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BVI Focus


By Tax-News.com Editorial
November 12, 2013


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 2013 there were just under 12,500 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 451,000, making the jurisdiction the world's most popular offshore corporate domicile. In total, over 800,000 companies have registered in the BVI.

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.”

In 2012, 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.

A banner year for M&A activity in the BVI was crowned with the USD55bn acquisition by Rosneft of Alfa Group, Access Industries and Renova's (AAR) 50% stake in Russian oil company TNK-BP. TNK-BP, Russia's third-largest oil producer, was owned by a holding structure established in the British Virgin Islands, reflecting the jurisdiction’s popularity as a domicile for international joint ventures.


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).


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, 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 2013, there were 1,567 professional, 567 private and 143 public mutual funds licences in the BVI. There were also 524 Investment Business Licences, 46 Authorised Representatives and 11 Approved Investment Managers.


Insurance

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, 2013, there were 150 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

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 and from within 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 both last year and in 2013. 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.”

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. It goes on to note a number of measures which the British Virgin Islands has undertaken to promote transparency. Some of those measures are as follows:

  • To date, the British Virgin Islands has concluded 24 TIEAs and is in the process of negotiation with other countries for more tax agreements;
  • In order to ensure better coordination and response to tax information exchange matters, the British Virgin Islands established the International Tax Authority (ITA) within the Ministry of Finance with the primary responsibility of facilitating assistance to foreign tax and law enforcement authorities in tax and tax-related matters;
  • The British Virgin Islands was the first jurisdiction to develop and implement a paper on immobilizing bearer shares in order to remove the anonymity associated with bearer share companies and this regime is well-established and enforced under the BVI Business Companies Act, 2004;
  • The British Virgin Islands subscribes and adheres to the Statement of Best Practice for Trust and Company Service Providers issued by the then Offshore Group of Banking Supervisors (now transformed into the Group of International Finance Center Supervisors) and accordingly licenses and supervises to high standards all trust and company service providers in the Territory;
  • All licensed trust and company service providers are supervised for their anti-money laundering and terrorist financing obligations, including the availability of beneficial ownership information, and periodic inspections are carried out in respect of the licensees to establish compliance and, where shortcomings are identified, appropriate enforcement action is taken;
  • The British Virgin Islands, in consonance with its long-standing policy of not encouraging or welcoming those who choose to break laws applicable to them, has committed to and is actively engaged in negotiations with the US Treasury in finalizing an Inter-Governmental Agreement (IGA) to facilitate the exchange of tax information; the British Virgin Islands is similarly engaged with Her Majesty’s Treasury and has committed to the G5 Multilateral Pilot Project on the automatic exchange of tax information.

The BVI Government has also commenced talks with the United States Treasury with a view to concluding a FATCA (Foreign Account Tax Compliance Act) intergovernmental agreement (IGA) with the US.

"We are of the very considered opinion that this course is the best one to adopt for the BVI," revealed Chief Minister Orlando Smith in August 2013 said. He also pointed out that the territory's financial services industry agrees with this course of action.

On August 15, the Cayman Islands announced that it has concluded negotiations with the United States on agreements which pave the way for automatic exchange of information under FATCA.

FATCA was signed into law by President Obama in March 2010 and is intended to ensure that the Internal Revenue Service obtains information on accounts held abroad at foreign financial institutions by US taxpayers. At the time of writing, nine IGAs have been signed by the US, but many more are under negotiation, several involving other IOFCs such as Bermuda and the Cayman Islands.


BVI Positioned For Growth

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 2008 and 2009. This has not been the case in the BVI: gross domestic product (GDP) contracted by 0.8% in 2008, although growth returned in 2010 when GDP expanded by 1.3%; the Government had a balanced budget in 2012; and with GDP per capita estimated to be USD42,300 in 2010, the BVI enjoys a level of prosperity that compares very favourably with the rest of the region. However, 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.


 

Tags: offshore | banking | standards | Insurance | compliance | regulation | Regulations | insurance | Banking | Investment | Invest | Investment | investment | legislation | law | financial services | services | tax | British Virgin Islands | Virgin Islands | business

 

 

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