Building on the success of the Jersey Limited Partnership model established pursuant to the Limited Partnerships (Jersey) Law, 1994 (the “Limited Partnerships Law”), two new types of Limited Partnership are proposed to be introduced into Jersey law; Separate Limited Partnerships; and Incorporated Limited Partnerships.
The draft Separate Limited Partnerships (Jersey) Law, 200- (the “SLP Law”) and the draft Incorporated Limited Partnerships (Jersey) Law, 200- (the “ILP Law”) are due to be debated by the States of Jersey during May 2010 and, if enacted, will result in three distinct Jersey limited partnership vehicles providing a wide range of solutions to commercial structuring requirements.
The first option would be the classic limited partnership constituted pursuant to the Limited Partnerships Law providing the usual partnership model with the benefit of limited liability to investors. This Limited Partnership has no separate legal personality or perpetual succession vested in the partnership itself which remains an unincorporated association.
The second option, proposed to be made available pursuant to the SLP Law, would create a new legal entity in Jersey law, a limited partnership with separate legal personality but which is not a body corporate, the “Separate Limited Partnership” (“SLP”). These characteristics would be shared with limited partnership models available in certain other jurisdictions, for example in Scots law.
The third and innovative option would be that introduced by the ILP Law, the “Incorporated Limited Partnership” (“ILP”). On registration under the ILP Law, the ILP would be a body corporate having a separate legal personality from that of its partners and having perpetual succession. It will also have unlimited legal capacity.
Tax Treatment in Jersey
In many cases, one of the principal attractions of a limited partnership for the partners will be tax transparency. The effect of this is that profits and losses of the limited partnership are attributed to the partners themselves who will be taxed in their country of tax residence according to their proportionate share of such profits and losses.
The Income Tax (Jersey) Law 1961 (the “Income Tax Law”) deals specifically with limited partnerships and the Comptroller of Income Tax has issued an explanatory booklet on the subject. This confirms that the standard limited partnership itself will not be subject to assessment for Jersey income tax and that a non-Jersey resident partner will not be liable to Jersey income tax except on certain types of Jersey source income. Please refer to our separate client briefing Jersey Taxation of Investment Vehicles at www.ogier.com for further information. The draft SLP Law and draft ILP Law provide that the SLP and ILP shall both be treated as standard limited partnerships for all Jersey statutory purposes (other than the SLP Law and ILP Law themselves).
Tax Treatment Overseas
Whilst detailed tax advice will need to be taken in each case in relation to all jurisdictions relevant to investors, Counsel’s opinion has been obtained in relation to the likely characterisation of the SLP and ILP (as at the date of this briefing) for the purposes of UK tax law.
It is envisaged by UK Counsel that the SLP is likely to be tax transparent for both UK income tax/corporation tax on income and UK capital gains tax/corporation tax on chargeable gains.
In contrast, UK Counsel envisage that the ILP is likely to be tax transparent for UK income tax/corporation tax on income but to be opaque for UK capital gains tax/corporation tax on chargeable gains.
Operational Advantages - Flexibility and Certainty
The Limited Partnership, SLP and ILP would all share the same basic operational structure. Each would have one or more general partners, tasked with management of the limited partnership and a number of limited partners who constitute the significant investors in the vehicle. The limited partners would benefit from limited liability pursuant to the Limited Partnerships Law, SLP Law and ILP Law respectively. The general partner can also be provided with limited liability by use of a limited liability company or a further limited partnership acting in the general partner’s role.
The Limited Partnerships Law, SLP Law and ILP Law would all provide express safe harbours for limited partners wishing to exercise a degree of influence (short of management) over the limited partnership. In each case, it would be expressly provided that a limited partner may exercise the following rights without these activities being construed as involvement in the management of the limited partnership and hence without risk of losing limited liability:
- acting as a director of a corporate general partner or being an employee or agent of the limited partnership;
- consulting with and advising the general partner in relation to the limited partnership’s activities;
- approving or being advised as to the accounts or the affairs of the limited partnership;
- acting as guarantor for the limited partnership;
- approving or disapproving any proposed amendment to the limited partnership agreement;
- approving or disapproving any of the following:
- the winding up of the limited partnership;
- the purchase, sale, exchange, lease, creation of security or other dealing in any asset by or of the limited partnership;
- the creation of any obligation by the limited partnership;
- a change in the nature of the activities of the limited partnership;
- the admission, removal or withdrawal of any general or limited partner; and
- any transaction where any general partner may have a conflict of interest with any of the limited partners.
