Offshore law firms around the world have their eyes on a potentially huge client base in the BRIC nations, but Mauritius is coming to the fore as a favourable channel of investment

On the list of the world’s most popular offshore financial centres (OFCs), the British Virgin Islands (BVI), Cayman Islands and Bermuda feature prominently. Yet over the last year law firms have moved into other offshore financial centres – notably Mauritius. Is this going to be a new growth area for lawyers and law firms in 2010?

BRIC radar
As corporations look to offshore jurisdictions to achieve tax efficiency for their investments, firms like Conyers Dill & Pearman and Appleby are keeping the BRIC markets in mind. Conyers is servicing investors in Russia through Cyprus, and investors into India and China through Mauritius. It has recently launched offices in Brazil (December 2008), and Mauritius (June 2009), and has formed an alliance with a Cypriot firm (November 2009). Last year Appleby became the largest offshore firm by partner numbers after it merged with the Isle of Man’s Dickinson Cruickshank in July. The firm also opened an office in Mauritius, among several other expansionary moves it made in 2009.

Mauritius
Mauritius is India’s largest foreign investor and the most attractive offshore gateway to one of the world’s fastest growing economies. The island nation is the offshore centre of choice for Indian entrepreneurs, so it’s not surprising that law firms are exploring a growth market there.

Mauritius’ growing investment rates are staggering: between 2000 and 2009 almost half of all foreign direct investment in India was routed through Mauritius (US$35bn of the total US$81bn – see boxout, below). In part, this is largely due to the Double Taxation Avoidance Agreement (“DTAA”) Mauritius has signed with India, as well as other nations such as China.

The head of Conyers Dill & Pearman’s Mauritius office, Craig Fulton, says that although the island is not viewed as a ‘traditional’ offshore jurisdiction, combining the DTAA with a strong legal system and a diversified economy gives Mauritius certain advantages. “There are definite advantages compared to the traditional offshore jurisdictions that cannot mitigate any tax implications in the ultimate country of investment,” he says. “In Mauritius, treaties allow capital gains to be taxed in the seller’s country of residence. Mauritius doesn’t impose tax on capital gains derived by a GBC1 (or ‘tax resident’ such as a Mauritian-incorporated company), nor levy any withholding tax on any gains, dividends or interest derived by an investor from a GBC1.”

Capitalising on the growing number of investors in the Middle East may also be easier for firms located in Mauritius. “While Mauritius has more commonly been used as an investment platform for FDI … into Asian economies, there is now significant investment being made by Asian investors into places such as Africa,” Fulton says. “With its network of treaties, Mauritius is often well placed to facilitate investments both ways.”

It’s for these reasons that the island is often regarded as the world’s ideal tax haven, but that advantage could also be a problem, at least in terms of the country’s relations with India. Following fallout from the financial crisis and during an Indian election year, the Indian government said that it may revise (and potentially abolish) the DTAA in a bid to crackdown on corporate tax evasion. The Mauritian government is reportedly in negotiations with the Indian government about reviewing these proposals.

Isle of Man

Trouble in Mauritius may well provide an opportunity for other OFCs to shine. Although it doesn’t have an official tax treaty with any Asian country, the Isle of Man (IOM) is competing with the more popular financial centres for its share of the global market. IOM has an AAA rating from Standard & Poor’s and Moody’s, but another good reason to invest there is its inclusion in the OECD’s White List. According to Mike Edwards, a Singapore-based partner at offshore firm Cains, the Isle of Man’s appeal can be attributed to its favourable regulatory and fiscal environment. “[It] is able to offer ‘products’ which are equal to, or better than, the offerings from other offshore jurisdictions,” he says. “Companies can be incorporated quickly and there is no requirement to obtain pre-incorporation approval from any government regulator. Directors and shareholders may be of any nationality and reside anywhere in the world and there is no requirement for [the] board or general meetings to be held in the Isle of Man.”

What distinguishes IOM from other offerings for Asian clients is the access it affords to the European market, via London’s stock exchange. Indian and Chinese enterprises are incorporating in the Isle of Man and listing on the Alternative Investment Market (AIM) –  as a gateway to Europe. “India is a key jurisdiction so far as the Isle of Man is concerned,” says Edwards. “Seventy five per cent of the Indian businesses listed on AIM in London have done so via Isle of Man companies. Consequently, the use of an Isle of Man holding company has become the norm.” IOM-based Cains has been following the trend of Indian corporations investing in Europe via the Isle for a number of years. He has provided advice for the KSK Power Venture, Unitech Corporate Parks, Promethean India, Dhir India Investments and DQ Entertainment.

“The Isle of Man is in a very favourable time zone for London and its capital markets upon which a number of Asian clients rely,” says Nick Verardi, who heads the corporate and commercial team in Appleby’s Isle of Man office (formerly Dickinson Cruickshank). “By using an Isle of Man vehicle as a holding company in a structure that may be ultimately listed on a stock exchange in the West, Asian clients are able to ensure that no tax is paid at the top of the corporate structure. At the same time [this] provides freedom to move capital around the group without incurring Isle of Man tax,” he explains.
For example, after establishing its IOM investment vehicle Hirco in 2006 the Indian property developer Hiranandani launched an IPO on the AIM and raised £362.6m. Hirco’s listing  was later followed by the Japanese insurer Tokio Marine Bluebell which set up in 2007.

While both Verardi and Edwards say Asian interest in the IOM will grow, it’s clear the Manx government will need to increase its efforts to lure more investment. Edwards says that the government is increasing its promotional activities in Asia, and part of that is about continuing its current efforts. “We believe that the way forward for the Isle of Man lies in adding value, rather than being seen to be predatory of other jurisdictions’ tax-base, and assisting Indian businesses to raise funds internationally is an example of that added value,” he says. That means the Isle of Man will be competing with Mauritius for its share of BRIC clients. But Verardi, whose firm now has offices in both IOM and Mauritius, doesn’t see it as a competition.

“What Mauritius offers is strong, but in a different way from IOM. [It] has a number of its own advantages, in particular the double taxation agreements with a number of Middle and Far East countries, and a cultural alignment to those geographic areas,” he said. “However, the Isle of Man offering has both the proximity to the city of London and the time zone, two factors which cannot be easily underestimated.” ALB