Bank bonds ditched as Jersey updates LLP law

Popular fund domicile Jersey has removed the “onerous” bank bond requirement from its limited liability partnership (LLP) law, to the delight of the private equity industry and its service providers.

Private equity firms use the tax-transparent vehicles when setting up their management structures or advisory models on the island.

The change to the 1997 LLP law, which was a precursor to the UK’s LLP law, was long overdue, according to James Mulholland, partner at offshore law firm Carey Olsen.

Previously, LLP law required a Jersey bank or insurance company to put up and maintain a £5 million bond for every LLP.

“This was the biggest stumbling block in setting up a Jersey LLP,” said Mulholland. “The update has made another tool available for not just private equity managers but also service providers.”

Now the law dictates that a solvency test, based on the one used in Jersey’s company law, must be completed to ensure sufficient creditor protection. “If you want the Jersey LLP to make a distribution, e.g. giving cash back to partners or buying back interests, you have to run a simple solvency test to say that on a 12 month cash-flow basis you are solvent which is a well-trodden path as it tracks Jersey’s company distribution laws,” said Mulholland.

In light of this update, Jersey has also amended its income tax law. This amendment, which came into effect on the same date as the LLP update, confirms that profits and gains from the international activities of a non-Jersey resident partner in a Jersey LLP are not subject to taxation in Jersey, according to a Carey Olsen client memo.