Tim Clipstone and Michael Gagie examine why the British Virgin Islands is the jurisdiction of choice for international business companies.
The British Virgin Islands (BVI) maintains its popularity as the jurisdiction of choice for international business companies by ensuring it is at the forefront of corporate legislation and international cooperation.
The popularity of BVI companies continued unabated in 2014, with incorporations of approximately 60,000 new business companies during the year; facilitating capital flows into developed and emerging economies by offering a tax neutral platform for raising finance; acting as efficient portals for collective investments; and providing well understood cost-effective corporate vehicles for cross-border transactions and investment.
Investors have always been attracted to the BVI for its common law legal principles, administrative simplicity and the ability to ring-fence liabilities. BVI securities laws are recognised by regulators worldwide, enabling investors to exit through a private sale or a listing on a major stock exchange. BVI companies are listed on stock exchanges worldwide, including the London Stock Exchange, LSE's AIM exchange, the New York Stock Exchange, NASDAQ, the International Securities Exchange, the Toronto Stock Exchange, and the Hong Kong Stock Exchange.
BVI companies do not add extra layers of taxation on top of those taxes that investors pay in their home country. This tax neutrality creates a level playing field for investors from all jurisdictions. The Organisation for Economic Cooperation and Development (OECD) recognises the BVI on its ‘white list’ on par with other leading jurisdictions (offshore and onshore) in meeting internationally agreed tax standards, in turn enhancing client and investor confidence in the BVI corporate vehicle.
The BVI does not impose a double layer of regulation. For example, there is no BVI takeover code or public filing requirement in the BVI applicable to a listed company. BVI companies are extremely flexible in their structure and handling, and there are few prescriptive statutory requirements. Ultimately, a BVI business company will be more flexible in operation, particularly if the company needs to raise equity finance for working capital purposes.
The fact there is no additional layer of tax and regulation ensures that the incorporation and ongoing costs of using a BVI company are low, whilst high standards are maintained as required by the International Organization of Securities Commissions (IOSCO), of which the BVI is a member.
This past year has seen a flurry of legislation designed to ensure that the BVI remains at the forefront of compliance with international regulatory and tax information sharing initiatives, including those put forward by the US and UK governments, the OECD and the EU, as well as adhering to the IOSCO principles for investment business regulation.
US and UK FATCA Implementation
The BVI has implemented its commitments under the Model 1B (ie, non-reciprocal) intergovernmental agreements with the United States, signed on 30 June 2014 (the US IGA), and with the United Kingdom, signed on 28 November 2013 (the "UK IGA" and, together with the US IGA, the IGAs) within the timescales provided in the IGAs.
The US IGA provides a framework for the implementation of the US Foreign Account Tax Compliance Act (FATCA) in the BVI and the UK IGA provides for reports of tax information to be made to HM Treasury in a similar manner.
As a result of the BVI entering into Model 1B IGAs, all BVI financial institutions, including funds and other investment vehicles, will be deemed compliant for the purposes of US and UK law, but will be required to comply with BVI law regarding their reporting obligations.
In addition to the obligations imposed by the IGAs, the BVI government has agreed to pass legislation to enable the operation of the OECD's Common Reporting Standard (CRS), which will extend FATCA style reporting to those OECD members who have implemented the Multilateral Convention as from 2017.
What is the obligation?
The IGAs provide for the BVI to obtain and annually provide certain financial information with respect to all accounts required to be reported on under the IGAs (Reportable Accounts) to the US and UK tax authorities.
If a financial institution is a Reporting Financial Institution (Reporting FI) for the purposes of the US IGA, it is required to register with the IRS and obtain a GIIN to avoid a 30 per cent withholding on certain US sourced revenue. There is no need to make an equivalent registration under UK FATCA.
The effect of entering into the IGAs is that BVI entities which are deemed to be Reporting FIs report all requisite information to the ITA, who will pass the information on to the IRS/HM Treasury rather than having to enter into agreements directly with the IRS/HM Treasury.
