ROBERT VERKAIK DISCOVERS WHICH FIRMS ARE BIG PLAYERS IN THE OFFSHORE LEGAL MARKET AND WHICH LAWYERS CHOOSE TO WORK THERELawyers working in the Channel Islands and the Isle of Man get a little touchy when 1970s tax parlance is used to describe the principal activities of the jurisdictions.

Guaranteed to cause offence is the use of the words 'evasion', 'haven' and in one case even 'offshore'.

Sensitivity surrounds the pre-conception that the Crown-dependent islands are still used by rock stars and the rich to escape taxation on the mainland.Today, the law firms servicing the island jurisdictions of Guernsey, Jersey and the Isle of Man are more geared towards the provision of financial services and assisting companies in their offshore businesses.

Instead of 'tax haven' lawyers prefer the term 'discrete investment business centre'.Since the late 1970s, each successive government has plugged the tax loopholes which attracted so many new accounts to the islands.

And a new money laundering Bill currently before the states of Jersey includes rigorous banking provisions which will make the island even more expensive for those who wish to transfer funds offshore.Nevertheless, there is no getting away from the fact that all three islands still offer extremely favourable tax concessions -- in some cases neutral taxation -- for certain trust funds, collective investments and banking services.Edward Cain's grandfather founded the Isle of Man law firm Cain.

He says the term offshore is completely erroneous.

'What is offshore to one person is onshore to another,' he says.

'The UK and US are the biggest offshore jurisdictions in the world if you look at it in terms of attracting non-resident business by the use of fiscally advantageous regimes.

We are not offshore and therefore dodgy, or somehow trying to get around rules that people would otherwise have to observe.'Michael Lombardi, a partner at Jersey law firm Ogier & Le Masurier, has no problem with the word 'offshore' but he too winces at the phrase 'tax haven'.Ogiers regards itself as one of the biggest financial services law firms on the island and this year it expanded its practice by setting up an office on Guernsey.

The firm advises a number of well known banks on the island including Barclays, Coutts, Chase Manhattan, ING, Lloyds and Royal Bank of Scotland.

Typical of the offshore commercial firms, Ogiers also advises a number of collective investment funds.

However, this work is not as significant as it once was.

'It's been replaced by securitisation as the big growth area,' says Mr Lombardi.The firm works closely with City law firms in putting the securitisation packages together, but the majority of the drafting is done in London.

Clifford Chance, Freshfields, Linklaters, Allen & Overy and Weil Gotshal & Manges are the lead firms working with the local practices.For Guernsey-based law firm Ozannes, instructions from City lawyers make up a large chunk of their business.

Partner David Moore says: 'City law firms provide a significant proportion of our commercial work.

But this is becoming progressively less as the work becomes more international.'Ogiers, not typical of other offshore law firms, only has a small trust company employing ten people and a private client department.

'We took the decision some years ago to focus on being commercial lawyers rather than advocates with a trust company attached,' says Mr Lombardi.Stanley Cleal is the director of the trust fund company CL Trustees, run by one of Guernsey's largest law firm-associated trust fund operations Carey Langlois & Co.

Mr Cleal says the trust company can advertise its services, whereas a law firm is not allowed.

These kind of trust companies act for both commercial and private individual clients who have investments that they wish to be managed in a more flexible regulatory regime.'In the last five years, we have seen something like a 200% to 300% growth,' says Mr Cleal.

'We now have close on £900 million of assets, in properties, investments or funds under the trustees control.' Mr Cleal says it has been in the last eight years that these kind of trusts have started to boom.

But more recently, it has been clients from continental Europe, particularly Switzerland, which have been providing a greater amount of the new business.

Mr Cleal says one reason for UK mainland businesses having fallen back is the government's efforts to put the onus on the settlors to pay tax on assets which they have given away to trustees offshore.The Isle of Man may have a lower public profile as an offshore investment centre, but it too is growing at a fast rate.

Mr Cain says the island is concentrating on 'quality' financial business.

But already the Isle of Man shipping registry now has more tonnage on its books than the English ships registry.

Cain's biggest areas of work are asset finance, project finance and securitisations.

