British Virgin Islands
Company formation in brief
Until recently, a BVI offshore company could claim itself to be the most popular among all other offshore companies incorporated in all other parts of offshore world. This Caribbean destination has become a home for over 700,000 offshore companies!
Before talking about the fundamental changes in local legislation that occurred at the end of 2018, we will touch some issues of BVI corporate legislation.
In accordance with the BVI Business Companies Act, offshore companies an be incorporated in all known organizational and legal forms.
A classical offshore company in the British Virgin Islands (BVI Business Company), is incorporated as a company limited by shares. It can be incorporated with one shareholder and a single director (natural or legal person).
The first director must be appointed within 30 days from the date of incorporation, and subsequent appointments of directors can be made by directors or shareholders.
The director can be dismissed by the decision of the majority of shareholders (at least 75%) or directors of the offshore company in accordance with provisions of the articles of association.
Each newly appointed director must sign the Consent to Act. Likewise, a resigning director of an offshore company is obliged to sign a notice of his resignation.
All companies are required to have a local registered agent and registered office in the British Virgin Islands.
Companies are entitled to issue only registered shares to their shareholders.
The British Virgin Islands Business Companies Act requires directors to keep financial records and keep primary accounting records.
In accordance with paragraphs 98 and 99 of the Companies Act, directors of offshore companies are required to keep records of all their financial transactions. At the same time, the format of the stored information can be either electronic (in accordance with the BVI Electronic Transactions Act) or paper, but the law requires "due accuracy" from the completeness of accounting.
The law does not provide a detailed explanation of the concept of "due accuracy". The company may store this information both in the registered office of the offshore company and at whatever address the directors deem appropriate.
The Financial Services Commission of the British Virgin Islands has the right at any time to require the registered agent of the company to provide financial information, and the agent, in turn, has the right to answer that the information is not stored at the legal address of the offshore company, but is held by its directors. However, in this case, the agent is obliged to provide full information about the structure of the company to the Financial Services Commission, including contacts in order for the Financial Services Commission to directly request the directors of the offshore company to provide the required within 30 days from the date of sending the request!
For failure to provide financial information, directors of a company may be fined US $ 10,000.
It is important to note that not all investment activities of companies registered in the BVI are subject to licensing there, and it makes this jurisdiction very popular for the establishment of offshore hedge funds, or, as they are also called in the BVI, closed-end investment funds.
A hedge fund is a private, unregulated or less regulated investment fund that is out of the reach of the general public and managed by a professional investment manager.
Closed-End Investment Fund should never be confused with Closed Mutual Fund - a fund that is subject to strict regulation in the BVI.
Closed-end hedge investment funds, such as venture capital funds or private equity funds, are not regulated by The Securities and Investment Business Act (SIBA) and are not subject to licensing by the Financial Services Commission of the BVI.
The lack of regulation gives the hedge fund manager much more flexibility than the mutual fund manager, who must strictly follow the licensed business. Such a hedge fund can be registered in the BVI as a company, partnership or trust, retaining all the tax benefits like a regular BVI company.
The Virgin Islands Special Trusts Act, abbreviated as VISTA TRUSTS ACT, was enacted to facilitate succession planning for family businesses. A trust is based on the separation of legal ownership of assets held in trust from beneficial ownership. After the entering into force of the trust agreement, a settlor of the trust ceases to be the legal owner of assets held in trust.
The use of a trust to service succession planning of ultimate beneficial owners of companies is supported by a rule established by trust law known as the “prudent man of business rule”. This rule imposes an obligation on the trustee to monitor the conduct of the directors of the parent companies and, if necessary, to intervene, including preventing the subsidiaries of the trust from entering into transactions involving undue risk.
In principle, the estate of the trust and all subsidiaries must legally be under the control and independent management of the trustee. However, this is often contradicted with wishes of the business owners, for whom it is enough that only share certificates are held under the terms of trust. With this in mind, the VISTA trust includes provisions for the custody of share certificates with the trustee regardless of the financial benefit of such an order, and also prohibits the trustee from interfering with the management of subsidiaries, except in special circumstances.
The VISTA Trust also contains provisions for the appointment and removal from office of directors of the trust's subsidiaries in accordance with the terms of the trust instrument. The VISTA Trust Instrument does not require directors to appoint persons approved by the trustee. Thus, the management and the control over the entire structure will be directly carried out by the client or his professional managers.
