BVI International Focus
By Lowtax Editorial
06 November, 2014
Ask people their thoughts on the British Virgin Islands (BVI), and most would reply something along the lines of “nice beaches.” This is of course true, and as with so many other Caribbean territories, tourism is a fundamental part of the BVI's economy - about 45% of it in fact. What many people perhaps don't realise is that financial services are just as important; indeed, the BVI is one of the largest IOFCs and it plays a key role in directing finance and investment all over the world.
BVI: An Introduction
The British Virgin Islands comprise 36 islands in the Caribbean Sea, about 80 kilometres east of Puerto Rico, north of the Leeward Islands and adjacent to the US Virgin Islands, of which only 16 are inhabited. The principal islands are Tortola (the largest island, and home to the capital of the same name), Virgin Gorda, Anegada and Jost Van Dyke.
The Islands are a dependent territory of the British Crown, and a member of the Commonwealth. The legal system is based on English Common Law and the Queen of England is the Chief of State who is represented by a Governor appointed by the Crown. The islands are largely self-governing since the 1967 Constitution and to a limited extent rely on UK statutes on international matters. The territory’s political stability is one of its major selling-points.
The Financial Centre
Statistics alone attest to the BVI's standing as a global financial centre. According to the jurisdiction's financial regulator, the Financial Services Commission (FSC), during the second quarter of 2014 there were just under 11,471 company incorporations, a figure which includes new incorporations, continuations and new registrations of foreign companies. This brought the cumulative total of active business companies registered in the BVI to just over 454,000, making the jurisdiction the world's most popular offshore corporate domicile. In total, over 800,000 companies have registered in the BVI.
According to statistics released in January 2014 by the United Nations Conference on Trade and Development, the BVI received USD92bn in direct foreign investment in 2013, more than Brazil and India combined. The figure is the fourth highest globally, topped only by the United States (USD159bn), China (USD127bn) and Russia (USD94bn). Brazil and India had FDI inflows of USD63bn and USD28bn, respectively. The BVI's FDI in 2013 represents a 40 percent increase compared with the previous year.
Fiduciary services and investment funds are other areas in which the BVI excels; indeed, in 2013 the jurisdiction was recognised in the Offshore 2020 Report by OIL Offshore Incorporation as the most important offshore financial services jurisdiction, being ranked first for asset protection and estate planning, individual tax planning, special purpose vehicles, and investment holding for corporations. According to the report, the BVI is so well entrenched, its structures and services so well-known and well used, that “it would take a massive shift in client sentiment to displace” the jurisdiction from its top ranking. OIL's Chief Executive Officer, Martin Crawford, said the report makes it clear that “the industry is better managed and better regulated than it was three years ago, with greater convergence between national and international agencies and global standardisation of many practices. We can expect this to continue.”
In 2014, The BVI achieved the highest rating among offshore centres in the Global Financial Centres Index (GFCI 16) and awarded the 2014 Offshore Excellence Award in Estate Planning by publishers Acquisition International. BVI Premier Orlando Smith said: "These surveys are testament to the hard work and commitment in maintaining the BVI's position as a leading financial centre in a fast changing global landscape. We have raised the bar in terms of regulatory and compliance standards, whilst continuously looking to improve our financial services proposition. There is no doubt that we face challenges, but we are committed to meeting these challenges head-on to ensure the future and continued success of the BVI as the world's preeminent offshore financial centre."
He added: "I am particularly pleased to see more acceptance of the important role the BVI plays in facilitating global investment and stimulating economic growth. Just take a look at what we have achieved in China, where for 25 years the BVI has been a catalyst for China's growth."
"It is also reassuring to see the acknowledgment that Asia will be a major growth driver in the future of offshore finance centres and that the BVI remains a key part of that growth. We have diversified our offering to cater for a wider audience and for changing client needs across this region – particularly around asset protection and estate planning – and also strengthened our geographical footprint with the opening of our BVI Asia office. I am confident that the future looks bright for the BVI, but we will not rest on our laurels."