The firm also acts for a number of well-known fund managers including George Soros and Mercury Asset Management.

'The reason these people are here is because the Isle of Man has an excellent international reputation for its high level of flexible regulation,' says Mr Cain.

The principal attraction is that fund managers wishing to set up business in the Isle of Man are taxed at a rate of 5% on profits, compared with a top rate of 20%, although they are subject to VAT.

Unregulated trusts schemes are tax-exempt.Travers Smith Braithwaite is unusual among City practices in that it is the only firm to have a significant presence on the Isle of Man.

With three permanent lawyers based in Douglas and backed-up from its City office, it now services a range of businesses on the island.

Partner Mike Pinson went there ten years ago just after the office was first opened.

He says when he told his London senior partners that he wanted to get out of the City, they suggested he went to Douglas to head the Isle of Man practice.

Although he had never been to the island before, he has found transition particularly smooth.Originally from the Isle of Man, Edward Cain joined from Simmons & Simmons's Hong Kong office two years ago.

He says his firm has a good relationship with the City firms advising on the bigger deals.

'Many offshore law firms are instructed directly by the City law firms,' he adds.

'We also find ourselves acting as primary advisers and asking law firms in o ther jurisdictions to provide that role for us.

The quality of the work I have done here is as good, if not better than I ever experienced with Simmons in London or Hong Kong.'For historical reasons, the legal professions in offshore jurisdictions have fought to protect their market monopoly.

Such is the onerous standard for qualification to become an offshore advocate, that many English solicitors working in Jersey, Guernsey and the Isle of Man do not bother with dual qualification.

For example, a significant part of the Jersey advocate exams is written in French, and all Isle of Man advocates must do the equivalent of two years articles, irrespective of seniority and experience gained on the mainland.

For this reason, Mr Pinson has not applied to become an Isle of Man advocate.Andrew Boustouler, a lawyer with Ogiers on Jersey and currently taking his Jersey advocate exams, comments: 'A lot of the language is in an old traditional style and there are only two main text books to research from.' Those solicitors who choose to remain English-only qualified are prevented from becoming partners in the local firms.

But Mr Cain says solicitors with the right experience and work are often remunerated and treated as full partners of the firm.There are two types of offshore law firm -- those registered on the islands by the local bars, and island offices belonging to mainland law firms regulated by the Law Society.

Since solicitors are not allowed to practise island law, law firms without locally qualified lawyers are restricted in what they can offer clients.

On the Isle of Man, 'foreign' firms are prevented from conducting conveyancing transactions.

Comments Mr Pinson: 'We would like to offer our clients the full service over here, so there is a minor irritation.' On Guernsey, there is something of a legal catch 22.

While no foreign lawyers are restricted on practising on the island, only Guernsey advocates can appear in court.

This prevents non-Guernsey qualified lawyers from conducting even basic conveyancing transactions, as under local law, conveyancing requires a court appearance.JERSEY'S LLP LAW-- LLPs have legal personality-- Partners will not be liable for LLP's debts or losses-- Financial provision of £5 million to be maintained-- No requirement for a general partner-- No requirement that accounts be filed-- Transparency for tax purposesDAN HAYES REPORTS ON DEVELOPMENTS IN JERSEY'S FRAUGHT ATTEMPT TO INTRODUCE LIMITED LIABILITY PARTNERSHIPSWhen commencement day for Jersey's limited liability partnership (LLP) law dawns on 9 September this year, administrators, legislators and professionals on the island would be forgiven for having mixed feelings.

For while the legislation may be ground-breaking, its wider impact may have been overtaken by events.Jersey may have hoped to attract the big accountancy and legal firms to its shores by introducing a law that limited partners' liability in a litigious international environment, but that now looks less likely.

This is partly because, in March 1997, the Inland Revenue said it would tax firms setting up as Jersey LLPs as corporations, and partly because Westminster is now looking at its own version of LLP legislation.Looking ahead to 9 September, Linda Smith, of Jersey-based law firm Bailhache Labesse, says: 'The big question is whether the accountancy firms will seek to register as LLPs, or whether they will simply wait for UK legislation and the greater certainty that may provide.'The accountants may well take the latter path because the current tax stand-off is complex.