As such, all BVI financial institutions must determine if they are Reporting FIs and, if so, determine if they have Reportable Accounts. Having considered whether there are any Reportable Accounts about which information must be reported to the ITA, the Reporting FIs will need to provide certain financial information to the ITA on those Reportable Accounts, starting in 2015 for the 2014 period. If the Reporting FI has no Reportable Accounts for the relevant period, it need do nothing further.
The BVI has set up an online portal for Reporting FIs to submit the required information regarding the Reportable Accounts, known as the BVI Financial Account Reporting System (BVIFARS), which can be found at http://bvi.gov.vg/fatca.
For the 2014 period, the requisite information must be reported to the ITA prior to 30 June 2015 for US Reportable Accounts and 31 May 2016 in respect of UK Reportable Accounts. For the 2015 period, the requisite information must be reported to the ITA prior to 31 May 2016 for US Reportable Accounts and 31 May 2017 in respect of UK Reportable Accounts.
Record Keeping Obligations
In addition to the IGAs and CRS, the BVI has entered into 27 Tax Exchange Information Agreements under the OECD framework, each of which provide for the BVI government to seek and pass on certain financial and ownership information in relation to BVI companies, partnerships and trusts following a valid request for such information. In connection with this, BVI companies, partnerships and trusts are now required to maintain all its records and underlying documentation for a minimum of five years and that the location of such records and underlying documentation be notified to the registered agent of the company, partnership or trust.
Alternative Investment Fund Managers Directive (AIFMD)
In the alternative investment funds sphere, the BVI's regulator, the Financial Services Commission (the Commission), has signed regulatory cooperation agreements with 26 of the EU Member States' competent authorities in the form prescribed by the European Securities and Markets Authority under the AIFMD to enable BVI funds to continue to be marketed in those Member States under the provisions of the Member State's private placement regimes. Signatories include the regulators in the UK, Ireland, Luxembourg, the Netherlands, and the Scandinavian countries.
Extension of the Approved Manager Regime
In addition to the regulatory and tax cooperation moves, the BVI has been keen to ensure its regulated businesses are given a broad range of options under the Securities and Investment Business Act, 2010 (SIBA). The most recent change involves the extension of the very popular Approved Manager Regulations to certain managers managing non-BVI funds. The Approved Manager Regime is a regulatory "light" regime for qualifying managers incorporated or formed in the BVI with open-ended assets under management of US$400 million or less and closed-ended assets under management of US$1bn through qualifying fund structures. The regime originally provided for managers to be approved to manage and/or advise BVI private and professional funds, BVI closed-ended funds having similar characteristics, entities feeding into such funds and their affiliates without having to apply for a full investment manager license under SIBA. This has now been extended to allow for the management by an approved manager of funds established in other recognised jurisdictions as well as the BVI, including the Cayman Islands, Ireland, Luxembourg, the UK and US, greatly expanding the scope and attractiveness of the regime.
Anticipated Changes in 2015
It is anticipated that the Commission will expand its range of available categorisations for open-ended funds to add to the very popular private, professional and public funds by the introduction of two fund classifications aimed at incubating start-ups and the approval of smaller "friends and family" funds. The fund product aimed at start-ups is expected to provide a light touch to regulation and not require any service providers to the fund for a limited time to allow managers to incubate strategies using money from experienced investors in order to develop a track record. The friends and family fund would also be lightly regulated and require only an administrator to be appointed to the fund to keep costs to a minimum.
In summary, all the changes we have seen recently have been vital to the continued use and utility of BVI companies and have kept the BVI at the forefront of corporate domiciles.
Michael Gagie is the global head of the BVI law practice of Maples and Calder and is based in Asia. Michael practises both BVI and Cayman Islands law and his experience and areas of practice cover corporate, downstream private equity work, commercial, banking and structured finance.
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