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17 September 2013
Investment is flowing in and out of the British Virgin Islands, with Asia and India benefiting. John Greenwood and Philip Munro report
The British Virgin Islands (BVI) has continued in recent years to position itself as one of the world’s leading offshore jurisdictions, finding particular appeal among high net worth individuals based in Asia.
This appeal is reflected in the BVI being consistently one of the top foreign investors into China: in 2008, only Hong Kong surpassed the BVI for foreign direct investment in the People’s Republic of China (PRC) – BVI investment being $15.95bn (£9.73bn). The BVI has also been identified as being the third most used jurisdiction for Indian outbound investment.
One of the key catalysts for the BVI’s growth as an offshore centre was the popularity of its 1984 International Business Companies Act, which allowed for the creation of companies exempt from all forms of BVI taxation. The 1984 Act was radical for its time, abolishing the concept of ultra vires for companies and facilitating cross-border migration of companies, among other benefits.
The BVI international business company (IBC) was a huge commercial success with, by 2000, nearly 41 per cent of all offshore companies in the world being formed in the BVI. It is understood that there are now 250,000 BVI companies operating in Hong Kong and the PRC.
Although not as popular as the Cayman Islands, the BVI is also a widely used funds jurisdiction, largely because of the ease of fund registration. Furthermore, BVI funds law does not restrict investment strategies or objectives in the same way as many onshore jurisdictions.
There are a number of different funds regimes subject to different regulatory requirements under the BVI Mutual Funds Act 1996, but there is an exemption to the requirement for a BVI Fund to be recognised under section 19 of the Mutual Funds Act if it is maintained by a group of family trusts for the sole purpose of facilitating investments into the fund. This is becoming more popular with wealthy families from Asia and India.
The BVI is also a favourable offshore trust jurisdiction. Under current BVI trust law, there is no requirement for registration of trusts. Other key features are that ‘protectors’ are explicitly permitted, forced heirship claims are excluded and, to make BVI trusts commercially attractive, there are specific provisions enabling trustees to create forms of charges over trust assets in favour of creditors. The BVI also allows for the creation of purpose trusts that need not have a perpetuity period.
The BVI has a parallel trust regime with the Virgin Islands Special Trusts Act 2003 (Vista) which came into force on 1 March 2004. Vista introduced a new form of trust for holding shares in companies, which is designed, primarily, for a situation where shares are to be held indefinitely and the trust is not intended to intervene in the conduct of the affairs of the company.
Vista removes the problems arising from the ‘prudent investor rule’ and ultimately allows individuals settling businesses into trust to remain on the board of the company through which they are operated. The opportunities opened up by Vista have proved particularly appealing in Asia, largely because of the number of trading businesses. Vista seeks to facilitate the holding of trading businesses by trustees in such a way that the trustee should not feel that it is placing itself at risk of exposure to liabilities.
The optimal trust structure for many high net worth families might now involve a private trust company (PTC). The BVI has recently moved to make itself a favourable PTC regime, clarifying any uncertainty over relevant licensing requirements. Financial Services (Exemptions) Regulations 2007 came into effect on 1 August 2007 and expressly exempted BVI companies from the need to obtain a licence under the Banks and Trusts Companies Act 1990. To be exempt, a PTC’s name must include the designation ‘PTC’ and reference must be made in its memorandum of incorporation to the fact that it is a PTC. It should be noted that a licence will be required to use either the word ‘Trust’ or ‘Trustee’ within the name of the PTC.
That the BVI has such a strong reputation as an offshore centre in Asia must mean that it will be well-placed to take advantage of the anticipated increase in Asian offshore capital: in the PRC alone there is an estimated $1.3tn in domestic savings that might be moved into offshore vehicles if freer movement of domestic capital were allowed.
The BVI’s reputation is such that it will continue to attract emerging market economies business. It has not, however, been complacent, as is shown by its legislative revisions. As new investor requirements emerge, the BVI has shown a willingness to work to meet them. n
John Greenwood is a partner and head of the BVI office and Philip Munro is a solicitor in Hong Kong, both at Withers