partners) can own the shares of the company as you see fit. So rather than have your individual names on the title of the property, you have a company name. This is a very easy method for joint investment, for confidentiality, and for organising ones assets under a manageable structure (and in many cases, in a Common Law structure).

So the only "Offshore Company" that I can currently use to buy property in Dubai, is the Jebel Ali Offshore Company?

Correct. This applies only in Dubai. For example, you can still buy property in Abu Dhabi through a BVI company.

The Dubai Lands Department decision of Jan 1st 2011, has confirmed that it will NOT register property title to any foreign company, unless that company is registered offshore with the Jebel Ali Freezone.

But can a foreign company own the Jebel Ali Offshore Company?

Yes. You can for example, use a BVI company, or a common law Trust, to hold the shares of your Jebel Ali Offshore Company. You will still need to clearly show the Lands Dept evidence of the ultimate individual owner(s), with attested share certificates and passport copies.

What about if my property is not yet delivered? I have signed the purchase agreement before January 2011 in my personal name, can I now switch to a company name?

The Dubai Lands Department have an interim property register, and main property register. Until your property is listed on the actual main property register (which happens after handover), then

it is possible to change the title from an individual name to a Jebel Ali Offshore Company, providing you can show that there is no change in the beneficial ownership (i.e. the same individual on the initial agreement, is the same owner behind the company).

But will there be an additional transfer fee, if the sale and purchase agreement is not currently in the name of a Jebel Ali Offshore company?

In order for the registration of title to take place, the developer of the property must issue a No Objection Certificate consenting to the registration in the name of the Jebel Ali Offshore Company. As mentioned above, normally the developer will want to see clear evidence that the person named on the sale and purchase agreement, is the same person as the beneficial owner behind the new Jebel Ali Offshore company. The developer normally charges an administration fee, which should not be more than Dh3-5,000, to issue the No Objection Certificate.

If the developer and Jafza both issue NoCs to the Land Department authorising the registration in the name of the Jafza offshore company, it is normal that the registration can be completed without charging an additional transfer fee, again provided that the ultimate beneficial owners of the new Jafza offshore company are the same as those mentioned in the original sale agreement.

What if my BVI company already holds the title deeds to my property in Dubai?

The recent changes to the policy only apply to registrations of titles taking place from January 1, 2011, and do not affect any that took place prior to that date.

Does Jafza allow offshore companies to own property anywhere in Dubai?

From the 2006 Circular that Jafza issued, it stated that Jebel Ali offshore entities could own property in any project in Dubai that were owned by Dubai World, Dubai Holdings and Emaar Properties.

Whilst we understand that there is no restriction on any freehold property, Jafza offshore companies must still obtain a "No Objection Certificate" from Jafza, in order to register title at the Land Department.

To date, we have not ever had a refusal for an "NOC", when clients are looking to own property outside the projects listed on the 2006 circular.

How is the Jebel Al Offshore Company set up, how much will it cost me?

Set up is fairly straightforward, with the normal due-diligence required on all proposed Directors and Shareholders. It will take about 4-5 days in incorporate, and requires the shareholders of the company to visit the freezone and sign (or provide a Power of Attorney to someone to act on their behalf).

The cost at set up is USD$4,950, and annually there is a registered agent fee of $1950. Sovereign Dubai is one of the oldest registered agents with Jafza, and we have a dedicated corporate services department of 25 people who are there to assist with all company formation enquiries.

What if I want to sell my property, and it is owned by the company, how do I do it?

You have two choices here, you can either sell the property OUT of the company, by simply signing the sale documents as a Director of the company, or you can sell the shares of company, (assuming the company only holds one asset, which is the house). The Lands Dept WILL need to be notified of the change in beneficial ownership of the company, with certified documents to be provided from Jebel Ali Freezone (all of which we can assist with).

Gibraltar

Ian Le Breton is Managing Director at Sovereign Trust (Gibraltar) Limited. He explains why Gibraltar can no longer be characterised as an “offshore tax haven”.

When Gibraltar’s new income tax regime came into force on 1 January 2011, it signalled the end of a long journey to reposition its financial services centre from an offshore tax haven to an onshore European Union (EU) finance centre.

The new regime brought Gibraltar into compliance with the rest of the EU by doing away with the previous exempt status tax regime. The new Act ended any discriminatory distinctions between onshore and offshore business by introducing a single 10% corporation tax across the board.

