International Tax Planning/IOFC Analysis - The BVI
By Lowtax Editorial
17 May, 2012
Like many International Offshore Financial Centres (IOFCs), the British Virgin Islands has had to adapt its legislative framework to survive in the increasingly competitive world of offshore and within the ever-tightening straightjacket of transparency demands from the OECD and other multilateral groups. So, in this feature we look at how the BVI is rising to meet these challenges, exploring key aspects of its offshore financial services regime.
The British Virgin Islands comprise 36 islands in the Caribbean Sea of which only 16 are inhabited. 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 territorys political stability is one of its major selling-points.
The islands are located about 80 kilometres east of Puerto Rico, north of the Leeward Islands and adjacent to the US Virgin Islands. The aggregate land area of the island group is 153 square kilometres. The principal islands are Tortola, Virgin Gorda, Anegada and Jost Van Dyke. The island of Tortola (land of turtle doves) is the largest of the British Virgin Islands situated about 130 kms east of Puerto Rico overlooking Sir Francis Drake Channel, and has Road Town, the capital, and the international airport (Beef Island). Despite its diminutive geographical stature however, the BVI is home to hundreds of thousands of international companies, and as we shall see later in this feature, plays a key role in facilitating investment into major economies, particularly in Asia.
On January 1, 2007 the British Virgin Islands Business Companies Act 2004 (the BVI BC Act) became 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. The new IBC legislation was drafted to ensure the territory was fully compliant with the European Union (EU) Savings Tax Directive and EU Code of Conduct on Business Taxation, as required by the United Kingdom of all its Overseas Territories.
Under the new regime, several different types of companies can be incorporated. These are:
- Companies limited by shares; likely to remain the most popular form of BVI company;
- Companies limited by guarantee not authorised to issue shares; this corporate form is likely to prove useful for not for profit organisations;
- Companies limited by guarantee authorised 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 authorised to issue shares; this structure provides greater transparency, as it is possible to look through the company to its shareholders; and
- Unlimited companies not authorised to issue shares; this type of company can be used to ensure effective estate planning.
In May 2011, the BVI government completed the first phase of implementing amendments to the Business Companies Act, set to be introduced later in the year. The BVI Business Companies (Amendment) Act 2012 was recently tabled for a first reading by the nation's House of Assembly, and the Business Companies Regulations, 2012, have been published in the BVI's Official Gazette. The Act and the Regulations are not yet in force under BVI law as the Act itself remains subject to a number of readings and reviews. However, the amendments contained in the Act and Regulations will affect a number of areas, including:
- Listed companies;
- Voluntary liquidations and voluntary liquidators;
- Involuntary dissolution and striking off of a company;
- The mechanics of security registration;
- The passing of directors written resolutions; and
- The choice of company names.
As Ray Wearmouth, Managing Partner, Ogier BVI, the international offshore legal and fiduciary services firm, observed, while the changes are not being viewed as controversial they have been introduced to further enhance the BVI's leading position as an international corporate domicile.
Taxes (or lack of them) in the BVI are extremely competitive and the territory is more accurately described as a no tax jurisdiction rather than a low tax one. The new Business Companies Act lowered the income tax rate to 0% for both local and International Business Companies and effectively removed the distinction between 'offshore' and 'onshore' entities. There is no capital gains or capital transfer tax, no inheritance tax, and no sales tax or VAT, although there are stamp duties on certain transactions, and property taxes. There are also no withholding taxes in the BVI. However, the BVI, like other British 'dependent territories', was forced to apply the EU's Savings Tax Directive from July 1, 2005, and chose to apply a withholding tax (initially of 15%, 20% post July 1, 2008 and 35% from July 1, 2011) to the returns on savings paid to nationals of EU member states. Fortunately for the BVI, the Directive does not currently apply to corporate entities.
