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Lowtax BVI International Focus

By Lowtax Editorial
15 November, 2012


Following on from our feature last May, in which we introduced the British Virgin Islands and explored the various facets of the jurisdiction’s offshore legal framework, in this feature we take a look at recent developments which have served to reinforce the BVI’s position as one of the most respected international offshore financial centres.

Ask people their thoughts on the 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.

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 2012 there were more than 15,000 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 a little under 448,000, making the jurisdiction the world’s most popular offshore corporate domicile.

Fiduciary services and investment funds are other areas in which the BVI excels; indeed, 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.”

Earlier in the year, leading international offshore law firm Ogier noted that its involvement in a number of global transactions was reflective of the strong demand of late for BVI-based corporate structures. Such high-profile transactions involving BVI structures have included:

  • Canadian-based financial institution Scotiabank’s USD1bn acquisition of a 51% stake in Colombia’s Banco Colpatria Red Multibanca Colpatria S.A., that country’s fifth largest financial group, representing Scotiabank’s largest ever-international takeover;
  • UK private equity group CVC Capital Partners’ purchase of a 51% controlling stake in Virgin Active - the fitness chain part of Richard Branson’s Virgin Group, valued at GBP900m;
  • Australian-listed diversified services company UGL Limited’s GBP77.5m acquisition of the trading operations of UK-listed property services company DTZ; and,
  • NYSE-listed global agri-tech provider, Monsanto Company’s acquisition of Beeologics, a start-up that researches and develops biological tools for targeted pest and disease control.

“The array of blue-chip companies, geographies and industry sectors covered by these deals underscore Ogier BVI’s capabilities as a trusted advisor to international business on all types of corporate transactions,” said Ray Wearmouth, Managing Partner, Ogier BVI.

“Ogier’s involvement in these arrangements also represent the continued confidence of the global financial community in the BVI as a stable and high-quality jurisdiction for structuring multi-national transactions,” he added.

Obviously, the BVI’s almost complete absence of taxation that 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 is also no capital gains or capital transfer tax, 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 to 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.

The BVI has also recently moved a step closer to launching 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 has 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.

The main restriction is that aggregate assets under management of all of the open ended funds cannot exceed USD400m and the capital commitments of all of the closed ended funds cannot exceed an as yet undisclosed amount to be specified in the Guidelines. It is expected that since closed ended funds are thought to expose the jurisdiction to a lower level of regulatory risk, the capital commitment restriction will be significantly higher than USD400m.

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.

Following some amendments to SIBA and the Approved Manager Guidelines and the publication of a template Application Form by the Financial Services Commission, the new regulations are expected to come into force in a few weeks.

By the end of June 2012, there were over 2,400 mutual funds registered in the BVI. This is significantly less than the 10,000 or so funds that are registered in the Cayman Islands; but the new regime is intended to raise the profile of the BVI as a fund management domicile.

The BVI also expect 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 already 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 an tax-efficient aircraft holding company domicile, and less than a handful of aircraft have been registered with the islands' Aircraft Register.

However, last year the government progressed plans to develop the local registry, and in June 2011 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 islands 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.

Law firm Harney's commented: "The new law complements the jurisdiction’s status as a US Federal Aviation Authority Category One aircraft register under the International Aviation Safety Assessment programme by creating a framework for registration in the British Virgin Islands of security over aircraft, and separately, aircraft engines. Lenders in particular will be comforted by provision in the legislation for the filing of priority notices (which reserve and protect a particular priority position for a prospective mortgagee, for fourteen days), and clear provisions on enforcement, transfer, transmission... and discharge of mortgages. This development paves the way for new business opportunities which complement and support the British Virgin Islands’ position as the premier offshore corporate domicile with over 850,000 companies incorporated to date."

Regulation has also been on the agenda for the BVI authorities this year, and 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) both 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.”

From an economic and fiscal point of view, the BVI can be said to be in a more stable position relative to some of its Caribbean peers, which have seen sharp falls in economic growth and the recurrence of budget deficits as the financial services industry contracted in 2009 and 2010. This has not been the case in the BVI, although economic growth has undoubtedly been muted. However, revenue figures do reveal just how dependent the jurisdiction is on the financial services sector, and finance minister Ronnie Skelton told parliament in 2010 that the government had received almost 60% (USD164m) of its total revenue from the financial services industry in 2009. The economic health of the BVI is therefore tied immutably to the state of financial services as a whole. For this reason, the government is likely to remain responsive to the needs of business.




 

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