Chris McKenzie and Lee Syin Long provide an assessment of the use of BVI IBCs by Asian investors and an examination of why the Caribbean state has been so crucial to the development of the Chinese economy.
From its initial emergence as an offshore financial centre in 1984, with the enactment of the International Business Companies Act, the British Virgin Islands has been synonymous as a corporate domicile for clients and investors around the world.
The BVI International Business Company has become extremely popular over the years, particularly in Asia and Russia. Over 900,000 International Business Companies (IBC) have been incorporated in the BVI since then, making the jurisdiction the clear global leader in offshore incorporations, with a 45 per cent international market share according to a 2004 report by the IMF.
Underpinning the global drive to incorporate BVI business companies in the 1980s and early 1990s were the problems which Panama faced post Noriega – having previously been a jurisdiction of choice for company incorporations, as well as the nervousness experienced by high net worth individuals in the years preceding the return of Hong Kong to China. Predominantly used in Asia as personal holding companies, BVI companies have in fact become so widely used in Hong Kong that IBCs are simply known as BVIs.
From its initial single offshore product offering, the BVI has since evolved into a jurisdiction which provides the full range of offshore financial products and services. For clients based in Asia, the BVI’s modern and progressive trust legislation has provided attractive and flexible structures for wealth and succession planning, as well as more sophisticated purposes. Tax related advantages have always been a strong motivation, but for wealthy families in Asia, the ability to engage in long term planned ownership structures for holding complex assets – in many cases incompatible with direct personal ownership – offshore trusts offer an effective and efficient mechanism for the consolidation and management of worldwide assets.
Coming some way behind several other leading offshore financial centres’ efforts to reform trust laws to become more attractive to international clients, the BVI did not introduce the Trustee Amendment Act until 1993. Falling into line with its competitors, the BVI’s 1993 legislative update introduced clarification relating to conflict of laws issues, settlor reserved power provisions, provisions relating to protectors and provisions enabling non-charitable purpose trusts. One of the more significant elements of this legislation was the abolition of the requirement for all BVI trust deeds to be filed publicly, which had previously cramped the growth of the BVI trust sector. Following the 1993 Act and particularly the influx of specialist trust lawyers into the Territory who were able to draft and review trust deeds and advise on BVI trust law, the number of BVI trusts began to grown steadily and within the space of less than a decade, the BVI had become known as one of the world’s leading offshore trust jurisdictions.
For Asian families a decade ago, one of the primary obstacles to structuring a trust was the high proportion of wealth in the continent which was tied up in operating investments or businesses. Special consideration therefore needed to be given to the laws which governed the trust and these issues underpinned the next major round of BVI trust law reforms in 2003, notably the introduction of the VISTA legislation, which has given the BVI a significant competitive advantage over many other jurisdictions. Essentially, the VISTA legislation uniquely enables trusts to be established to hold shares in BVI companies as holding companies for other assets such as shares in foreign companies and speculative investments, as well as providing a safe and appropriate way to hold commercial assets in a trust structure.
The Virgin Islands Special Trust Act (VISTA) addressed the problems in the use of trusts as succession vehicles, which had arisen due to the English ‘prudent man of business rule’, which was designed to help preserve the value of trust investments but which made the trust an unattractive vehicle to hold assets which settlors intended trustees to retain. Equally problematic was the requirement for trustees to monitor and intervene in the affairs of underlying companies: for example trustees would be obliged to prevent the company from entering into an unduly speculative venture. Furthermore, the requirement to exploit the shareholding to maximum financial advantage may have involved accepting a financially attractive takeover bid for the company, despite the wishes of the settlor. Such obligations created problems for settlors and trustees alike, which were circumvented by the BVI’s VISTA trust regime, which enables a shareholder to establish a trust of his or her company that disengages the trustee from management responsibility and permits the company and its businesses to be retained as long as the directors think fit.
The VISTA trust is particularly suitable for a range of applications, notably where the settlor of the trust wishes to retain control, as matters can generally be structured so that settlor control can be retained at the director (company) level, while the same applies when the settlor intends the shares he or she wishes to settle on trust and/or the underlying assets of the company to be retained.
Other applications include those where trustee involvement in the underlying company’s affairs is undesirable or inappropriate, as well as charitable or non-charitable purpose trusts for securitisations and off-balance sheet transactions, or to hold shares in private trust companies, or where the underlying assets of the trust will comprise of speculative investments which would otherwise be regarded as inappropriate for the trustees of a traditional trust.
Typically with a VISTA trust, shares in non-BVI companies and/or other assets are held by a BVI company, the shares of which are held by the trustee of the VISTA trust. VISTA then prevents the trustee from being able to procure a disposal of underlying assets or from being able or required to engineer an intervention in the affairs of controlled subsidiaries.
The regime, which enabled the establishment of private trust companies in the BVI,was introduced in 2007, making the BVI trust product yet more attractive to international clients. Private trust companies, which have been extremely popular for many years, are companies which are incorporated with their main functions being to act as the trustees of specific trusts or a number of related trusts.
Private trust companies enjoy the benefit of limited liability and perpetual existence, as with most other corporate vehicles. Just like the VISTA regime, meanwhile, the private trust company allows settlors or their family members or appointees to exercise significant control over trustee’s decisions by being directors of private trust companies. They exhibit a simple corporate structure and also preserve confidentiality,which is of growing importance with jurisdictions where concerns exist over financial privacy and personal safety.
To qualify as an exempt private trust company certain conditions need to be fulfilled, including being a BVI company incorporated under the BVI Business Companies Act and being defined as a private trust company in the company’s memorandum. The company’s registered agent must hold a Class 1 Trust Licence under the BVI’s Banks and Trust Companies Act and must not solicit trust business from the public. Additionally, the company must carry on no business other than being the trustee, protector or administrator of the trust and all of its business must be unremunerated or related trust business.
With competitive fees, the BVI is considered an excellent jurisdiction to establish a private trust company as no licence is needed and the BVI company can be established very quickly, providing all the conditions of the BVI's 2007 regulations are met. There is no requirement for a local director or authorised representative, nor are there any capitalisation requirements and no need to establish a physical presence in the jurisdiction.
With a well-regarded and appropriate legal and regulatory framework, the BVI has met the wealth structuring needs of families and high net worth individuals in Asia for many years, with the VISTA and private trust company regimes providing particularly useful solutions. With the inherent flexibility of offshore trusts combined with the BVI’s renowned corporate environment, the jurisdiction will continue to service the requirements of Asian clients for long term ownership structures that perfectly suit their needs.
Chris McKenzie, Partner, Walkers, BVI, and Lee Syin Long, Head of Trusts (Asia), Walkers, Singapore