It is important to note that in accordance with the VISTA TRUST ACT, direct subsidiaries of a trust must be incorporated in the British Virgin Islands. A holding company incorporated in the BVI (in turn owned by VISTA TRUST), owns shares in other companies registered in the BVI and / or in another jurisdiction, and also complies with the provisions of the VISTA TRUST ACT.
It should be emphasized, however, that an offshore company incorporated in the BVI, in practical terms, should be located between the Vista trust and other companies that are part of the family business.
This notice serves to inform you of the recent amendments to the BVI AML Regulations and AML Code of Practice (collectively "the legislations"). The primary objective of these revisions is to ensure the BVI's compliance with the evolving international standards established by the Financial Action Task Force (FATF) and update and clarify the current application of the existing legislation.
While there were many changes, we will focus on the expansion of the definition of 'relevant business' to include virtual asset services, and what this may mean for you.
The amended AML Regulations provided the following definitions:
A “virtual asset” means a digital representation of value that can be digitally traded or transferred, and can be used for payment or investment purposes, but does not include (a) digital representations of fiat currencies and other assets or matters specified by enactment or guidelines; or (b) a digital record of a credit against a financial institution of fiat currency, securities or other financial assets that can be transferred digitally.
A “virtual assets service” means the business of engaging, on behalf of another person, in any VASP activity or operation (as outlined in the definition of “VASP”), and includes (a) hosting wallets or maintaining custody or control over another person’s virtual asset, wallet or private key; (b) providing financial services relating to the issuance, offer or sale of a virtual asset; (c) providing kiosks (such as automatic teller machines, bitcoin teller machines or vending machines) for the purpose of facilitating virtual assets activities through electronic terminals to enable the owner or operator of the kiosk to actively facilitate the exchange of virtual assets for fiat currency or other virtual assets; or (d) engaging in any other activity that, by enactment or guidelines, constitute the carrying on of the business of providing virtual asset service or issuing virtual assets or being involved in virtual asset activity.
A “VASP” (virtual asset service provider) provides, as a business, one or more of the following activities or operations for or on behalf of another person (a) exchange between virtual assets and fiat currencies; (b) exchange between one or more forms of virtual assets; (c) transfer of virtual assets, where the transfer relates to conducting a transaction on behalf of another person that moves a virtual asset from one virtual asset address or account to another; (d) safekeeping or administration of virtual assets or instruments enabling control over virtual assets; (e) participation in, and provision of, financial services related to an issuer’s offer or sale of a virtual asset; (f) perform such other activity or operation as may be specified by enactment.
As a relevant person, VASPS will be required to comply with the AML Regime, which includes (but is not limited to):
• Appointing a money laundering reporting officer (MLRO)
• Establishing and maintaining a compliance manual
• Complying with reporting requirements
• Staff training
• Complying with the travel rules for the transfer of virtual assets
The provisions related to virtual asset services will be effective on December 1st, 2022. These changes will require you to take immediate action if you own or are associated (as a director, shareholder, or beneficial owner) with a BVI entity under our administration, undertaking virtual asset projects or business.
If you are classified as a VASP you must inform the Licensee and take the necessary actions to comply with the new requirements.
On 19th December, 2018, the British Virgin Islands passed the Economic Substance (Companies and Limited Partnership) Act, 2018, which came into force on 1st January 2019.
The most important details of the new legislation are:
1. According to the Act, a legal entity which carries on a relevant activity during any financial period must comply with the economic substance requirements in relation to the following activities:
a) banking business;
b) insurance business;
c) fund management business;
d) finance and leasing business;
e) headquarters business;
f) shipping business;
g) holding business;
h) intellectual property business;
i) distribution and service centre business
2. Subject to these new legal provisions, a legal entity complies with the economic substance requirements if:
(a) the relevant activity is directed and managed in the British Virgin Islands;
(b) having regard to the nature and scale of the relevant activity:
- there are an adequate number of suitably qualified employees in relation to that activity who are physically present in the Virgin Islands (whether or not employed by the relevant legal entity or by another entity and whether on temporary or longterm contracts);
- there is adequate expenditure incurred in the Virgin Islands;
- there are physical offices or premises as may be appropriate for the core income-generating activities; and
- where the relevant activity is intellectual property business and requires the use of specific equipment, that equipment is located in the Virgin Islands;
(c) the legal entity conducts core income-generating activity; which is described in the law as follows:
means the business of accepting deposits of money which may be withdrawn or repaid on demand or after a fixed period or after notice, by cheque or otherwise and the employment of such deposits, either in whole or in part,
(a) in making or giving loans, advances, overdrafts, guarantees or similar facilities, or
(b) the making of investments,
for the account and at the risk of the person accepting such deposits.
