British Virgin Islands: Offshore Business Sectors

BACK TO BRITISH VIRGIN ISLANDS INFORMATION: BUSINESS, TAXATION AND OFFSHORE

The British Virgin Islands seem to have got as close to being a perfect 'private' offshore international financial centre as can be imagined. For 25 years the Government has welcomed offshore business, and has created a world-standard regulatory structure to avoid money-laundering and other criminal activity. Like Bermuda, the BVI decided not to encourage the growth of offshore banking, but the BVI International Business Company has probably been the world's most successful offshore entity, and is used extensively in financial holding and investment structures, as well as in trust management. The IBC Act was replaced by the BVI Business Companies Act 2004, which came into full force on January 1, 2007, the change was not expected to stem the tide of company registrations, quite the reverse in fact. The BVI have also been successful in developing mutual funds and captives, although not being the leading jurisdiction in either case. Finally, the BVI have a strong position in yachting both as a registry and as an operating base.

This section of the lowtax.net site describes the most important types of offshore business activity carried out from the British Virgin Islands.

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 1 January 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.

The Finance Centre is responsible for providing information on the BVI and its activities, co-ordinating BVI participation at industry conferences and events, liaising with the media and producing marketing material including advertising, brochures and a new web-site.

The British Virgin Islands has not escaped 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 are still the third-best on record, with corresponding revenue holding up well, he said.

However, it is the captive insurance and mutual fund sectors of the BVI's financial services industry that are being most badly affected by the global events, he relayed to the Assembly.

"The [Financial Services] Commission has already seen evidence of this in the increased number of requests by funds for voluntary cancellation and by notification of suspensions of redemptions as well as a downturn in the number of new applications for recognition," O'Neal said.

In December 2008, the British Virgin Islands received praise in a Caribbean Financial Action Task Force Evaluation Report.

The report concluded that the BVI is largely compliant with the FATF 40+9 Recommendations and that, as a territory, it has maintained a robust public policy commitment to ensuring that it plays its part in the global fight against money laundering and the financing of terrorism.

According to the BVI Financial Services Commission, the CFATF report highlighted the efforts undertaken by the BVI since the last CFATF mutual evaluation of the Territory in 2002 to ensure compliance with established Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) principles and the Territory’s commitment to the establishment of standards in legal, law enforcement, regulatory and international cooperation matters.

The Report specifically notes that:

“The [British] Virgin Islands has maintained a robust public policy commitment to ensuring that the Territory plays its part in the global fight against money laundering and the financing of terrorism. Successive Virgin Islands governments have promoted policies to ensure that the jurisdiction can play its part to effectively combat cross border financial crimes, maintain a reputation of being a clean jurisdiction, and where it is found that the jurisdiction has been used by criminals, to fully cooperate with the international community. This government commitment has led to the jurisdiction being in the forefront in the introduction of modern financial services legislation such as a licensing regime for trust and corporate service providers, immobilisation of bearer shares and the introduction of mandatory suspicious activity reporting obligations.”

In a statement the Financial Services Commission (FSC) said it was “pleased with the outcome of the mutual evaluation and the recognition given to the Territory’s adherence to AML/CFT standards."

The statement added:

"However, the FSC recognises that there are areas highlighted by the Report which call for improvement. In this context and in the context of the continuing changing circumstances and improvements to the global AML/CFT regime, the FSC is now focused on the adoption of appropriate measures to effect necessary improvements to its areas of AML/CFT responsibility in order to strengthen the Territory’s continued adherence to established standards relating to the global war against money laundering and terrorist financing.”

“The British Virgin Islands strives to ensure its continued place in the international community as a leading and reputable international finance centre. The Territory will continue to be a strong cooperative partner in the shaping and implementation of compliance standards and supervision pertaining to money laundering and terrorist financing, while ensuring a modern and conducive atmosphere for the conduct of legitimate business.”

British Virgin Islands Financial Holding and Investment

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. It is difficult to be sure why the BVI became the jurisdiction of choice for these markets: of course, the IBC has been highly flexible; secrecy is good; the BVI's reputation is good; there is common law; and so on. But other jurisdictions could make similar claims. At all events, it happened, and the IBC's success has had a knock-on effect in terms of the diversity and professionalism of supporting services in the BVI. The authorities are keen to expand into new markets, and will no doubt legislate further to open up new possibilities.

