It may be the world's second-largest economy, but China is still (almost) virgin territory for firms offering offshore legal advice. This April, Appleby became the first, but certainly not the last, firm to be allowed to provide offshore legal advice on the Chinese mainland.

Just as with other sectors in the past, China is a bit late to the offshore party, but is catching up quickly. The $25 billion IPO of Cayman Islands-registered Alibaba in September couldn’t have been a clearer reminder of just how much things have changed in the past decade.

Leon Santos, group partner at Collas Crill in Singapore, notes that private companies including Alibaba, as well as state-owned enterprises (SOEs) from the mainland, have flipped the script on the China-offshore dynamic. Not that long ago, offshore counsel were involved in PRC-focused transactions through structures set up by international investors to invest in China.

Over the past few years, that trend has reversed, says Santos, with large Chinese SOEs and private companies investing around the world in Africa, the U.S. and Europe.

“We see opportunities to work with the next generation of rapidly growing Chinese companies who wish to engage in M&A and IPOs through international markets like Hong Kong, Singapore, London and New York,” he says. “This will also bring opportunities to advise mainland clients on their wealth planning for assets held in many different countries.”

Appleby’s chief representative in Shanghai, Malcolm Moller, sees a broad spectrum of demand for offshore services in China.

"We are seeing all types of legal services in demand, with corporate transactional activity being at the core of this,” Moller says. “We have advised on more than 60 corporate deals in the last 12 to 14 months for example. Chinese and Asian growth is, and will remain, highly dependent on international cross-border investment and deal flow which requires efficient access to capital.”

Law firms, be they domestic, offshore or international, will continue to provide advice and assistance to businesses and investors operating or moving into this fast-moving regulatory environment, he adds.

Mainland China corporations have an increasingly sophisticated grasp of the pros and cons of using offshore financial hubs for various activities, and they are beginning to take greater advantage of opportunities there.

“Offshore financial centres such as the Cayman Islands, British Virgin Islands (BVI), Jersey and Guernsey are well-respected jurisdictions internationally, built around a tax neutral platform, with well-established legal systems and offers flexibility to companies that choose to incorporate there,” Ogier’s China Managing Director Kristy Calvert says.

“We see a lot of demand from the mainland China market for offshore structures, from investment funds, IPOs to corporate M&A transactions,” Calvert adds. “We are also seeing a trend in Chinese clients choosing to litigate in the BVI and Cayman courts to resolve shareholder dispute matters as many of them have holding structures there.”

Terence Ho, head of the China Funds practice at Maples and Calder, says the prospects for offshore counsel in mainland China are “very good,” adding that there is an increasing appetite from Chinese managers to launch offshore funds.

“Our dedicated China team has helped Maples and Calder maintain its market lead in the Greater China investment funds market, advising on an unprecedented number of Chinese-sponsored Cayman Islands-domiciled private equity, real estate and hedge fund funds over the last 12 months,” Ho says.

“On the private equity side, Maples and Calder is equipped with the largest fund formation and downstream practice among the offshore law firms. During the past 12 months, the team has advised on transactions for almost all of Asia's 20 largest private equity funds managers. We are also seeing increased litigation work from the PRC, with our instructions coming directly from PRC law firms without an international intermediary law firm being involved. The litigation is mostly related to shareholder disputes in the BVI and Cayman Islands.”

The IPO market has also rebounded, notes Greg Knowles, who heads the corporate practice at Maples and Calder, with Chinese businesses structured as Cayman Islands and BVI companies once again looking to list on foreign exchanges. Most recently, the firm acted as Cayman Islands counsel to Alibaba with regard to its listing on the New York Stock Exchange. Maples and Calder affiliate MaplesFS also acted as the Cayman shares registrar for the IPO.

Going forward, the activities of offshore counsel in mainland China may depend on market conditions and the evolution of the licensing regime, says David Lamb, Hong Kong-based partner and co-chairman at Conyers Dill. Getting a licence to practise offshore law in China remains difficult, particularly when it comes to countries that are not members of the World Trade Organization (WTO) such as Bermuda, the British Virgin Islands and Cayman Islands. Another popular offshore site, Mauritius, is a WTO member.

“The question whether or not the licensing regime regulating the practice of foreign law might be eased is largely a political one, especially for jurisdictions which are not members of the WTO in their own right,” says Lamb. “From our perspective, China has been an important market and will continue to be so.”

A diverse market

So who is driving mainland interest in offshore counsel? Appleby’s Moller sees several sources for demand.

"Both Chinese and international clients based in China are interested in the offshore offering,” Moller says. “And this includes domestic law firms representing Chinese clients, corporates, high net worth individuals and of course, SOEs looking to use offshore vehicles to make outbound investments globally, including North and South America, UK, Europe and in fast-growing markets like Africa and India. According to the Fortune Global 500, 95 Chinese companies have made it into the world's top 500 companies by revenue for 2014, reflecting a steady increase over the years.

Not only will offshore vehicles become more popular with large mainland corporations, they will also attract smaller companies who can also benefit from the offshore upside.

“Chinese companies are going outbound either for listing in HK, the U.S. or UK or making outbound investments globally, and we see more and more companies in China using offshore structures for their transactions, whether that would be a large SOE or a small private Chinese company,” says Ogiers’ Calvert.