In August 2014, the BVI Government tasked a private sector consultancy to expand and diversify the islands' financial service industry and look at ways to strengthen the territory's reputation. The Government has engaged the services of global management consultants McKinsey & Company to chart a new direction for the industry, and a team from the firm, comprising experts in financial regulation, asset management, and wealth planning, have undertaken a nine-week consultation with public sector representatives, domestic private sector practitioners, and other BVI international practitioners in Latin America, Europe, and Asia.
The Government has asked the firm to review BVI's existing legal and business environment to identify the health, quality, and productivity of the financial services industry. The team will also review other work previously undertaken by the BVI and advise on the suitability of these recommendations. Additionally, the project team will advise and assist the Government on building its support for the industry and on measures to better protect the international reputation of the territory.
Tax and Company Law
Obviously, the BVI's almost complete absence of taxation has driven much of this business to the jurisdiction; the new Business Companies Act lowered the income tax rate to 0% for both local and International Business Companies, and there are no capital gains or capital transfer taxes, no inheritance tax, and no sales tax or VAT. Strong confidentiality provisions are another factor behind the historic growth in business company and trust formations.
However, just as important is the jurisdiction's robust yet flexible legal and regulatory framework that has had to adapt to demands for greater transparency from the likes of the OECD yet remain attractive in the face of strong competition from other offshore jurisdictions.
Although the Business Companies Act is barely 10 years old, the government and the legislative assembly recently completed work on an amendment aimed at streamlining, clarifying and improving the administration of the affairs of BVI Business Companies, following a process of public consultation in 2011.
The BVI Business Companies (Amendment) Act 2012 and accompanying BVI Business Companies Regulations 2012 took effect on October 15, 2012.
Among the 85 new and amended provisions, some of the key changes that have been made are as follows:
- Notice of Amendment: Where a notice of amendment in respect of a company's memorandum and articles of association is not filed within the time specified in a Court order this would result in the order ceasing to have effect.
- Foreign character names: Creation of a framework for the development in Regulations of the use of foreign character names which could boost the attractiveness of the Territory as a corporate domicile.
- The Registrar: Insulation of the Registrar from any disputes arising in relation to the use of company names concerning intellectual property rights. Under the new Act, parties with intellectual property rights claims relating to company names will have to resolve their dispute in Court and the Registrar will only act in accordance with the order issued by the Court.
- Registered Agents/Registration: Registered agents are granted permission to register bulk changes of registered agent names, addresses and offices.
- Fees: A new fee scale for registered agents which is dependent on the number of companies that a registered agent acts for with the fee being significantly less than would be charged on a company by company basis.
- Removing foreign companies from the Register of Companies: The Registrar has increased powers to remove a foreign company from the register of foreign companies. If a foreign company has been removed from the register and subsequently applies to be re-registered, it must pay any outstanding fees relative to its prior registration, including any penalties.
- Voluntary liquidation: creates the possibility of appointing an additional voluntary liquidator to act jointly with an existing voluntary liquidator. Provision is also made regarding the resignation of a voluntary liquidator, his/her removal by the Court and the procedures to be followed in the event of a vacancy in the office of a voluntary liquidator.
The 29 new provisions in the accompanying BVI Business Companies Regulations, 2012 have been developed to complement the implementation of some of the provisions of the Act.
While these amendments do not alter the nature of a BVI Business Company, they are expected to enhance its attractiveness and that of the BVI as a favoured corporate domicile.
Banking and Trust Management
The British Virgin Islands banking sector, which has been limited to a small number of international banks as part of the BVI's determination to exclude money-laundering, is regulated under the Banks and Trust Companies Act 1990 (as amended, principally in 1995, 2006, 2010 and 2013). Under this legislation, banks are licensed in three categories: a General Banking License permits all forms of banking activity; a Class 1 Restricted Banking License permits international business only (i.e. a licensee may not transact business with BVI residents, other than another licensee or an IBC); and a Class 2 Restricted Banking License permits the conduct of banking business only with counterparties named in the license. As at June 30, 2013, there were six General Banking licensees and one Class 1 Restricted Banking licensee in the BVI.