Ms Smith points out that accountancy firms Ernst & Young and PricewaterhouseCoopers gave notice that they would appeal if the Inland Revenue tried to tax them as corporations if they set up as Jersey LLPs (see [1998] Gazette, 3 June, 8).

But she adds: 'There can't be an appeal until there is a tax assessment, and there can't be a tax assessment until a firm has set up as an LLP.'Given this situation, professional firms may wait and see what Westminster comes up with.

Alison Crawley, head of professional ethics at the Law Society, is hopeful.

She points out that when mainland LLPs were first talked about by the previous government, the deal offered was that they would be taxed as partnerships but would retain the form of companies.

She predicts the present administration will follow that lead, but adds: 'The taxation element is key.'This wariness about how the LLP question may progress is shared by Stephen Durno, secretary of the Law Society's company law committee, who says: 'In practice, an Act introducing the LLP could be of benefit to solicitors but we will need to see the small print.' He agrees there may be advantages over the current system, but adds that concern about a worst-case scenario of financial ruin has traditionally alarmed accountants more than it has solicitors.

And it is probably the former profession that will be quicker to seize the LLP if and when it becomes available.Jersey's experience may justify a few misgivings.

Some lawyers on the island maintain the big accountancy firms -- which expressed an interest in the development of an LLP law -- used the controversy that erupted over its draft stage to encourage the UK government to start the ball rolling on legislation of its own.

They also suggest the British government could not have stomached the potential loss of finance and face had some of the country's largest professional organisations decamped to the island.The view in some parts may now be one of frustration.

Linda Smith says: 'From the Jersey authorities' point of view -- given such a storm blew up over the introduction of the LLP law -- if it does not produce much business, in the form of partnerships registering as Jersey LLPs -- it will be something of a disappointment.' And, after all, Westminster's LLP law may be following hot on Jersey's heels.

Says Ms Crawley: 'The Department of Trade Select Committee will produce a draft Bill for consultation between now and 19 October 1998.

The consultation period will probably run over into the new year, then it will be a question of parliamentary time.' She is hopeful that if the Bill looks uncontroversial and that if a window of opportunity arises, it may be slipped into the next parliamentary session.Ms Crawley forecasts the possibility of setting up as an LLP on the mainland will appeal to some practices.

'I think a lot of the larger firms will be interested -- certainly those that are already talking openly about their profits and have got over the fear of published accounts.

They will also be attractive to national firms which have offices up and down the country, and where partners are unsure of who exactly they are in partnership with.'If this is the case then, with some degree of symmetry, interest may be kindled in other offshore jurisdictions.

Nigel Carey, chairman of the Guernsey Bar Association, says: 'As a practitioner anything which gives a bit of protection is to be welcomed.

If the UK was to introduce LLPs, Guernsey might introduce them for local consumption.

It would be up to ourselves and the accountants to make a case to the legislature.' But, he adds, the Jersey experience has not created much enthusiasm for LLPs in Guernsey.

'They came up with a high-profile scheme to attract the major accountancy firms without thinking of the consequences,' he says.A similar view emerges from the Isle of Man.

Andrew Corlett, chairman of the Isle of Man Law Society's external relations committee, says his own island's LLP legislation would not be suitable for professional partnerships.

He points out that it dates back to the early years of the century -- it is based on English partnership legislation of 1907 -- and is aimed at entrepreneurs; allowing for a general partner, who has unlimited liability, to operate in conjunction with limited partners who do not take an active part in the business.

He adds that the Isle of Man also allows for limited liability companies but that these too would not be suitable for the purposes of lawyers or accountants.

They only have a lifespan of 30 years and they are taxed as corporations.Mr Corlett was part of an Isle of Man government working party that followed developments with Jersey's LLP plans with the thought of possibly following suit.

However, it was decided that there was no need to introduce an equivalent unless there was demand from within the island's professional community -- a demand which, he adds, has not manifested itself.

He also sympathises with Jersey's experience.

'Jersey came in for a lot of criticism,' he says, but adds that it may have been used by the large accountancy firms to fulfil an agenda of their own.

