Guernsey is not the only offshore financial center to seize the initiative. Barbados and Panama saw their DTTs with Luxembourg come into effect at the start of this year as did an agreement between the United Arab Emirates and Cyprus. Jersey and the Isle of Man have both signed treaties with Malta in recent years, while Jersey and Seychelles are awaiting ratification of agreements with Luxembourg.

The key issue is that DTTs offer a lot more to tax neutral jurisdictions than TIEAs. The former address information exchange but also offer a variety of other financial benefits; the latter, by comparison, amount to little more than an agreement to serve as an outpost for foreign revenue authorities. In this sense, a DTT with a mid-shore financial center is particularly desirable because it solidifies a trading relationship. For those managing offshore structures, just the tax breaks on passive income – capital gains, interest, dividends, royalties, and so on – are compelling.

Qualification for treaty benefits rests on establishing a sufficient level of substance in the jurisdiction so that regulators have no reason to suspect a company exists solely to leverage these benefits. The potential impact of this on a local economy is significant.

Regulators look unfavorably on companies that, among other things, have limited business activities in the jurisdiction or operate on a scale that doesn’t tally with the amount of income being generated. It is therefore necessary to set up a local office, hire staff and retain service providers, lawyers and accountants to support the structure. For every company that seeks to take advantage of treaty benefits, there is additional commercial revenue for the jurisdiction.

Tax neutral locations that rely heavily on the financial services sector to spur GDP growth need this extra economic activity. They also need to appreciate the role they are increasingly being called upon to play in offshore structures. Guernsey, in seeking DTTs with Luxembourg and Hong Kong, is trying to secure its future in Europe and Asia as a piece of the fund management puzzle rather than its focal point. As an important private equity fund jurisdiction, an alliance with Luxembourg offers access to the euro zone and an easier time navigating the EU Alternative Investment Fund Manager Directive. Hong Kong, meanwhile, is the destination of choice for fund managers targeting a rapidly growing region.