means the business of undertaking liability under a contract of insurance to indemnify or compensate a person in respect of loss or damage, including the liability to pay damages or compensation contingent upon the happening of a specified event, and includes life insurance business and reinsurance business.
means the conduct of an activity that requires the legal entity to hold an investment business license pursuant to section 4 and category 3 of Schedule 3 of the Securities and Investment Business Act, 2010, which includes the following sub-categories:
Sub-category A: managing Segregated Portfolios (Excluding Mutual Funds);
Sub-category B: Managing Mutual Funds;
Sub-category C: Managing Pension Schemes;
Sub-category D: Managing Insurance Products; and
Sub-category E: Managing Other Types of Investment
means the business of providing credit facilities of any kind for consideration. Consideration may include consideration by way of interest. The provision of credit may be by way of instalments for which a separate charge is made and disclosed to the customer in connection with:
(i) the supply of goods by hire purchase
(ii) leasing other than any lease granting an exclusive right to occupy land
(iii) conditional sale or credit sale
Where an advance or credit repayable by a customer to a person is assigned to another person, that other person is deemed to be providing the credit facility for these purposes. Any activity falling within the scope of “banking business”, “fund management business” or “insurance business” is excluded from this definition.
means the business of providing any of the following services to an entity in the same group:
(a) the provision of senior management;
(b) the assumption or control of material risk for activities carried out by any of those entities in the same group; or
(c) the provision of substantive advice in connection with the assumption or control of risk referred to in paragraph (b) but does not include “banking business”, “finance and leasing business”, “fund management business”, “intellectual property business”, “holding business” or “insurance business”.
means any of the following activities involving the operation of a ship anywhere in the world other than solely within British Virgin Islands waters (as defined in section 2(2)(a) of the Merchant Shipping Act, 2001):
(a) the business of transporting, by sea, persons, animals, goods or mail;
(b) the renting or chartering of ships for the purpose described in paragraph (a);
(c) the sale of travel tickets or equivalent, and ancillary services connected with the operation of a ship;
(d) the use, maintenance or rental of containers, including trailers and other vehicles or equipment for
the transport of containers, used for the transport of anything by sea;
(e) the management of the crew of a ship.
The definition of “ship” for these purposes does not include a “fishing vessel”, “pleasure vessel”, or a “small ship” (under 24m) as defined in the Merchant Shipping Act, 2001.
means the business of being a “pure equity holding entity”, meaning a legal entity that only holds equity participations in other entities and only earns dividends and capital gains.
An entity which holds assets which are not equity participations is not a pure equity holding entity. An entity which holds a mixed asset portfolio (shares and real estate for example), or non-equity assets such as bonds or government securities, falls outside the definition of a pure equity holding entity.
means the business of holding “intellectual property assets”, meaning any intellectual property right in intangible assets, including but not limited to copyright, patents, trademarks, brand, and technical know how, from which identifiable income accrues to the business (such income being separately identifiable from any income generated from any tangible asset in which the right subsists).
“Income” in respect of an intellectual property asset incudes:
(b) capital gains and other income from the sale of an intellectual property asset;
(c) income from a franchise agreement; and
(d) income from licensing the intangible asset.
The focus here is on entities receiving income from licensing or otherwise exploiting the intellectual property rights, rather than owning IP relating to its business activities.
means the business of either or both of the following:
(a) purchasing from foreign affiliates
(i) component parts or materials for goods; or
(ii) goods ready for sale; and
(b) providing services to foreign affiliates in connection with the business,
but does not include any activity included in any other relevant activity except “holding business”. Broadly, an entity is affiliated with another entity if it is in the same group of the other entity.
3. Additionally, the law specifies that a pure equity holding entity, which carries on no relevant activity other than holding equity participations in other entities and earning dividends and capital gains, has adequate substance if it:
(a) complies with its statutory obligations under the BVI Business Companies Act, 2004 or the Limited Partnership Act, 2017 (whichever is relevant);
(b) has adequate employees and premises for holding equitable interests or shares and, where it manages those equitable interests or shares, has adequate employees and premises for carrying out that management.