'I could not really see the Big Six accountancy firms moving offshore,' he says.The general view from the offshore jurisidictions seems to be that any additional practice development innovations will have to be fuelled by internal demand.

This certainly seems to be true of multi-disciplinary practices (MDPs) which were, a year or so ago, being mentioned in the same breath as LLPs.

Guernsey's Nigel Carey says: 'I don't think there's any real need for them, and there is no pressure to introduce them.' In this, he is echoed by Carol Canavan, secretary of the Jersey Law Society, who says: 'MDPs are not an issue as far as I am aware.'The position from the Isle of Man is equally unenthusiastic.

Says Mr Corlett: 'We had a vote on the introduction of MDPs in May at a general meeting of the Isle of Man Law Society and it was firmly rejected.

It was felt that the rhythms of an accountancy practice and a law practice were not sufficiently in harmony.

The way accountants and lawyers do business really is different.'In the wider market of the mainland however, there may be more enthusiasm.

Ms Crawley says the Law Society will be consulting on MDPs in September and adds that they may well be seen as attractive by some clients because they would allow them easily to consult with a number of advisors at once.

There are also staffing implications, she adds: 'Solicitors at the moment can employ anyone, but they cannot give them a partnership.

Some think that this means they lose some of their best people.' Ms Crawley used the example of law firms who employ patents specialists ultimately losing them to firms of patent agents.

'It creates an uneven playing field,' she says.

And, she adds, there may be other benefits to the formation of MDPs.

'They may help create investment and venture capital options to help firms expand and upgrade technically without borrowing money and paying interest.'She also maintains that MDPs could be good news for smaller firms: 'There may be benefits in the high street wher e firms may find themselves needing to offer a wider range of services.

They may find that being able to join up with accountants or surveyors, for example, may help them become more efficient and help them maintain the public's access to legal services.'PAUL ROGERS ANALYSES THE IMPACT THAT EUROPEAN MONETARY UNION IS LIKELY TO HAVE ON THE ISLANDS' PECULIAR STATUSThe Channel Island bailiwicks of Guernsey and Jersey have always been closer to continental Europe than mainland UK, both physically and in some ways culturally.

To this day, advocates on the islands are likely to have earned their qualifications at a French university.

So it should not come as too much of a surprise to discover that their support for European Monetary Union (EMU) is enthusiastic enough to warm the hearts of hardened Europhiles like former Conservative Chancellor of the Exchequer Kenneth Clarke.On the mainland, significant doubts about the common currency continue to besiege efforts to integrate the economy more closely with those of its European Union (EU) partners.

But the islands, together with their Irish Sea counterpart the Isle of Man, see EMU as at worst neutral, and at best a harbinger of boom time.What fears that do exist pertain more to tax harmonisation rather than that of monetary union.

And, because they are not direct signatories to the Treaty of Rome -- which established the EU -- the Channel Islands are reasonably confident that they cannot be forced to raise their levies to continental levels.

The down-side of that autonomy is that, as non-signatories to European treaties, the islands have no direct influence over the policies devised by the European Commission.

But their views are expressed to the Bank of England, and they maintain legal representation in Brussels.The most likely scenario, put forward by John Langlois -- parliamentary deputy on Guernsey, vice-chairman of the governments' finance and advisory committee, member of the EMU working party and senior partner in the law firm Carey Langlois -- is that the Channel Islands will follow the wait-and-see policy of successive UK governments, joining only when the mainland does, possibly in 2002 or shortly afterwards.

At that point, their currencies will be replaced by new ones, backed by euros instead of pounds.

These would be exchangeable at par in banks, but would not be legal tender on the streets of the EU.

'The effect is going to be almost exactly the same as on the City of London itself,' said Mr Langlois.Before this, however, the islands will have had to make changes, and these are already generating business for lawyers on the islands.

All three jurisdictions are preparing to introduce 'mirroring' legislation which would ensure continuity of contract after the 11 participating European currencies are rolled into one.

Companies will not be able to cite the merger to get themselves out of awkward deals.

In this, the islands are not unique; jurisdictions as far away as New York and the Far East are also introducing mirroring legislation.Some of the bigger financial institutions on the islands are also launching contract audits to make sure that all their agreements comply with the new legislation, though more recently written documents will most likely have taken the change into account.Edward Cain, an associate at law firm Cains on the Isle of Man, mentions a recent Italian mutual fund which his firm helped to set up.

