British & United States Virgin Islands Companies: Caribbean Tax Planning Opportunities For The Pacific Rim


In recent years, British Virgin Islands ("BVI") International Business Corporations ("IBCs") have become an increasingly popular corporate and tax planning tool, especially for Hong Kong and other Pacific Rim companies with international operations. Compared to the thousands of BVI IBCs which have been used by Pacific Rim businesses, United States Virgin Islands ("USVI") tax exempt companies are a lesser known, but equally valuable entity, particularly where secrecy as to ownership is a less important concern.

Located in the Caribbean Sea about eighty kilometers east of Puerto Rico, the BVI and the USVI are geographically close, separated at their closest point by only several hundred meters of ocean, yet they are politically distinct territories. Likewise, the tax-free entities that may be established in each territory will provide similar tax benefits to their owners, although there are quite distinct reasons that a company ought to be established in one of these jurisdictions rather than the other. This article explores the similarities and differences between the BVI IBC and the USVI Exempt Company and their possible uses in corporate structures. Even those who already employ a BVI IBC in a corporate structure may find that some of the ideas discussed below will help them to fulfill other planning goals. In addition, corporate planners may also find that the USVI structures suggested in this article are the perfect vehicle for their particular situation.

History and Legislative Background BVI.

In the late 1960's and 1970's, BVI companies were used by English tax planners in connection with tax plans to avoid the foreign exchange restrictions of the sterling territories and to take advantage of the several tax treaties between Great Britain and the United States and the Scandinavian countries which were extended to the BVI. Starting in the late 1970's, BVI companies were used by several tax planners as a convenient gateway for investment into the United States as an alternative to the Netherlands Antilles. A non-resident of the BVI could form a non- resident BVI "CAP 243 company" (now known as a "CAP 285 company") under the old Companies Act of 1885 and obtain the benefits offered by the U.S. treaty. However, efforts by the United States Treasury Department to halt this type of "treaty shopping" escalated substantially in the early 1980's. The result was the unilateral termination by the United States of the BVI treaty, effective in 1983, as well as termination of treaties with several other jurisdictions.

By then, however, the BVI was determined to broaden the base of its offshore company industry even without a U.S. treaty. In particular, there was hope that the BVI could benefit from the lower costs involved in operating mutual funds and other investment vehicles which were not treaty dependent from the BVI as compared to other offshore jurisdictions such as Bermuda or the Cayman Islands. The passage of the IBC Ordinance in 1984 accelerated these developments. As discussed in more detail below, unlike CAP 285 companies, among other convenient features IBCs allow a simple form of bearer shares, require only one shareholder rather than two, and do not require annual meetings.

Even in the absence of tax treaties, in the following decade the IBC has had an incredible rate of growth and has contributed substantially to a sophisticated financial services infrastructure in the BVI consisting of approximately forty trust companies. With the political unrest in the very popular and inexpensive jurisdiction of Panama in the late 1980's, the number of IBCs has mushroomed to approximately 90,000, with hundreds of new companies being formed each week.

USVI.

In the meantime, across the Sir Francis Drake Channel, the USVI was making plans in 1983 and 1984 to develop an offshore company industry of its own. The USVI also had to contend (and still does) with the tax policy of the United States government. The first type of tax-free entity to be offered in the USVI was a foreign sales corporation ("FSC"), a type of company sanctioned by the U.S. Congress in 1984 and designed to be owned by United States exporters of manufactured goods. FSCs were very successful in the USVI, which is now home to about 4,000 of these entities, or about 80% of the market.

Eager to follow up on this success, the USVI government persuaded the U.S. Congress to include in the Tax Reform Act of 1986 provisions to permit the territory to offer tax free status to non-United States persons who wish to establish a tax free entity under the U.S. flag. These entities, USVI Exempt Companies, have been available since 1987, but until recently were virtually unknown to tax planners. The USVI Exempt Company is unique because it is the only corporate entity which enjoys all the non-tax advantages of incorporation in a United States jurisdiction, but without any United States federal, state, or territorial income tax. Amendments to the USVI Exempt Company Law in 1993 have broadened the attraction of the USVI Exempt Company. The amendments permit companies to transfer their domiciles into the territory and they authorize the establishment of exempt branches in the USVI, similar to those traditionally established in jurisdictions such as Hong Kong for the ownership of patents and other intangibles. The amendments also permit an Exempt Company (including a branch) to elect to pay a 1% tax on its net income.