4. In regard to legal entities which carry on intellectual property business, the law includes a presumption that the legal entity does not conduct core income-generating activity if:
(a) the activities being carried on from within the Virgin Islands do not include any of the activities identified as core-income generating; or
(b) the legal entity is a high risk IP legal entity.
The BVI ECONOMIC SUBSTANCE (COMPANIES AND LIMITED PARTNERSHIPS) ACT, 2018 does not apply to non-resident companies and partnerships. Please note, however, that "non-resident company” and “non-resident partnership” mean a company or partnership which is resident for tax purposes in a jurisdiction outside the British Virgin Islands and which is also NOT on Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes (American Samoa, Belize, Fiji, Guam, Oman, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu).
Amendments to the Beneficial Owner Secure System (BOSS) Act have also come into effect as of 1st January, 2019, which will now require legal entities (in addition to the information regarding Beneficial Owners) to provide information about their tax residency status and activities, enabling the International Tax Authority in the BVI to monitor whether the relevant entity is carrying on relevant activities and, if so, whether it is complying with the economic substance requirements.
Economic substance will be assessed during a period called “financial period”, and the new legislation will affect BVI entities which are deemed to be:
1) tax resident in the BVI, and
2) which carry on and earn income from the above mentioned relevant activities during any financial period.
If the entity’s activities are relevant activities, the directors will need to consider whether they have adequate substance in the BVI to prevent financial penalties and potential strike off. If there is insufficient substance based on the activities, then actions will need to be taken to improve substance before the end of the company’s 2019 financial period.
In the cases of entities conducting pure equity holding activities there may be reduced substance requirements. A legal entity that is a pure equity holding entity and is deemed a passive entity, i.e. it does not engage in buying and selling regularly, can meet the substance requirements by having a registered agent and registered office in the BVI. A company will also need to demonstrate that the relevant activity is directed and managed out of the BVI and it has an adequate number of suitably qualified employees.
A company can meet the requirements by outsourcing or by engaging local companies to provide needed services through temporary or long-term contracts.
In accordance to the BVI Regulations, the Economic Substance Declaration for all BVI companies must be updated and submitted within each financial period of the companies as follows:
A) Companies incorporated before 1st January 2019:
- The financial period commences no later than June 30, 2019 and ends 12 months later, unless the company elects for a shorter period in order to align with its tax accounting period;
- December 29, 2020 will be the final date when complete information must be already entered in the BVI Registered Agent’ database.
B) Companies incorporated on or after 1st January 2019:
- The financial period of an entity incorporated, for example, on the 4th February 2019 ends on the 3rd February 2020 (12 months after incorporation), unless the company elects for a shorter period to align with its tax accounting period.
- August 03rd, 2020 will be the final date when complete information must be already entered in the BVI Registered Agent’ database (but no later than 6 months after end of financial period).
As a result of the above, every BVI company is now in its first “financial period” and needs to have its activities duly classified, since that would be initial step to determine if it is conducting or if it intends to conduct a relevant activity.
At this stage, the BOSS platform remains offline and all BVI Registered Agents are now receiving classification of the companies in order for the Agents to be able to upload information as soon as the BOSS system become available.
Penalties for failing to provide required information without reasonable excuse may include fines up to US$75,000 and imprisonment for up to five years. The penalty for failing to comply with BOSS requirements may be a fine of up to US$250,000 and imprisonment for up to five years.
The penalty for failing to comply with the requirements is subject to a minimum penalty of US$5,000 on a first determination of non-compliance and US$10,000 on a second determination. The maximum penalty is US$20,000 on a first determination of non-compliance (US$50,000 if it relates to a high risk intellectual property legal entity) and US$200,000 on a second determination (US$400,000 if it relates to a high risk intellectual property legal entity).
A company can be struck for failure to comply with the legislation after a three step regime for determining non-compliance and providing the company with the opportunity to remedy the non-compliance. In exceptional cases the International Tax Authority may immediately proceed to strike off a company.