“The market of potential clients is large and growing given the appetite of Chinese businesses to invest outside their own borders,” Collas Crill’s Santos says. “Principally, we would work with the trusted advisers to Chinese clients, who may be bankers, advisers, lawyers and other professional service providers.”

The China challenge

The Chinese market may hold much promise, but given government sensitivity to and supervision of the financial sector, knowing the lay of the land in regulatory terms is vital.

"Keeping up with the developments in China's business and regulatory environment, and navigating the continued barriers to trade and investment and the free convertibility of capital are key challenges,” Moller says. “Restrictions and control will remain for the short to medium term as it is clear that China is not yet ready for full liberalisation yet on the mainland. But as a result, international financial centres, onshore and offshore, will likely continue to play significant roles in China's outgoing investment."

Frances Woo, Hong Kong-based chairman and managing partner at Appleby, says that in addition to keeping abreast of regulatory changes, firms also need to have the credibility that comes with experience and a solid grasp on the vast and complex Chinese business landscape.

"We know through more than a quarter of a century of doing business in China that cementing confidence and building solid relationships with Chinese SOEs, private entrepreneurs, business owners and others in the market is key,” Woo says. “Reputation and track record are even more important, particularly given the pace of growth. These factors, both with Shanghai-based clients and clients elsewhere in China, are significant to anyone opening up in this market."

The key challenges in the Chinese market are political, tax and government-related factors, says Santos.

“As long as the authorities and government agencies in China are comfortable with the offshore structures being used by individuals and companies, these will continue,” he says. “This means working with Chinese clients and advisers who are close to the establishment.”

By now, the world may have become accustomed to China being an economic powerhouse, but nevertheless, the mainland market for legal services is still in its early days.

“The legal industry in China is a very young industry, mainly shaped and developed over the past decade,” Calvert says. “Traditionally, Chinese clients have not had a strong appreciation for the value of quality legal services in the past in the local Chinese business culture. But as they develop into more international businesses, we will see more use of offshore counsel and them becoming their trusted advisers over the longer term.”

Looking forward

And what about the longer term? There is no doubt that the offshore market in mainland China will mature, but it is difficult to say exactly how things will play out in the coming years.

"China's legal services market has matured and grown rapidly over the past decades and is seeing greater interaction internationally,” Woo says. “Just like the business and regulatory environment in China, we expect that this market will continue to develop and evolve and increase in sophistication. As this occurs, we see the use of offshore counsel playing a continuing, if not greater, role to intermediate international transactions.”

However, Woo adds there will continue to be real regulatory rigor applied to ensure that firms operating in China continue to apply best business practices to their operations and can meet the needs and deliver advice that is of the highest calibre, and is robust and credible.

“Accordingly, we do not see a sudden influx of firms to the Chinese market but a refinement of strategies, geographic and practice focus and tie-ups with global firms,” she said.

Beijing is encouraging Chinese companies to reach out to the four corners of the globe, and China Inc is doing just that. This is, of course, good news for well-placed offshore firms.

“We believe there will be more offshore law firms entering the mainland market in the next two to three years, as demand for offshore services will continue to grow,” says Calvert. “With the Chinese government’s ‘Going Out’ strategy, offshore law firms have a key role to play in shaping and structuring international transactions as Chinese companies become internationalised.”

With this internationalisation, Chinese companies will become more adept at navigating offshore financial centres, but they will also need assistance in other peripheral areas.

One example is MaplesFS’ rollout of FATCA solutions to Chinese clients impacted by the regulations, points out Eastern Fong, regional head of fund services at MaplesFS.

“We expect we will be very busy for the next two to three years and beyond in providing FATCA compliance services to clients. Trusts is another area where we anticipate growth, based on the current interest we are seeing in both IPO-related trusts for employees of Chinese businesses and in private wealth planning trusts, particularly in instances of emigration,” says Fong.

In addition to Cayman Islands and BVI law, Maples and Calder practises Irish law and sees a lot of potential in China for the use of Ireland's tax regime, including the Irish double tax treaty with China, Knowles says.

“Ireland is positioning itself as a significant player for Chinese investment in Europe. In particular, a number of Chinese law firms and investors are interested in the use of a tax-efficient Irish holding company, which can be owned by a Cayman fund, to hold investments in Europe.”

Being the first to offer offshore legal services in mainland China has not only improved Appleby’s position, but has also opened the door for other firms to enter the region. This will not only shape the future of individual firms China practices, but also the industry as a whole.

"We've been operating in China for more than 25 years,” Moller says. “It is a well-trodden path for us. Now we are able to offer offshore legal services, and this has catapulted our strategy of being the leading offshore legal and fiduciary firm forward.”

“We have been able to deepen our relationship with China-based clients and service them better. For our international clients, it also means that we have an even deeper understanding of the regulatory regime in China to better inform, guide and assist especially with the interface between China and offshore. China is a diverse and continually evolving market and our ability to innovate, be proactive and adapt is key."

Regardless of how things play out, one thing can be said with certainty: Offshore firms currently involved in the mainland will seek to deepen their engagement and leverage the foot they have in the door into a strong long-term position in this massive market.