Trust management has been a major activity in the British Virgin Islands for 30 years or more. Originally the trust was used primarily by wealthy individuals from the major common law countries, but it is now accepted as a major technique of asset protection in all parts of the world. Trusts in the BVI have a basis in common law, and are formed under the Trustee Ordinance 1961. The Trustee (Amendment) Acts 1993, 2003 and 2013 considerably modernised and updated the legislation, allowing for purpose trusts among other things. The new legislation, together with the highly flexible BVI International Business Company, has opened up wider markets for the BVI trust, in which clients are not necessarily interested so much just in tax avoidance, but also in the efficient management of wealth in a more general sense.
The Virgin Islands Special Trusts Act (VISTA) came into effect in March 2004 and permits special trust vehicles to hold shares in private trust companies (PTCs), thus broadening the appeal of the vehicles. The 'VISTA' law allows BVI trusts to exclude the so-called “prudent man of business rule” which has traditionally made the trust an unattractive vehicle to hold long-term assets and requires trustees to monitor and intervene in the affairs of underlying companies. The Act enables a shareholder to establish a trust of his company that disengages the trustee from management responsibility and permits the company and its business to be retained as long as the directors think fit.
The VISTA legislation authorises the entire removal of the trustee’s monitoring and intervention obligations (except to the extent that the settlor otherwise requires); permits the settlor to confer on the trustee a duty to intervene to resolve specific problems (eg a deadlocked board); and allows trust instruments to lay down rules for the appointment and removal of directors (so reducing the trustee’s ability to intervene in management by appointing directors of its own choice).
There was already a substantial fund management sector in the British Virgin Islands when the Mutual Funds Act 1996 came into force in 1998. The Act divides open-ended investment funds into a number of classes: Private Funds, being funds sold to no more than 50 investors on a private basis; Professional Funds, being funds sold to market professionals or individuals with net worth over USD1m; and Public Funds, divided into 'ordinary' mutual funds sold to the general public and 'selective' mutual funds sold on a selective basis through intermediaries. In 2010, the Mutual Funds Act 1996 was replaced by Part Three of the Securities and Investment Business Act (SIBA), having largely the same effect. The new Act retains the same classification of funds and codifies some of the practices already undertaken by funds domiciled in the BVI, introducing laws to regulate investment business, public issues of securities and market abuse.
The BVI recently launched a new 'regulation lite' fund manager regime with the publication on November 1, 2012, of the final form of the Investment Business (Approved Manager) Regulations, 2012.
Developed as an alternative to the existing regime in which fund managers wishing to do business in the BVI must hold a full licence under Part 1 of the Securities and Investment Business Act (SIBA), the new regime provides for eligible fund managers and advisors to submit a simple application to the Financial Services Commission and start business seven days later. A Part 1 licence will typically take the Commission at least four weeks to process.
Ross Munro, global head of investment funds at Harneys and chairman of the Securities, Investment Business and Mutual Funds Advisory Committee, which worked closely with the Financial Services Commission in the development of the new regime, commented: "The Approved Manager regime seeks to strike the right balance of flexibility and effective regulation taking into account the relative risk profile of the business carried on. I believe that the regime achieves this and will prove to be an attractive option for fund managers seeking to commence business quickly and in a cost effective manner."
Under the Regulations, an Approved Manager can act as the investment manager or investment advisor to any number of private or professional funds recognized under SIBA as well as any number of closed-ended funds domiciled in the BVI which have the key characteristics of a private or professional fund. The Approved Manager can also act for non-BVI feeder funds into BVI master funds.
Although Approved Managers will not be restricted to any material extent in the way they carry out business, the regime has been intentionally crafted to be a ‘licensing regime’ rather than an entirely exempted activity. The Commission will have powers at its disposal to take action against the Approved Manager should it become necessary for it to do so in its role as regulator.
Approved Managers will be subject to certain obligations:
- They must have at least two directors at all times, one of whom must be an individual.
- They are required to have an authorized representative regulated in the BVI.
- They are required to notify the Commission of any change to any of the information provided by them pursuant to their application for approval within 14 days.
- They must notify the Commission of any matter in relation to them or their conduct, which has or is likely to have a material impact or significant regulatory impact with respect to them or their business.
- They are required to prepare and submit financial statements to the Commission. However, there is no audit requirement.