As an onshore EU country with competitive rates of corporate and personal taxation – as well as the absence of capital gains, value added, inheritance, wealth or gift taxes – Gibraltar now offers opportunities that few other international finance centres, or specialised finance centres as Gibraltar prefers to be known, can match.

Gibraltar firms engaged in financial services are regulated by the Financial Services Commission. Implementation is critically important and by all measures, Gibraltar benefits from excellent regulation. The Gibraltar government is highly responsive; recent changes to legislation have allowed the industry to develop in such vital areas as insurance, funds and investment management. 

When considering financial services, professional advice should be sought at the earliest opportunity.  Options can be explored but it is critically important that corporate or trust structures comply with reporting requirements and that any tax implications are carefully considered. 

One way to demonstrate international credibility is to appear on the OECD Global Forum’s “white list”. The main criterion for achieving such a cherished position was for a jurisdiction to have entered into a series of bilateral Tax Information Exchange Agreements (TIEAs). Demonstrating the willingness of the two signatory countries to exchange information relating to a taxpayer, Gibraltar has engaged fully with the process and entered into such accords with 20 separate countries. 

Gibraltar competes effectively with its peers within the diverse sectors that make up the finance centre. Several global banks are represented providing a full range of banking services and investment management is another important cog in the wheel. In particular, Gibraltar benefits from Experienced Investor Fund (EIF) legislation and its funds regime has a well-deserved excellent reputation globally. Insurance is another vitally important component of the finance industry. 

Under EU “passporting” rules, regulated Gibraltar firms are permitted to expand across Europe in respect of insurance, reinsurance, banking and investment services.

The establishment of companies, trusts and other structures remains core to firms such as Sovereign. The larger firms have diversified into other areas including investment management, accounting and insurance services. A few also able provide marine and aviation services including registration of yachts and aircraft. In our own case, established a quarter of a century ago, we boast 25 offices around the world. With over 70 staff, Gibraltar remains our largest office hence we are well placed to provide the services and advice international clients will need.

Overall then, Gibraltar has a good story to tell. The next time you come across lurid reports about international tax havens, rest assured that Gibraltar is now recognised as a preeminent onshore EU finance centre and all of us in the finance industry are striving to ensure that this story can only get better in the future.

Trust & Company Management: International reach and depth of service

Milestone GRP - The main trend over the last decade has been global integration and compliance. How has this im- pacted  Gibraltar's economy and how has it impacted  the Trust and Company Management industry in particular?

Mr. Ian Le Breton - Looking at compliance, we are regulated by the Financial Services Commission (FSC) with a strong but, at the same time, cooperative hand. They have turned what could otherwise have been extremely onerous, difficult to im- plement policies, into something that remains costly and time consuming, but is  done with a cooperative spirit with them. From  time to time we have discussions  with them,  and the relationship is good. I describe it as a hand in hand approach, not a hand in glove one. It is a partnership type of approach. There is lot of new regulation to take on, and other internati- onal groups, the OECD, IMF, the EU, are going to impact us.

You need to have a pragmatic view and simply live with this, and even the Government cannot  do anything about it. We work with this, whether we like it or not, we have to move with the times  and we do it fairly successfully. That means  that Gibraltar can look to the world and say that we comply with all these groups; we are signing all these TIEAs, we might soon have double tax  agreements, and we’ve moved from being considered an offshore financial centre to what  it is now an international specialised financial centre.

Milestone GRP -  Gibraltar and the  Government  are often described as agile and nimble. Do you agree with that cha- racterization?

Mr. Le Breton - It is very true. Agile and nimble, but also po- sitively reactive is the type of word  to describe it. Proactive too, as we tend, in Gibraltar, to identify trends and adapt to them. That is what we do in Sovereign and a number of firms with whom we share the space in Gibraltar, too. We need to reinvent ourselves as we go along, and any firm like us that does not have this approach is going to find themselves falling behind because legislation and rules are changing all over the world at all times. So if you cannot be agile and nimble then you are lost. That  takes us back to our small but  perfectly formed nature.

It is not difficult to talk to the Government's departments, even to members of the  Government themselves, if we need to, quickly. Obviously legislation changes take time but we cer- tainly have a good rapport with these people and that means that we can be agile and nimble.

