BVI International Focus
By Lowtax Editorial
12 December, 2018
Small in geographical stature the territory may be, but the British Virgin Islands, commonly known by its abbreviation the BVI, is one of the most significant international offshore financial centres.
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. 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 the UK is head of state; she is represented by a governor appointed by the Crown. The islands have been largely self-governing since the 1967 constitution was promulgated, though to a limited extent they rely on UK statutes on international matters. The territory's political stability is one of its major selling points.
The Economy and Finance Centre
The BVI economy, one of the most stable and prosperous in the Caribbean, is highly dependent on tourism, which generates an estimated 45% of the national income. More than 934,000 tourists, mainly from the US, visited the islands in 2008. Because of its close links with the US Virgin Islands, the British Virgin Islands has used the US dollar as its currency since 1959.
In the mid-1980s, the government began offering offshore registration to companies wanting to incorporate in the islands; incorporation fees now generate substantial revenues. In 2017, 32,493 new business companies were registered in the BVI, which represented an increase on the previous year. There are more than 450,000 active companies on the BVI companies registry.
The adoption of a comprehensive insurance law in late 1994, which provides a blanket of confidentiality with regulated statutory gateways for investigation of criminal offenses, made the British Virgin Islands even more attractive to international business. There were 224 insurance companies registered in the BVI in October 2018, including 141 captive insurance companies and 36 domestic insurers. The BVI is recognised as one of the world's finest jurisdictions for captives.
Fiduciary services and investment funds are other areas in which the BVI excels; indeed, in 2013 the jurisdiction was recognized 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. At the end of 2017, there were 1,499 mutual funds in the BVI, a figure which includes 136 segregated portfolio companies or SPCs.
The BVI banking sector, on the other hand, has been limited to a small number of international banks, as a consequence of the BVI's determination to exclude money-laundering. There were six general banking licence holders as at September 30, 2016, plus two money services businesses, two financing businesses, and one class I restricted banking licensee (permitting the bank to transact only with overseas customers).
Other important sectors of financial centre include ship and aircraft registration.
Established in December 2001, the Financial Services Commission (FSC) is 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.
Obviously, the BVI's almost complete absence of taxation has driven a great deal of 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 is no capital gains, capital transfer,Â inheritance or sales tax and no 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.
In March 2017, the BVI implemented the OECD's base erosion and profit shifting (BEPS) minimum standards as a BEPS associate member. As a member of the BEPS 'inclusive framework', the BVI is committing to implementing the OECD's proposed minimum standards on harmful tax practices, tax treaty abuse, country-by-country reporting, and dispute resolution. The territory's government has said it will take forward legislative proposals to introduce country-by-country reporting, a core element of BEPS.
The BVI has signed an inter-governmental agreement with the United States to exchange information under the US Foreign Account Tax Compliance Act (FATCA), in addition to a similar agreement with the UK under its FATCA-equivalent regime with its offshore territories. However, in general, BVI companies are not required to register or report under FATCA unless they are considered a foreign financial institution in the eyes of the US.
The BVI has also committed to sharing information from 2017 under the OECD Common Reporting Standard. This requires all participating jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. According to guidance issued by the BVI Government in November 2016, the BVI will take a "wider approach" to implementing the Standard by collecting a wider range of information, including on non-residents' accounts. The list of participating jurisdictions that have agreed to implement the Standard has also been updated in the guidance.
BVI Companies Act
One of the most important legislative reforms of the modern era in the BVI was the British Virgin Islands Business Companies Act 2004 (the BVI BC Act), introduced on 1 January 2007. This is now the sole Business Companies Act in the jurisdiction, creating an environment where financial institutions and corporations can undertake a wide range of structured asset and project finance transactions in the BVI.
Under the 1984 IBC Act, just one corporate form was available, that of the company limited by shares. Under the new regime, several different types of companies can be incorporated. These are:
- Companies limited by shares. The most popular form of BVI company (see below).
- Companies limited by guarantee not authorized to issue shares. This corporate form is likely to prove useful for not for profit organizations;
- Companies limited by guarantee authorized to issue shares. This 'hybrid' type of company provides greater flexibility in structuring transactions, as a result of its combined equity and guarantee membership;
- Unlimited companies authorized to issue shares. This structure provides greater transparency, as it is possible to look through the company to its shareholders; and
- Unlimited companies not authorized to issue shares. This type of company could be used to ensure effective estate planning.
The Act also allows companies to be registered as restricted purposes or segregated portfolio companies. The former would likely be used primarily in structured finance transactions, while the latter's use will be limited to mutual funds and insurance companies.