- They will be required to submit an Annual Return to the Commission by 31 January of each year containing summary details of the business they are carrying on.
The Investment Business (Approved Manager) Regulations, 2012 were enacted on December 10, 2012.
At the end of June 2014, there were 1,538 professional, 546 private and 97 public mutual funds licences in the BVI. There were also 527 Investment Business Licences, 46 Authorised Representatives and 43 Approved Investment Managers.
The British Virgin Islands insurance sector offers one of the very few examples of an IOFC which deliberately took the axe to a thriving business sector in order to clean it up. In 1990 there were 2,000 captives in the BVI, of which many were known to be 'shell' operations possibly engaged in doubtful or even illegal activity or money-laundering. By applying minimum capital regulations and other measures, the Government reduced the number of captives to a mere 125 acceptable companies, and installed new legislation designed to maintain a solvent and well-regulated insurance sector. As at June 30, 2014, there were 146 captive insurance licensees in the BVI, and 36 domestic insurers.
The United States continues to be the region of origin of parent companies for most BVI-licensed captives. However, the jurisdiction has global appeal and captives originating from countries such as Switzerland, Guernsey, Taiwan, the Middle East and South America have also been formed in the BVI. The construction, finance, real estate and healthcare industries account for the most BVI captive licenses.
In January, 2010, the Financial Services Commission announced the coming into force of the Insurance Act, 2008. The new Insurance Act replaces the Insurance Act, 1994. The new insurance regime allows for a wide range of insurance activities, including single-parent and group-owned captives for direct and reinsurance business, rent-a-captives, underwriting for risk purchase and risk retention groups, alternative risk transfer, protected life policies etc.
The Insurance (Amendment) Act, 2002 makes provision for segregated portfolio companies. A segregated portfolio company (sometimes referred to as a protected cell company) is an entity that allows each portfolio or cell to have legal separation of assets. Thus, the assets and liabilities within a segregated portfolio would be segregated from the assets and liabilities of other segregated portfolios and those assets and liabilities of the company that are not held in any segregated portfolio.
Shipping and Aviation
The British Virgin Islands also operates a Shipping Register, and Road Harbour is a Port of British Registry. The BVI have developed a very strong business in yachts, to the exclusion of most other types of shipping. Large numbers of private yachts are registered in the BVI, and many of them take part in the highly successful yacht chartering business which forms a major part of the BVI's appeal to visitors. A substantial network of professionals in the BVI exists to advise on and manage yacht chartering operations. 2006 saw the re-launch of the Virgin Islands Shipping Registry (VISR), which fulfilled the conditions for Category One membership of the UK's Red Ensign registry group, enabling the registration of larger vessels. In essence, the upgrade from BVI’s current status as a Category Two registry has meant the implementation of and strict compliance with international maritime conventions dealing with ship safety, the health and welfare of seafarers, environmental protection and international and domestic maritime security. It is believed that these obligations will be compensated for through spin-off benefits to both the public and private sector in the areas of legal, company registration, asset management and other corporate services in the jurisdiction.
The BVI also expects to become a major force in the world of aviation finance and aircraft registration after the introduction of legislation designed to facilitate these activities.
The laws the Mortgaging of Aircraft and Aircraft Engines Act, 2011, and the Mortgaging of Aircraft and Aircraft Engines Regulations, 2012 have now entered into force and will enable aircraft operators to register ownership of aircraft and aircraft engines in the British Virgin Islands under three separate registries, for aircraft, their engines, and their mortgages.
Lending institutions require that entities demonstrate legal ownership of assets before providing financing, to achieve legal certainty that they may retain a debtor's assets in the case of a credit default. The new law will enable local operators to register ownership of aircraft and aircraft engines unlocking credit opportunities for fleet expansion.
While the British Virgin Islands has been operating in the aviation sphere for several decades, the territory until lately has been known only as a tax-efficient aircraft holding company domicile, and less than a handful of aircraft have been registered with the islands' Aircraft Register.
However, in 2011 the government progressed plans to develop the local registry, and in June that year the aforementioned legislation was approved by the jurisdiction's legislative assembly, in recognition that in order to secure business from international operators the islands needed a supportive regulatory environment.