Milestone GRP - How has the global downturn affected the growth of the company? What  areas are you are develo- ping?

Mr. Le Breton - We have certainly seen growth  despite the economic downturn. In the last 4 years our staffing has grown by 10%  or more.  As  for our product  here, it is certain that

there is an increasing depth to our services. We do a certain amount of work on the personal pension side, particularly the UK transfers, the  Qualifying Recognised Overseas Pension Schemes (QROPS), and Qualifying Non-UK Pension Schemes (QNUPS), which is a different model altogether but has simi- larities. We are  expending our marine division that is based in  Gibraltar, looking at yachts, and last year we  established an aviation division. Again looking at clients with big jets, big yachts: these are the  types of clients we need to approach anywhere. So our strategy is to use these subsidiary groups to look at markets in a slightly different way.

Milestone GRP - How have Gibraltar’s infrastructure deve- lopment contributed to  these specific opportunities, such as the registration of yachts or aircraft?

Mr.  Le Breton -  The growth  of Gibraltar's  infrastructure  is extremely useful to us. For Sovereign it is important that the infrastructure continues to develop in Gibraltar, not just for the business itself, but also for our staff. It is important that they continue to find this an attractive place to live and work. From Sovereign's point of view, we are one of 25 offices, so whilst we were established here in 1987 and here is where everything started and it continues to be our largest base.

Milestone GRP - Are there any limitations to operating here?

Mr. Le Breton - There are limitations. We are never going to land a jumbo jet at the airport, so are we going to set up direct links with New York with 300 people on board  a plane? No, we will not. But, using this as an example, we have infrastruc- ture that is not right here but just a short drive up the road in Malaga where we have  a full international airport, so that is not a real limitation.
We have a wonderful  time  zone advantage,  the  climate  is great, and this is important since people are attracted to Gib- raltar for its climate and lifestyle. A lot of people like our firm are doing what they can to build it up. We have a lot of compe- tition out there, but generally overall we are doing a good job. I encourage executives from wherever they are in the world to come and have a look.
Milestone GRP - As a well established foreigner in Gibraltar, what do you see as existing misconceptions about the place?

Mr. Le Breton - One area I want to work on is the impression that Gibraltar is just open for the British. That is not the case. Brits make up a percentage of the client base, but just a  per- centage of it, and that is a message I want to get across. We are ready to build our market from around the world. Europe is obviously a main area of course, but there are advantages for other parts of the world, too. Gibraltar is a good place to headquarter a company and maybe the CEOs from around the world may want to start considering that, and then come to talk with us when they do.

Partnerships in today’s world

We keep hearing governments across Europe tell us that “we’re all in this together”. British newspapers in particular seem to take great delight in reporting examples of how some of the more wealthy members of the current cabinet are “out of touch” with ordinary people. The recent story about whether or not to charge VAT on hot “pasties” was just one example. But in general, it seems that most people in the UK realise that by working together – in partnership if you will – things will eventually get better. Certainly the huge deficit is being reined in although there is a long way to go.

Since the last edition, I have had the pleasure of attending the long awaited wedding of two good friends. It was a lovely affair; my partner and I had a very jolly time and we wish the newlyweds a long and above all, a very happy, marriage.

Going to the ceremony got me thinking – weddings do that, don’t they? – and all the talk of partnerships led me down several paths. What constitutes a partnership anyway? And when we hear the term in a business context, is it based on the same principles as two people who call themselves “partners”?

A simple definition of partnership is that it is an arrangement where parties agree to cooperate to advance their mutual interests. But let’s go back a little to explore the term used by individuals in their personal lives, rather than the business context.

Years ago, if one was neither married nor engaged but still committed to another person in a steady relationship, the words “boyfriend” or “girlfriend” seemed to do perfectly well (although I accept it sounded rather odd when describing people old enough to be one’s parents). The term “common law marriage” was one taught to me by my mother although I used to get alarmed at the level of vitriol in her voice when she said “common” – as if there were something dreadfully wrong about it all.

Fast forward 25 years and the word “partner” seems now to be the in-phrase. Time was, just a few years ago in fact, that if I had referred to my partner in polite company, there’d be a short intake of breath for it was taken as read that I had to be referring to another man. In these days when so many people maintain a relationship without ever entering into marriage, the term partner could just as well refer to a girlfriend of several years’ standing. It’s all become rather confusing.

