A Chinese company looking to incorporate offshore has a wide range of locations to choose from. The Cayman Islands, Bermuda, the British Virgin Islands (BVI), Jersey, the Seychelles and Mauritius are among the best-known jurisdictions.
Tax-friendly policies and corporate structures designed to facilitate stock market listings mean these jurisdictions are favored by venture capitalists seeking easy ways to cash in on their investments.
Familiarity is a big draw for the Caymans. The islands were the jurisdiction of choice when China’s tech firms first started listing on NASDAQ and are still very popular.
“In the early 2000s, the Caymans was easier and more credible than Bermuda or BVI,” said Derek Sulger, a co-founder of wireless firm Linktone, which incorporated in the Caymans as part of its preparations for a NASDAQ listing in 2004.
Sulger, who now runs a private-equity firm, admits there is a herd mentality as Chinese firms with big ambitions follow the tried and tested paths used by earlier successful listings. But he believes this faith is well- founded, given the experience Caymans’ law firms have dealing with Chinese companies.
As of mid-May, Caymans-incorporated entities accounted for half of NASDAQ’s 60 Chinese firms and 22 of the New York Stock Exchange’s 41 Chinese firms. Firms looking to list in Singapore or Hong Kong often incorporate in the stock exchange’s own jurisdiction, although Bermuda and Caymans are also popular.
For years, young firms opted against incorporating in BVI as this made it harder to list in Hong Kong. Although the Hong Kong exchange now promotes itself to a wide variety of countries, it has traditionally given precedence to companies from the Caymans, Bermuda, Hong Kong and mainland China. However, this didn’t harm BVI’s popularity as a location for holding vehicles through which company directors control their personal stakes in a listed Caymans company.
“We still set up five BVI companies for every one Caymans company,” noted Catherine Morgan, managing director of CIA China, a company that specializes in offshore incorporation.
Other jurisdictions are also trying to find their own niches in the market. For example, Hong Kong is expected to attract more offshore incorporations by virtue of its double taxation agreement with the mainland, while the Seychelles hopes to challenge BVI by offering corporate services at lower prices.
Greg Knowles, a Hong Kong-based partner at Maples & Calder, one of the world’s largest offshore law firms, is skeptical about any changes in the ruling order.
“No one has made any headway and threatened the Caymans and BVI lead,” he said. ”Other jurisdictions may have the same kind of legal systems but they don’t have the same scale of infrastructure to support it.”