The government anticipates that following the entry into force of the legislation, on October 15, 2012, the BVI will be able to leverage its position as a holding company domicile to lure international operators to register their aircraft and engines in the BVI. Similar legislation has long been in place in Bermuda and the Cayman Islands.
Regulation and Tax Transparency
The Financial Services Commission Act, 2001, enacted in December 2001, established the British Virgin Islands Financial Services Commission as an autonomous regulatory authority responsible for the regulation, supervision and inspection of all financial services in the BVI. Such services include insurance, banking, trustee business, company management, mutual funds business as well as the registration of companies, limited partnerships, intellectual property and ships. As a result, the Commission now oversees all regulatory responsibilities previously handled by the government through the Financial Services Department. The Commission has also been tasked with new responsibilities including promoting public understanding of the financial system and its products, policing the “perimeter” of regulated activity, reducing financial crime and preventing market abuse.
The establishment of the Commission also ensures a commitment by the BVI to play its part in the fight against cross border white collar crime while safeguarding the privacy and confidentiality of legitimate business transactions.
Indeed, regulation and transparency has been high on the agenda for the BVI authorities lately. For instance, on June 20, 2012, the United Nations (UN) Convention against Transnational Organised Crime (also known as the Palermo Convention) and the UN International Convention for the Suppression of the Financing of Terrorism (the Terrorist Financing Convention) came into force in the BVI.
To mark this event, BVI Premier and Minister of Finance, Dr. Orlando Smith, made an announcement to emphasize that the government is taking a “zero tolerance” approach to crime and terrorist financing. “With both conventions being extended to the BVI, we can continue to speak highly of our reputation as a compliant jurisdiction in the areas of border security, financial services and international cooperation,” Smith said. “Keeping up with international standards is key in participating in the global economy.”
Prior to the extension of the two conventions, the BVI had already incorporated the requirements of the conventions as acknowledged in the Territory's 2008 Mutual Evaluation Report by the Caribbean Financial Action Task Force (FATF), the international standard-setting body on money laundering and terrorist financing issues. Premier Smith further stated: “With the extension of the two conventions, the BVI is now in compliance with the recommendation of the FATF.”
The Palermo Convention requires a commitment against all forms of organised crime, including money laundering and corruption. The convention's supporting protocols also call for the prevention of human trafficking and smuggling, and the illicit manufacturing and trafficking of firearms.
The Terrorist Financing Convention requires the territory to maintain its actions in the prevention of the financing of terrorists and terrorist organisations, illicit arms trafficking, drug dealing and racketeering and the exploitation of persons for purposes of funding terrorist activities. Director of the International Affairs Secretariat, Elise Donovan, echoed the Premier, commenting: “Compliance is critical to the continued success of the financial services sector. The Convention will indeed encourage further growth so that the BVI can be recognised as a globally integrated financial centre.”
Regarding the Palermo Convention, she added that: “This further strengthens our efforts in international cooperation in the fight against money laundering and terrorist financing. The BVI strives to maintain its commitment to its international obligations and is always eager to demonstrate to the world our ability and willingness to cooperate. The Palermo Convention signals our compliance with international standards to all our stakeholders worldwide.”
The BVI was ranked as a top tier financial jurisdiction by the Financial Stability Board (FSB) in its latest evaluation on the adherence of all countries and jurisdictions to global regulatory standards.
According to the FSB's annual assessment, the BVI has demonstrated "sufficiently strong adherence" to internationally agreed information exchange and cooperation standards in the areas of banking supervision, insurance supervision and securities regulation.
Smith, said: "This rating is another testament to the strength of the BVI's independent regulator. We (BVI) take a zero-tolerance approach to financial crime and I commend the work of the regulator in ensuring the continued compliance of the BVI to international standards."
However, with tax and corporate transparency topping the agenda at the G8 Summit in Northern Ireland in June 2013, the responsibility of IOFCs to ensure compliance with the latest international standards has intensified to new levels. In response to this, and in common with some of the UK’s other dependent territories which also happen to be classed as IOFCs, the BVI Government issued on July 5, 2013 an action plan to prevent the misuse of legal persons and legal arrangements through the use of tax information exchange agreements (TIEAs), alongside other measures.