The great majority of IBCs were formed as asset protection vehicles, sometimes in association with trusts, either to hold shares or other types of asset.

Responding to 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. The Acts came into force on 1 January 2005. The Financial Services Commission (Amendment) Act of 2004 addresses the regulatory framework for immobilising bearer shares, in particular the rules governing custodians.

Companies formed before 1 January 2005 had until 31st December 2009 to comply with the new rules. Companies formed after 1st January 2005 must comply from their date of formation.

An Authorised Custodian is a person who holds a valid licence issued under the Banks and Trust Companies Act 1990 ("BTCA"), and whose licence specifically includes an authorisation permitting the holder to act as a custodian. Recognised Custodians are persons not licensed under the BTCA and not resident in the British Virgin Islands but who are specifically approved by the Financial Services Commission as Recognised Custodians. At the time of writing, there are 13 such custodians.

In December 2009 the Hong Kong Stock Exchange (HKEx) announced that the BVI had been placed on its list of acceptable jurisdictions for an issuer’s place of incorporation under Chapter 19 of the Listing Rules, paving the way for the listing of BVI-incorporated companies on the exchange.

The decision by the HKEx means that companies wishing to list shares on the exchange can do so under a less stringent process, detailed within a guidance note available on the HKEx's website, rather than applying as an overseas company.

Commenting on the announcement, law firm Conyers Dill and Pearman, which has been involved in over 40 listings on the exchange by BVI companies, said that whilst it would significantly reduce red tape, BVI companies may need to alter their articles of incorporation to enhance shareholder protection to comply with Hong Kong securities legislation. Under the legislation, an applicant must satisfy the following criteria:

Amend its memorandum and articles to address certain issues of shareholder protection where the protection afforded to shareholders is considered less stringent than in Hong Kong; and
Demonstrate a reasonable nexus between its place of incorporation and its place of business operations.

According to Conyers Dill and Pearman: “the key advantage for British Virgin Islands companies in being able to list directly on the Hong Kong Exchange is there should be no need for an applicant to undertake either (i) a restructuring of its business and operations through the establishment of a new Bermuda or Cayman Islands holding company or (ii) a redomicile of its place of incorporation by way of merger or continuation, prior to listing. This would be of particular benefit for companies incorporated in the British Virgin Islands:

with a listing on another exchange who wish to have a secondary listing in Hong Kong and avoid the time, cost and expense of such a restructuring or redomicile; or
used as a private equity investment vehicle with complicated convertible preferred share type structures, where a restructuring of the sort described above may not be readily achievable, or only achievable with difficulty, due to the need to obtain multiple preferred shareholder and other approvals.”

“In light of the popularity of British Virgin Islands companies as special purpose vehicles for investments in Asia, and particularly the People’s Republic of China, the Hong Kong Exchange’s decision provides investors in such companies with a further route to exit investments through a listing on a highly regarded, Asian-focused, stock exchange. In addition, for those entities incorporated in the British Virgin Islands with operations in Asia but a primary listing on another stock exchange (i.e. AIM, NASDAQ), a secondary listing on a more market appropriate exchange is now easily within reach.”

British Virgin Islands Investment Fund Management

There was already a substantial fund management sector in the British Virgin Islands when the Mutual Funds Act 1996 came into force in 1998. Almost 2,700 mutual funds were registered in the BVI as at March 31, 2011.

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 $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;

All open-ended funds have to be 'recognised' or registered by the Registrar of Mutual Funds, an official of the Financial Services Commission. The Act also sets up a licensing regime for managers and administrators of mutual funds. Umbrella funds and funds of funds are both permitted. Closed-end funds are not covered by the Act. See Law of Offshore for further details of the regulatory regime for investment funds. Investment funds in the BVI normally take one of three corporate forms: the Business Company (BVIBC); the Unit Trust; or the Limited Partnership (see Forms of Company). A BVI mutual fund can also be specifically registered as a Segregated Portfolio Company under the BVI Business Companies Act 2004.