It is denominated in 'the legal currency of Italy' rather than the lira, he says, thus making a later amendment to euros unnecessary.Memorandums of un derstanding and articles of association, particularly those written before the Maastricht Treaty was negotiated, will also have to be checked, although few changes are expected.Financial institutions will have more work to do.

Some derivatives, such as French franc/German mark swaps will become irrelevant.

And bond funds which used to be balanced between several different European currencies may have to be re-jigged.

'If you had a balanced portfolio of bonds, you might diversify into other currencies or, if you found the euro is a strong currency, concentrate in it,' says Mr Langlois.

'If the euro becomes a strong reserve currency, the position of the Channel Islands becomes an added advantage if an offshore centre were close to dealers in the same time zone.'Michael Lombardi, a partner in the business law group at Ogier & Le Masurier in Jersey, sees the eventual change from sterling to euros as an opportunity for financial institutions.

Because the conversion will almost inevitably involve an exchange rate taken to several decimal places, many conveniently whole numbers in company accounts will suddenly become fiendishly tricky fractions.

'You're going to end up with inconvenient numbers so you'll be allowed to round to a whole amount,' he says.

'But the European legislation appears to allow for variation in national rules for rounding,' says Mr Lombardi.While the UK convention is to round seven point five up to eight, for example, in some countries it would be rounded down to seven.

The issue is not trivial.

When dealing with a large number of such calculations even fractions of a pence can add up to substantial amounts.The rounding problem will also hit shares.

'For administrative and accounting convenience, companies are going to want to reorganise their capital,' says Mr Lombardi.

'Most serious players are going to take the opportunity to sort out their capital structure, fixing things that have been on their pending list for some time.' It remains an open question whether new share certificates, denominated in euros, will have to be issued.While these issues will probably generate some new business for legal firms on the islands, few of them are gearing up for a major flood of work.

In recent years, they have taken a growing slice of the local business away from the major solicitors in the City of London, but any sharp increase in work could still be more easily dealt with on the mainland.

Besides, recruiting new lawyers is a problem even at the best of times.

The complexities of different legal traditions, restrictions on residency on the islands, and the strong demand for solicitors in London, make it hard to attract bright young lawyers.OFFSHORE ESTATE PLANNING: RECENT DEVELOPMENTS, BY ROBIN VOSThe world offshore tax and estate planning is a place which changes quickly.

New tax regimes are created.

Existing offshore centres offer new types of trusts and companies.

Offshore planners use these to devise ever more complicated asset holding structures.

Meanwhile, the UK Inland Revenue has new legislation to combat what it sees as unacceptable tax avoidance through the use of offshore structures.The Finance Act has recently passed into law.

Despite strong representations from various interested parties, including the Law Society's revenue law committee highlighting the unfairness and unworkability of parts of the new legislation, the government has resisted making any significant changes to the provisions which originally appeared in the Finance Bill shortly after the budget in March this year.The publicity surro unding Tory allegations in relation to HM Paymaster General Geoffrey Robinson's offshore trust interests left the government little alternative but to change the rules relating to the taxation of capital gains arising to offshore trustees.

The new rules had to deal with Geoffrey Robinson-type situations.

Unfortunately, Geoffrey Robinson is not only the settlor of an offshore trust, he is also a beneficiary of an offshore trust set up by someone domiciled and resident outside the UK.

Both of these types of trusts have therefore been affected.

Looking first at trusts set up by UK individuals, these originally enabled capital gains to be deferred.

Tax would only be payable on gains realised by the trustees if, and to the extent that, benefits were received by UK resident and domiciled beneficiaries.

The rules were changed in 1991 so that gains realised by any offshore trust set up after that date -- in which the settlor had an interest -- would be taxed on the settlor.

The settlor had an interest not only if they or their spouse were beneficiaries, but also if the settlor's children were beneficiaries.

Trusts set up before March 1991 were not affected unless they were subsequently tainted, for example, by the addition of assets.The new legislation has abolished the distinction between trusts set up before or after March 1991.