In common with many other offshore jurisdictions, the British Virgin Islands responded to pressure from the OECD and FATF by tightening up its regulatory regime. The BVI government established an independent regulatory body - the Financial Services Commission (FSC) - on January 1, 2002. Then, in October, 2002, the BVI Finance Centre was established under the FSC as a dedicated financial services marketing unit designed to promote the BVI as a premier international centre for financial services. In response to this international pressure, the BVI Government has legislated to restrict bearer shares. The International Business Companies (Amendment) Acts of 2003 and 2004 provide the legal framework for immobilising bearer shares, and the Acts came into force on January 1, 2005. The Financial Services Commission (Amendment) Act of 2004 addresses the regulatory framework for immobilising bearer shares, in particular the rules governing custodians.
The international crack down on tax evasion and banking secrecy does not seem to have dented the popularity of the BVI as a corporate domicile, however. Indeed, the phenomenal growth of the BVI International Business Company (IBC) was fed by political instability in Latin and Central America, and more recently the handover of Hong Kong to mainland China. Analyzed by the immediate destination of investment, foreign direct investment (FDI) figures released by the Hong Kong government in December 2011 showed that the BVI was the most important destination for Hong Kong's outward FDI, with a share of 43.1% of the total stock. While it was to be expected that the Mainland of China accounted for the largest share of the total inward FDI stock in Hong Kong at end-2010, at 36.9%, reflecting the importance of investment from mainland China into Hong Kong, it is a lesser-known fact that the BVI has, for a number of years now, accounted for the second-largest share of Hong Kongs inward FDI, at 32.5% of FDI stock at the end of 2010.
The British Virgin Islands did not escape the contagion of the global financial and economic crisis however, and Premier and Minister for Finance Ralph T. O'Neal disclosed to parliament that 2008 was "a year of little or no growth in financial services". Responding to a question in the First House of Assembly, O'Neal revealed that company incorporations were down by 20% in 2008 compared with the record year of 2007, when 75,000 companies registered in the jurisdiction. Nonetheless, the 2008 figures were still the third-best on record, with corresponding revenue holding up well, he said.
While the level of new incorporations has not quite managed to return to its pre-crisis peak, the FSC revealed in December 2011 that business activity for the second and third quarters of 2011 grew. Business incorporations and registrations, at 17,056 in Q3, showed improvement on Q2 registrations and incorporations of 15,689, and this was a marked increase on that recorded in Q3 2010, when a total of 15,946 businesses were registered or incorporated. There were 457,331 active companies incorporated in the BVI by the end of the third quarter in 2011, including 545 Limited Partnerships.
As described below, there are many other strings to the BVIs offshore bow, including fiduciary services, investment funds, and marine services. Banking, however, has not taken off in the same way that it has in other IOFCs. This is partly deliberate; the authorities decided not to encourage offshore banks to establish themselves in large numbers, as a defence against money-laundering. Unlike Bermuda, however, which created local banks to the exclusion of external banks, the BVI authorities allowed in a small number of international banks. There are in fact a total of 15 banks in the BVI, including Barclays Bank and Chase Manhattan. Total assets for the banking industry stood at approximately USD2.45 billion in the third quarter of 2011.
In a similar vein, the BVI 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. Since 2005, the number of captives in the BVI has remained more or less static at around 250 but had dropped to 174 by the end of the second quarter of 2011.
Trust management, on the other hand, 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) Act 1993 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.
There was already a substantial fund management sector in the British Virgin Islands when the Mutual Funds Act 1996 came into force in 1998. A total of 2,627 mutual funds were registered in the BVI as at September 30, 2011 (although this number is dwarfed by the approximately 90,000 funds registered in the Cayman Islands). 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 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 BVIs 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.
So, in summary, while the challenges mentioned at the start havent gone away, and there are now added economic risks stemming from the eurozone debt crisis, there is no doubt that the BVI is an attractive offshore destination, offering stability, high levels of privacy, good reputation, and flexible legislation.
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