The legislation allows more flexibility on the name that can be used by a BVI business company, and allows the re-use of the name of a company which has been previously struck off from the register, has changed their name, or been dissolved. The Act also permits company names to contain foreign characters, which should be particularly attractive to company owners in the Far East.
The BVI BC Act has abolished the concept of authorized share capital and replaced it with a maximum number of shares that the company is entitled to issue. It has also removed the requirement that a dividend can only be declared and paid out of "surplus," leaving in place the pre-existing solvency test requirement, and has boosted the rights of minority shareholders.
The Act also formalized and tightened the record keeping obligations of companies. Bearer shares are prohibited unless authorized by the memorandum or articles of association, and bearer share certificates must be deposited with a custodian who has been approved by the BVI Financial Services Commission.
The BVI Business Companies Act 2004 was amended several times in 2017. The most important of these are:
- BVI Business Companies (Amendment of Schedule 1)(No. 3) Order, 2018 - in force 1 September 2018.
- BVI Business Companies (Amendment) Act, 2018; Segregated Portfolio Companies (BVI Business Company) Regulations, 2018; Segregated Portfolio Companies (Insurance) Regulations, 2018; and the Segregated Portfolio (Mutual Funds) Regulations, 2018 - all in force 1 October 2018.
On 4 June 2018, the Micro Business Company Act, 2017 was signed into force. The Act is intended to help small businesses not in the financial sector (chiefly sole traders and SMEs, particularly family businesses) to start up. This is done by allowing these businesses to have a prescribed corporation form.
BVI Trust Management
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 modernized 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.
VISTA authorizes 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 (e.g. 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).
VISTA was amended by the Virgin Islands Special Trusts Act (Amendment) Act, 2013. Two of the main changes that the amendment brought were that co-trusteeship of VISTA trusts is now permitted and a VISTA trust's qualifying trustee may now be an unlicensed BVI private trust company.
BVI Investment Funds
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, sold to no more than 50 investors on a private basis; professional funds, sold to market professionals or individuals with net worth over US$1m; 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.
In November 2012, the BVI launched a 'regulation lite' fund manager regime with the publication of the Investment Business (Approved Manager) Regulations, 2012. 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.
These regulations were promptly amended, and on 2nd January 2014, the Investment Business (Approved Manager) Regulations (Amendment), 2013 went into force. These regulations permit the use of the approved managers regime by investment managers of non-BVI funds. They also allow approved managers to provide services to a fund not from a recognised jurisdiction, so long as it invests the greater part of its assets in a qualifying BVI fund or one from a recognised jurisdiction.
The British Virgin Islands insurance sector is a rare example of an international offshore financial centre that took great pains to clean up its act. In 1990 there were 2,000 captives in the BVI, of which many were known to be 'shell' operations, often engaged in doubtful or illegal activity, such as money-laundering. By applying minimum capital regulations and other measures, the Government reduced the number of captives to (currently) a mere 141 acceptable companies, and installed new legislation designed to maintain a solvent and well-regulated insurance sector.
The United States continues to be the country 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 Insurance Act, 2008 came into force, replacing the Insurance Act, 1994. The 2008 Act 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.
BVI Shipping and Aviation
The British Virgin Islands also operates a shipping register, and Road Harbour is a designated port of British registry. The BVI has 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 Islands' appeal to visitors.
There is a substantial network of professionals in the BVI to advise on and manage yacht chartering operations. 2006 saw the relaunch 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 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.
The BVI has taken steps to become a major force in the world of aviation finance and aircraft registration. The Mortgaging of Aircraft and Aircraft Engines Act, 2011, and the Mortgaging of Aircraft and Aircraft Engines Regulations, 2012 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 entities to 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 enables local operators to register ownership of aircraft and aircraft engines unlocking credit opportunities for fleet expansion.
Assisted by an internationally comprehensible legal framework based on English common law and a supportive government, a thriving finance industry has developed in the BVI. It has been built largely on company incorporation services, trust and fiduciary services, investment funds and, more recently, insurance. To a large degree, the BVI has had to continually adapt its legal framework to keep pace with both changing international transparency standards, and the competition from other financial centres.
As we enter an era when automatic information exchange is the norm rather than the exception, and with changes to the international corporate tax environment under the OECD's BEPS work ongoing, the jurisdiction will have to continue moving with the times. However, having already shown its adaptability in an ever-changing world, there is no reason to suppose that the BVI won't continue to thrive in the years to come.
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