The plan states that BVI recognizes and supports the need for transparency in relation to the establishment of corporate entities, including legal arrangements, and is committed to supporting initiatives that seek to establish international standards in that respect.
A further sign of the BVI’s commitment to new tax transparency rules came in November 2013 when the territory was granted inclusion in the OECD's Multilateral Convention on Mutual Assistance on Tax and Administrative Matters during the recent annual meeting of the OECD Global Forum in Jakarta, Indonesia.
The Convention exists to facilitate the multilateral exchange of tax information between its members. Smith, said: "The Multilateral Convention further enhances the information exchange regime currently in effect within the BVI and is firm evidence of our commitment to meet and exceed global standards on tax transparency while yet being a premier jurisdiction to do business in financial services."
In July 2014, the BVI published guidance notes on requirements under their intergovernmental agreements (IGAs) to facilitate automatic information exchange with the United States and the United Kingdom.
The guidance notes are looked on as a key part of the BVI's regime for the implementation of the US and UK IGAs, and were prepared in conjunction with the recommendations of the Foreign Accounts Tax Compliance Act (FATCA) Working Group, which comprised members of the private sector, and primary legislation considered by the BVI's House of Assembly on July 22.
FATCA, which was enacted by Congress in 2010, took effect on July 1, 2014, and targets non-compliance by US taxpayers using foreign accounts. It requires US financial institutions to withhold 30 percent of certain payments made to foreign financial institutions (FFIs) that do not agree to identify and report information on US account holders. Foreign governments have two options for complying with FATCA: they can either permit their FFIs to enter into agreements with the Internal Revenue Service (IRS), or they can themselves enter into IGAs with the US.
The US Treasury has developed two alternative model IGAs. Under the Model 1B agreement signed by the BVI, FFIs will identify all relevant reportable accounts and provide the required information to the BVI International Tax Authority, who will then relay that information to the IRS.
On November 28, 2013, the BVI Government and the UK signed an IGA, and then, on June 30 2014, an IGA was signed with the US. As a result, it was confirmed that FATCA's withholding tax and account information requirements will not apply to BVI FFIs, apart from where there are circumstances of unresolved significant non-compliance.
During the parliamentary session held to consider the IGA legislation, Premier Smith confirmed that the obligation to provide information by BVI FFIs under FATCA "does not, in itself, put any new obligations on those islanders who, in having dual nationality, also have to report to the US tax authorities. These obligations have always existed as part of the obligations of being a US person."
"However, the BVI Government will assist persons who consider themselves to need this support in meeting their reporting requirements to the US, by providing useful advice and identifying professionals versed in US tax matters," he said, adding: "We will announce the measures that we are taking to assist islanders who are also 'accidental' Americans, as we often refer to them, in coming up to speed on their commitments to the IRS."
In reviewing the BVI's accomplishments in his 2014 Budget address, Smith pointed out that the territory's International Tax Authority, which was established in July 2012 to address tax information exchange procedures, has "made significant inroads in the management and fulfilment of the BVI's international tax obligations." He went on to say he expects the unit to produce a "paradigm shift in the manner in which the BVI deals with its international tax obligations."
Mr Smith also noted that the BVI's government continues to support the United Kingdom's agenda on tax, transparency and trade and is committed to supporting the work of the Global Forum on Tax Transparency and Exchange of Information for Tax purposes and the FATF.
In his assessment of the 2013 FDI statistics, James Zhan, the director of UNCTAD's investment and enterprise division, said that foreign investment in the BVI is likely to slow down due to efforts by the G20 nations to enforce greater tax transparency. However, UNCTAD’s own figures, combined with healthy numbers of incorporations and the positive reviews of the jurisdiction by the international investment community would suggest that the BVI isn’t going to go into decline as an IOFC any time soon. And Government revenue figures do reveal just how dependent the jurisdiction is on the financial services sector: in 2009 the government had received almost 60% (USD164m) of its total revenue from the financial services industry. The economic health of the BVI therefore goes hand in hand with the health of financial services industry, and for this reason, the government is likely to remain responsive to the needs of business in the years to come.
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