In the UK, it was the Labour government that took the politically brave and potentially risky decision to enact civil partnership legislation in 2004. Possibly soon to be extended to Gibraltar, the legislation set out clear guidelines for the first time relating to the responsibilities of partners and the benefits to be gained from entering into such an arrangement. Aimed at same-sex couples, there have been complaints of discrimination ever since from straight couples who do not wish to enter into marriage but seek the financial and legal benefits of a partnership arrangement. So far the government has maintained that such people can simply get married but sometimes it’s more complicated than that.

The civil partnership legislation is very clear. In exchange for a series of undertakings and legal definitions of what constitutes the partnership between two people, several important benefits arise. The most important implications from a financial perspective are probably those dealing with succession issues and inheritance tax in the UK and the setting out of new rules relating to next of kin and a lot more besides. Sadly – but inevitably – it also goes into considerable detail about how such partnerships should be dissolved.

These new rules in effect brought into force for individuals important aspects of legislation that had previously only been available in a corporate setting. Business partnerships, as we shall see, are nothing new. Legal partnerships come in several shapes and sizes but they all follow a similar pattern. It is also now very common to see the initials LP (standing for limited partnership) or LLP (limited liability partnership) appended to the name of many of our large firms, legal and accountancy in particular.

But hang on. Surely partnerships – law firms, doctors and so on – were not supposed to be able to limit their liability. Wasn’t that the whole point? In exchange for the comforting knowledge that the partners in question, whether they were drafting a contract or diagnosing a condition, were putting not just their professional reputations on the line but also their assets. Of course, insurance was used to mitigate some of this risk but ultimately their judgment, and that of their colleagues, was backed by individual partners’ wealth.

In several jurisdictions, many of them based on English law, partnerships as a separate legal entity have become far more popular in recent years. Essentially the intention was to retain the benefits of partnership whilst allowing at least some protection associated with limited liability. But this concept is not restricted to English law and is certainly nothing new.

In the third Century BC, Roman societates publicanorum exhibited many similarities to the company structures we see today – but at least one partner had to be included who was fully liable for the entity’s debts. Across the Islamic world too, such arrangements became common. In Europe, the Italian commenda of the tenth Century were the forerunners of the LPs and LLPs we see today.

As always there are differences across the various jurisdictions where such structures can be established but the general principles are similar enough. A limited partnership may typically have up to 20 members, at least one of which is a “general” partner. This general partner has the power to bind the partnership by entering into contracts and so on and also assumes unlimited liability for the debts and obligations of the partnership. This potential liability can itself be mitigated if the general partner is itself established as a limited company.

In these circumstances, the other partners could enjoy “limited” liability in respect of the partnership in much the same way that shareholders in a company know that their financial risk is limited to the amount of capital that they have invested into the company. It follows that these limited partners may not take part in the management of the company nor are they able to bind it contractually. The limited liability partnership differs in that there are limitations in liability for all partners.

Assuming such partnerships are properly structured from the outset, limited partnerships can be extremely flexible. Within reason, they are able to do anything a “natural person” – that is someone like you or me acting in an individual capacity – can do. A partnership can enter into contracts, own assets and, importantly, it can carry on in existence despite any changes in the status of the individual partners. In other words, in many ways such partnership “entities” are much more closely related to companies than a traditional partnership of old.

Tax advantages are likely to result because, generally speaking, these types of structures are established so that profits are taxable in the hands of the partners rather than the partnership itself – in the US, this is often referred to as “look-through treatment” because the taxman will “look-through” the partnership structure to assess the individual partners. Additionally, limited partnerships allow for the issue of shares in cases where other corporate facilities may not be desirable.

In summary, partnerships can offer the managers of businesses a more flexible, modern approach to liability and risk management in general. Their benefits were there for the Romans more than 2,000 years ago and I imagine the law relating to partnerships will continue to develop further in millennia to come. They are not necessarily simple to establish so, as always, professional advice should be sought at the earliest stage.

And so back to those friends whose marriage we have just celebrated. I happen to know that they read The Gibraltar Magazine – at least I hope they do for the lady in question happens to be the magazine’s editor. From my own partner and me and on behalf of my colleagues at Sovereign too, I say congratulations and we wish you a long and happy partnership.