Registration under this chapter permits effective differentiation and management of several distinct investment portfolios or asset classes within the organizational boundaries of one mutual fund.

The Segregated Portfolio Companies Regulations, 2005 were gazetted on 22 December, 2005 and the first quarter of 2006 saw the first private fund re-registered as a Segregated Portfolio Company, with a total of 189 segregated portfolios as at 31 March, 2006. This figure had reduced to 124 by 31 March, 2011.

Exemption from tax applies to funds covered by the Mutual Funds Act, to IBCs, to Trusts and to Limited Partnerships. See Offshore Legal and Tax Regimes for further details of taxation and fees payable.

The BVI Registrar of Mutual Funds recognises 39 jurisdictions as having sufficiently prudent systems of regulation/supervision of mutual fund business in place so as to allow him to approve applications for recognition and registration by British Virgin Islands mutual funds which list a functionary (e.g. a manager) from the recognised jurisdiction. The 39 jurisdictions are: United Kingdom; United States of America; Argentina; Australia; Bahamas; Belgium; Bermuda; Brazil; Canada; Cayman Islands; Chile; China; Curacao; Denmark; Finland; France; Germany; Gibraltar; Greece; Guernsey, Hong Kong; Isle of Man, Ireland; Italy; Japan; Jersey; Luxembourg; Malta; Mexico; The Netherlands; New Zealand; Norway; Panama; Portugal; Singapore; Spain; South Africa; Sweden; and Switzerland.

Although there are now 400 entities providing management and/or administration services to Mutual Funds in the BVI, Mutual Funds do not have to be managed or administered from within the BVI. Regulated service providers in the above jurisdictions around the world are accepted by the BVI Registrar of Mutual Funds to provide management and administrative services to BVI Funds, allowing greater flexibility when appointing service providers. Similarly a non-BVI Mutual Fund is not required to be regulated under the Mutual Funds Act only because it is managed or administered from within the BVI, provided that the management or administrative service provider is a BVI entity, licensed under the Mutual Funds Act.

The FSC is working on a code of practice to regulate BVI incorporated managers and administrators which will adopt the highest international standards. The Securities and Investment Business Act, 2010, came into effect on 17 May. It requires all mutual funds in the BVI to have an authorised representative in the BVI and to have at least two directors. The authorised representative will have certain responsibilities to ensure that its mutual fund client comply with the regulatory requirements in the BVI.

It does not seem that the implementation of the EU's Savings Tax Directive has led to an outflow of fund business from those jurisdictions. The 'equivalent measures' legislated by the BVI in anticipation of the STD have given the BVI an advantage over other offshore jurisdictions which have not implemented equivalent measures, for example Bermuda and the Bahamas.

Key EU fund jurisdictions, notably the UK and Ireland and, in addition, Switzerland have implemented legislation and/or guidance notes that acknowledge that certain types of fund (eg non-UCITS funds) are outwith the STD.

Distributions and other payments derived from funds which are not UCITS or elective UCITS are not reportable as savings income under the regulations. A UCITS is an ‘undertaking for collective investment in transferable securities’ authorised in accordance with the UCITS Directive. Non-EU funds may or may not be UCITS depending in a complex way on their nature. Even when a fund is a UCITS, its distributions are only taxable under the STD when the 15% threshold for income from money debts is breached. The rules are complex.

The BVI regulations are such that funds established there are deemed not to be UCITS, with the exception of restricted public funds as defined in the Mutual Funds Act 1996.

Accordingly, in respect of any such BVI non-UCITS funds, paying agents (whether feeder funds or nominees or otherwise, and whether in the BVI or in the EU) will not be required to make reports or withhold on distributions regardless of the application of the asset test or the identity or residence of the recipient of the dividend or distribution.

In September 2008, it was announced by the British Virgin Islands Financial Services Commission (FSC) that a new Annual Return regime for BVI investment funds had been created.

The idea of the Annual Return is that the BVI will be able to benchmark its fund industry, to conform with international reporting standards, and to enable the regulator to gather financial information that may assist with the strategic development of the BVI funds industry.

