Ashley Davies, Walkers, examines just how popular BVI business company corporate vehicles are with Asian investors and the crucial role that they play in wealth management.
The British Virgin Islands is home to the BVI Business Company ("BC"), which has firmly established itself as the offshore company of choice throughout the Asian region. The BC is a versatile corporate vehicle that is easy and quick to establish under the British Virgin Islands' BVI Business Companies Act ("BVI Act") and there are now literally hundreds of thousands of these companies being used in a wide variety of transactions in China, Hong Kong and throughout the Asian region. In this article we will be looking at why this is the case, as well as discussing some of the advantages of BCs and their uses.
Where BCs are Being Used in Asia
BCs are used in a wide spectrum of corporate and finance transactions in Asia, from multi-billion dollar cross-border transactions to discrete investments by high net worth individuals. The growth of investment in China has been met with a growth in the number of international transactions involving multiple layers of offshore companies, particularly BCs. For example, a common group structure for real estate investments for mainland China based groups would involve a syndicate of lenders advancing funds to a BC as borrower and obtaining security and guarantees from other BCs. The British Virgin Islands borrower would own a Hong Kong subsidiary, which would in turn own the mainland China entity, which ultimately would hold the property assets.
A look at the local newspapers in Asia on any given day is likely to reveal BCs being involved in a number of other high profile matters including:
Background as to the Popularity of BCs
The British Virgin Islands is widely regarded as a politically stable, flexible, creditor friendly, common law jurisdiction where BCs can be incorporated quickly and are not subject to overly restrictive regulations. For example, the British Virgin Islands has historically had no statutory prohibition against the provision of financial assistance by a BC for the purchase of its own shares, has no statutory requirement for a BC to demonstrate corporate benefit (in the context of entering into guarantees, for example), and has a simple security registration regime (see below). The structures involving BCs have usually been in place for many years and international investors and banks are generally comfortable with using BCs. BCs have also traditionally been cheap to set up and maintain. Investors and banks are also relatively comfortable that, should they need to explore insolvency or litigation options, the British Virgin Islands has a deep bench of experienced professionals, a tested judiciary and a proven track record of being responsive to the needs of international creditors. In addition, Asian investors are often particularly comforted by the fact that there are no foreign exchange controls or foreign exchange regulations under the laws of the British Virgin Islands.
The Ease of Setting Up a BC
The British Virgin Islands offers rapid and cost effective incorporations and it is generally easy to maintain a BC once set up. Generally it takes two to three business days for a BC to be incorporated. Once incorporated, as a matter of British Virgin Islands law there is no requirement to hold annual general meetings of shareholders, file audited accounts, have British Virgin Islands resident directors or physically hold board meetings in the British Virgin Islands. Thus it is possible to run a large Asian business using many BCs with relatively minimal physical interface with the British Virgin Islands.
Setting Up a BC to be a "Bankruptcy Remote"
Using a BC can reduce the risk that a particular entity in a transaction will be caught up in an insolvency situation, particularly that of another member of the group seeking finance. A BC can be set up in such a way that the risk of it being wound up involuntarily is minimised. Care would need to be taken to make sure that it does not carry out any business or enter into any transactions other than the specific transaction for which it is set up. It will have shareholders and directors who are independent of the other transaction parties (eg the originator in a securitisation, or the airline in an aircraft financing, where in both instances the shares of the BC could be held on charitable trust and thus less likely to be consolidated with other transaction participants). Generally, contractual restrictions on the BC's activities in the transaction documents are sufficient to satisfy rating agency requirements although the BC may have a restricted objects clause in its memorandum if investors require this. While the BC is not as popular as Cayman Islands companies for the typical bankruptcy remote structure, we are seeing more interest in BCs being used for these purposes and this could be a possible area of growth for the jurisdiction in future.
Tax Advantages of Using BCs
A major reason for using BCs in certain offshore jurisdictions is that they provide a tax neutral means of inserting vehicles in a structure: interest payments, distributions and the like typically can pass through the BC without an additional layer of tax (eg withholding or corporations tax) being levied at the BC level. Subject to certain limited exceptions, there are no stamp duties, income taxes, corporate or capital gains taxes, withholdings, levies, registration taxes, estate duties, inheritance taxes or gift taxes or other duties or similar taxes which would apply to BCs being used in a typical Asian financing or investment structure. Of course, whether taxes would arise in other jurisdictions under other applicable laws will have an impact on the overall tax effectiveness of any given structure, but it is clear that BCs are well regarded from a tax planning perspective.
BCs in Secured Financing Structures
In Asia, lenders have become increasingly comfortable in lending to corporate groups using BCs. In a secured financing context, a BC is often asked to grant security to a security agent or trustee for the benefit of the lenders as part of the security package. The security package may include one or more of the following: a security agreement over all the assets and undertaking of the BC, an account charge, a share mortgage or charge over the shares it holds in subsidiary companies, etc. A BC can also often find itself the subject of security, where its parent has granted security over the shares it owns in the BC.
The taking of security by lenders from BCs and/or over the shares in BCs raises a number of issues for lenders and their counsel which are favourably answered by the British Virgin Islands regime.
In particular, the security registration regime is relatively quick and simple. Following execution of the security documents, lenders will want to ensure that their security package is properly registered for BVI law purposes. To do this, each BC providing security would typically be asked to:
If a security document is registered as described in (b) above, then, subject to certain exceptions, generally it will have priority over security interests which are subsequently registered on the register of registered charges in respect of the same secured property, or which are unregistered.
Note that other registration requirements may need to be addressed depending on the nature of the transaction. For example, a British Virgin Islands ship mortgage should be registered on the British Virgin Islands ship register under the BVI Merchant Shipping Act, 2001.
Is the Use of BCs Decreasing in Asia?
To conclude, it is worth noting that despite some adverse commentary in the popular press following the collapse of Lehman Brothers and the related financial crisis, we have not seen any noticeable reduction in the uses of BCs in Asia – most large corporate groups have BCs within their group structures, and high net worth individuals continue to favour their uses. Banks and other financial institutions are familiar with lending to such companies. The flexibility and proven track record of BCs suggest that the phenomenon of BCs is set to continue in Asia.
Ashley Davies is an associate in Walkers' Hong Kong office. He advises on Cayman Islands and BVI law in relation to real estate finance, construction finance, structured finance, acquisition finance, syndicated loans, private equity and general corporate transactions.
Bermuda, British Virgin Islands, Cayman Islands, Dubai, Guernsey, Hong Kong, Ireland, Jersey, London and Singapore.