Active investors would therefore be able to play a significant role in relation to all three varieties of Jersey limited partnerships with statutory confirmation that there is no risk of forfeiting their limited liability.
Further certainty for investors is provided by the equal ranking of limited partners’ loans to the limited partnership with those of third party creditors. Further, distributions of profits and return of limited partners’ contributions to the limited partnership would not be at risk of being reclaimed to the assets of the limited partnership unless the limited partnership was cash-flow insolvent (without recourse to the general partner’s personal assets) at the time of making the payment and (in any event) for a period of only six months following the date of payment (in the absence of fraud).
In terms of flexibility, there would be no Jersey requirement for a UK Financial Services Authority registered Operator of a Jersey limited partnership or any equivalent Jersey law requirement.
The regulatory approach to any limited partnership depends on whether the limited partnership also constitutes a regulated collective investment fund.
Where a limited partnership does not constitute a regulated collective investment fund, regulatory consent from the Jersey Financial Services Commission (“JFSC”) is required for the creation of partnership interests under the Control of Borrowing (Jersey) Order 1958 (“COBO”) only. Certain prescribed information must be included in relation to the general partner of the limited partnership (although not in relation to the limited partners). There is no requirement to file the partnership agreement and no requirements to provide the names of the limited partners. COBO consent can usually be obtained within two to three days of application.
Where a Jersey limited partnership constitutes a regulated collective investment fund regulatory authorisation will also be required from the JFSC pursuant to the Financial Services (Jersey) Law 1998 (“FSJL”) and the Collective Investment Funds (Jersey) Law 1988 for the general partner and any other funds services provider in Jersey to the limited partnership (in practice entailing a single application).
Following the introduction of a general licensing regime in respect of funds service business under the FSJL in November 2007, many service providers will already hold a licence to conduct the relevant functions of general application, with no additional regulatory approval being required in respect of such service providers.
Jersey’s investment funds regulatory regime contains a full range of regulatory options tailored to the needs of investors and promoters. This range includes light-touch, institutional funds, stock exchange listed funds, unregulated funds and others. For further information on Jersey funds’ regulatory options please refer to our client briefing Jersey Investment Funds - Regulatory Options.
The Partnership Agreement
The Limited Partnerships Law does not and the SLP Law and the ILP Law do not propose to prescribe any requirements as to the contents of the limited partnership agreement. Sponsors and investors therefore have full commercial flexibility.
The partnership agreement will set out in detail the rights and obligations of the general partner and limited partners and will usually deal in particular with the following matters:-
- the name of the limited partnership (which must not include the name of any limited partner);
- the purposes for which the limited partnership is established;
- the powers, obligations and authority of the general partner in relation to the limited partnership;
- the admission of new partners, the retirement of existing partners and the transfer of partnership interests;
- the extent of liability of each of the partners to make contributions to the limited partnership; and
- the allocation and distribution of the limited partnership’s capital and profits.
Incorporated Limited Partnerships - Bodies Corporate
Both the ILP Law and the SLP Law, adopting the approach of the Limited Partnerships Law, provide that Jersey general partnership law continues to apply to all three limited partnership vehicles. In addition, in the case of the ILP (reflecting its status as a body corporate), the general partner will act as the agent of the ILP and will have the same statutory duties to the ILP as a director to a Jersey company, to act honestly in good faith, with a view to the ILP’s best interest, with the care, diligence and skill of a reasonably competent person in similar circumstances. The ILP will also be subject to winding up and insolvency law provisions applicable to bodies corporate.