On the 1st of January 2023, various significant amendments to the BVI Business Companies Act, 2022 will come into force, and the key revisions include the following:
In addition to their existing record keeping obligations, BVI offshore companies will be required to provide certain financial information, in the form of an annual return, to their Registered Agent. The form of return has yet to be finalized, but it is expected to consist of a simple balance sheet and profit and loss. This will not need to be audited.
The annual return will need to be filed within nine months of the end of an entity’s financial year (which we expect will not necessarily have to be a calendar year). The Registered Agent will have an obligation to inform the FSC if it has not received the annual return within 30 days of the due time.
The information filed with the Registered Agent will not be made publicly available, nor will the Registered Agent be obliged to file them with any regulator or BVI government authority. There are exceptions that will apply to listed companies, companies which pay tax in the BVI and certain BVI regulated entities.
BVI offshore companies may be struck off the Register in a number of different circumstances but are most often struck because they have failed to pay their annual fees. Once struck off, under the current law, they enter a state where that company (and its directors, members, and any liquidator or receiver) may not take any actions. In the current system, it will remain in that state for seven years, unless it is brought back to good standing. A struck company may generally be restored at any time by paying any accrued fees and penalties, together with rectifying any other defect in its compliance with law (such as appointing a new registered agent where the old one has resigned). If it does not get brought back into life prior to the end of the seven years, it will be dissolved by operation of law.
IMPORTANT! The Amended Act effectively abolishes this period, so that struck off companies will be dissolved immediately.
Brief transitional arrangements will apply to companies which are currently in a struck off or dissolved state. However, we would strongly urge all clients with struck or dissolved companies with underlying assets or business operations to take immediate action to bring the company back into good standing.
For companies that are in a dissolved state, the process of restoration will change significantly!
Under the current law, dissolved offshore companies are only restorable by Court order. The Amended Act introduces a simpler method for companies in this state to restore by application to the Registrar of Corporate Affairs (the Registrar) within five years of the date of dissolution, subject to meeting certain requirements. Chief among these is that a licensed person has agreed to take on the role of RA for the restored company and has declared that information they hold is up to date and in compliance with various BVI regulations.
There is also a requirement to take steps to notify the Crown if any property has vested in it. A company may still also be restored by court order, in any of the following scenarios:
• The company was struck off the Register and dissolved following the completion of a liquidation.
• On the date of dissolution, the company was not carrying on business or in operation.
• The purpose of restoration is to (I) initiate, continue, or discontinue legal proceedings in the name of or against the company; or (ii) to apply for property that has vested in the Crown bona vacantia to be returned to the company.
• In any other circumstance where the court considers that, having regard to any circumstances, it is just and fair to restore the company to the Register.
When a company is restored under either limb, it is deemed never to have been struck off/dissolved.
The British Virgin Islands Financial Services Commission (FSC) will be making available the names of the directors of BVI companies to registered users of the online VIRRGIN system (the BVI Financial Services Commission’s internet-based information network that provides on-line electronic access to the services of the Registrar, including electronic filings of document).
There is expected to be an additional cost to the search. Searches will need to be run against a company name, rather than the name of a director.
Clients should note the full register of directors, which companies have been required to file with the FSC on a private basis since 2016, will not be public. The information available will not include dates of birth, or addresses. The names of former directors will not be available.
We are under the understanding that the FSC will extract this information from the registers they have on file, without the need for new or additional action from clients. Entities which have not kept their register up to date or which are otherwise not in compliance with their existing obligations should, however, take care to rectify this position as soon as possible.
The Amendment Act introduces new eligibility criteria for persons wishing to act as liquidator for solvent liquidations of BVI offshore companies from 1 January 2023. A person must have physically resided in the BVI for at least 180 days prior to the appointment to be eligible as a liquidator. In certain circumstances it may still be possible to appoint a joint liquidator where only one liquidator qualifies under the new criteria. The Amendment Regulations create additional experience and expertise requirements for any person wishing to be appointed as liquidator.
The Amended Act provides for the framework by which the BVI might in the future introduce a public register of persons with significant control, although it is important to note no changes are expected to come into force on 1 January. The BVI government had previously made a commitment to introduce such a register by 2023, subject to certain caveats including such registers becoming an international standard. The Amended Act provides that the Government may by future regulations, specify the requirements for the format of such registers. It also provides that the regulations may contain exemptions or restrict access to certain person’s data.
By the end of 2023 all BVI offshore companies should ready themselves to comply with the new legislation.
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