British Virgin Islands Banking

When the BVI began their development as an IOFC, 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 USD2.4 billion in the first quarter of 2011.

Lately there has been pressure on the Government from the business community to allow in larger numbers of respectable offshore banks; professional firms in particular feel that the BVI's legislative and regulatory apparatus is well up to global standards and well able to defend the BVI and its good reputation against scams, criminals and drug money. By now it's likely that the Government would not refuse new applications from top banking institutions.

Banks are regulated under the Banks and Trust Companies Act 1990, and supervised by the Banking and Fiduciary Division of the Financial Services Commission. See Offshore Legal and Tax Regimes for further details of the supervisory and taxation regimes.

British Virgin Islands 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) 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. See Law of Offshore for a fuller treatment of trust law in the BVI.

There is a large and sophisticated community of professional advisers on trust matters in the BVI. Companies offering trust services must be licensed under the Banks and Trust Companies Act 1990, and supervised by the Banking and Fiduciary Division of the Financial Services Commission. See Offshore Legal and Tax Regimes for further details of the licensing regime for trust managers, and fees payable. The BVI trust sector has experienced moderate growth since 1995 growing on average at a rate of 4% annually.

British Virgin Islands Insurance

See Offshore Business Review – Insurance for a more general treatment of captive insurance companies.

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.

Since 2005, the number of captives in the BVI has remained more or less static at around 250 but had dropped to 185 in the first quarter of 2011.

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 industry accounts for the most BVI captive licenses, with 21% of the sector. Finance/insurance (18%), Real Estate (16%) and Healthcare (16%) are the other major industries represented.

Segregated Portfolio Companies (SPC’s) continue to gain momentum in the Territory, sparked by the introduction of SPC Regulations at the end of 2005 and expanded SPC provisions in BVI’s enhanced Business Companies law regime.

The Insurance Act 1994 and the Insurance Regulations 1995 establish the regulatory and supervisory regime for insurance, including captives, in the BVI. Insurance licenses distinguish between Long Term, General and 'Credit Life' insurance companies. Insurance professionals (agent, broker, adjuster, etc) are also licensed. The sector is regulated by the Financial Services Commission. See Law of Offshore for further details of the regulatory regime.

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. There is now once again a flow of new insurers arriving in the BVI. Although obviously it is far behind Bermuda and Cayman, its two local competitors, it is considerably cheaper as a jurisdiction and has legislation which is at least as good.

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. The creation of segregated portfolios is subject to the approval of the Financial Services Commission. Most captives and other insurers in the BVI use the Business Company form, which is exempt from taxation. See Offshore Legal and Tax Regimes for details of the taxation of captives and the license fees payable.

British Virgin Islands Ship Management and Maritime Operations

See Offshore Business Review – Shipping for a more general treatment of offshore shipping registries.

The British Virgin Islands 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.

Yachts already under British registration elsewhere can transfer their Port of Registry to Road Harbour; foreign-registered yachts need to provide evidence of the prior registration and its cancellation; new yachts need the Builder's Certificate and the Bill of Sale made out to the registrant. The registration process involves a fair amount of documentation; the Registrar of Shipping issues the Blue Registration Book which includes the Certificate of British Registration.

Chartering operations will probably take place through a company: if the chartering is to take place out of the BVI, then a Companies Act (Cap. 285) company is necessary (see above and see Direct Corporate Taxation for details of the tax regime); if chartering is to take place outside the BVI, then a Business Company will probably be the best form (see above and see Offshore Legal and Tax Regimes for details of the tax regime).

There is a substantial network of professionals in the BVI to advise on and manage yacht chartering operations.

2006 saw the re-launch of the Virgin Islands Shipping Registry (VISR), which fulfilled of the conditions for Category One membership of the UK's Red Ensign registry group, enabling the registration of larger vessels. The Virgin Islands Shipping Registry was created through a merger of the Shipping Registry Division of the BVI Financial Services Commission and the Marine Unit of the Ministry of Communications and Works.

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 Red Ensign Group is a British-based network of registries regulated under the auspices of the UK government’s Maritime and Coastguard Agency.