All trusts, whenever created, will now be subject to the charge on settlor provisions if the settlor has an interest.

The test as to whether or not the settlor has an interest has been extended for trusts created after March 1998, so that the settlor will be treated as having an interest if the settlor's grandchildren are beneficiaries, even if neither the settlor nor the settlor's children can benefit.

However, this does not however apply to existing trusts.The changes do not come into effect until April 1999.

However, there are transitional provisions which will mean that in most cases, any gains realised between March 1998 and April 1999 will be attributed to the settlor on 6 April 1999.

One exception to this is trusts for the benefit of the settlor's minor children.

Although these would now normally be caught by the charge on settlor provisions, the trusts remain protected whilst the settlor's children are under 18.

In some circumstances, there are other ways of reorganising trusts prior to 5 April 1999, but expert advice would be necessary to navigate the tightly drawn anti-avoidance rules contained in the transitional provisions.There is a nasty sting in the tail for settlors who become subject to tax on the trust gains.

The settlor has a statutory right of reimbursement out of the trust fund for any tax he has to pay.

This does not cause a problem as long as the settlor is a beneficiary of the trust.

However, if the trust is set up for the benefit of the settlor's children and the settlor is specifically excluded from benefit, the question arises as to whether or not the trustees have power to satisfy the settlor's right of reimbursement.The settlor is not a beneficiary and, on the face of it, any payment to the settlor out of the trust fund would therefore be a breach of trust.

This is unlikely to cause a problem where families get on well as it should be possible to negotiate an acceptable solution.

However, life becomes more difficult if the settlor and their beneficiary children are alienated.

In the face of an objection from the beneficiaries, the trustees can only satisfy the right of reimbursement if it is enforceable in the relevant jurisdiction.It is a general principle of international law that the courts of one country will not help to enforce the tax laws of another country.

It may well be the case that enforcement of the settlor's right of reimbursement would be seen as an indirect enforcement of UK tax law.

Even if enforcement were refused on this ground, a local court might consider that giving effect to legislation which permits a distribution from a trust to a person who is not a beneficiary would be contrary to public policy.As the new legislation brings into the scope of the charge on settlor provisions, trusts set up many years ago, those trusts would clearly not make provision for the possibility of having to reimburse the settlor for tax paid in the UK.

This is one example of the injustice of the recent changes.

It can only be hoped that the Inland Revenue takes a sympathetic view in such situations.Trusts set up by individuals resident or domiciled outside the UK have in the past been completely free of UK capital gains tax.

Distributions could be made to UK beneficiaries without any capital gains tax consequences.

With effect from March this year, any gains realised by the trustees will be taxable on UK resident and domiciled beneficiaries to the extent of any benefits they receive from the trust.Although this only applies to gains realised after 17 March 1998, there is no upbasing of the trust assets to that date.

A gain is therefore potentially chargeable, even if it was realised on 18 March 1998 and the gain accrued almost entirely before the budget.

This gives rise to a number of practical difficulties.

Many trusts set up by non-UK individuals initially have nothing to do with the UK.

Subsequently, a beneficiary may move to live in the UK and become domiciled there.

Any distributions received by that beneficiary will potentially be subject to UK capital gains tax.

However, it is unlikely that the trustees would have retained sufficient records to calculate the gains for UK tax purposes.

There is no reason why they should have done so.

It is difficult to see how the legislation can work in these circumstances.There will be many situations were, on 17 March 1998, UK resident and domiciled beneficiaries were enjoying benefits from offshore trusts set up by non-domiciled individuals.

These benefits may, for example, take the form of an interest free loan or the occupation of a house where the benefit accrues on a daily basis.

It may be difficult for such beneficiaries to restructure their affairs in a way which will enable them to eliminate or minimise the benefit they are receiving.

There are even situations where gains were realised on Budget day but before the Budget speech.

A beneficiary enjoying an ongoing benefit suddenly finds himself in the position of having a capital gains tax charge which he could quite legitimately never have expected to arise, at least without some sort of warning to enable him to reorganise his affairs.Again, it is possible in some circumstances to restructure such trusts but the options are limited and can be quite complex.