Share Ownership, Secrecy and Shareholders' Rights

Unlike CAP 285 companies, which are required to have at least two shareholders, there are no restrictions on the ownership of shares of IBCs. IBC shares may be in registered or bearer form, or both, and shares in one form may be exchanged for shares in the other. Whether or not shares are in bearer form, BVI law does not require public disclosure of the identity of the shareholders or the directors of an IBC.

USVI Exempt Companies are required to have registered shares, although there is no requirement that the identity of the owner of the shares be publicly disclosed. Nevertheless, the USVI is subject to tax administration procedures that could require the USVI registered agent of an Exempt Company to provide this information to either the United States or the Virgin Islands tax authorities if requested. The identity of the directors of a USVI Exempt Company must be disclosed in the company's annual report which is subject to public inspection; however, a degree of secrecy may be maintained by utilizing nominee directors.

Shares of USVI Exempt Companies may not be owned by United States or USVI citizens, residents, or companies in an amount which equals or exceeds ten percent of their value or voting rights. There are two exceptions: USVI residents may serve as voting trustees of an Exempt Company so long as the beneficial owner is not a United States or USVI citizen, resident, or company; and one USVI Exempt Company may own another.

Under both BVI and USVI law, shareholders have the same types of rights which are typically granted to shareholders of companies created in the British or American systems. These include the right to dissent from major corporate actions, such as a merger, the right to notice of, and attendance at, meetings of members, and the right of inspection of company books and records.

Corporate Management Directors and Officers.

BVI companies are managed by a board of a directors that may consist of one or more individuals or companies who may act on the company's behalf. For convenience in the handling of routine corporate maintenance functions, typically an IBC will have one corporate director supplied by a trust company. Directors meetings may be held whenever necessary, either within or outside the BVI, but they are not required. Proxies for directors are permitted. BVI companies are not required to have officers, but the directors may appoint such officers or attorneys- in-fact as may be desired and may provide them with broad power and authority to act on the company's behalf.

A USVI Exempt Company is also managed by a board of directors, but unlike in the BVI, a director of an Exempt Company may not act on behalf of the company unless he is also an officer. There must be at least three directors of an Exempt Company, all of whom must be individuals, although trust companies will often provide one or more nominee directors. The directors, in turn, elect the officers of an Exempt Company, usually at the annual directors meeting. Proxies are not permitted at directors meetings. At a minimum the directors must elect a president (who must be a director), a secretary, and a treasurer. The offices of president and secretary may not be held by the same person. The by-laws of an Exempt Company set forth the specific powers and duties of each officer and, especially in the case of the president and any vice- presidents, such powers are usually quite broad.

In neither the BVI nor the USVI are there any residency requirements for directors.

Annual Meetings.

The first directors are appointed by the subscribers in the case of an IBC, or by the incorporators in the case of a USVI exempt company. Subsequently, in the case of both IBCs and USVI Exempt Companies, directors are typically elected at an annual general meeting of shareholders and they serve until their successors are elected. In the case of USVI Exempt Companies and BVI CAP 285 companies, annual meetings are required; for IBCs they are optional. Both jurisdictions permit proxies at shareholders meetings, and neither jurisdiction requires meetings to be held in any particular location.

Neither jurisdiction requires annual directors meetings, but typically a USVI Exempt Company will hold such a meeting after its annual shareholders meeting for the purpose of electing officers for the ensuing year.

Annual Reports and Other Formalities.

There are no annual reporting or filing requirements for IBCs, although if an IBC so chooses it may submit for registration to the Registrar of Companies its share register, its register of directors, or its register of mortgages and charges. If it does submit one or more of these registers, then they are open to public inspection and may be relied upon. Once an IBC elects registration it is bound by the contents of the register and it is required to update the register unless it subsequently elects in writing to cease registration of its registers. A CAP 285 company must make its register of mortgages and charges available at it registered office for inspection by members and creditors. By September 30 of each year, it must submit to the Registrar of Companies a list of members and directors and a summary of information regarding outstanding shares and share warrants.

The USVI requires the filing of an annual report at the time of payment of the annual license fee which is due on or before June 30 of each year. The report is required to list the names and addresses of all officers and directors of the company (but not the shareholders) and is open to public inspection. It also must contain a certification by the authorized representative of the company that the company is in compliance with all applicable laws, rules, and regulations.

Taxation, Fees and Requirements

BVI.

IBCs are exempt from all forms of local taxation except the annual license fee. If timely paid, this fee is $300 for IBCs with par value shares and capital of $50,000 or less, $350 for IBCs with no par shares and capital of $50,000 or less, and $1,000 for IBCs with capital exceeding $50,000. Fees are due on or before May 31 or November 30 of each year depending on whether the IBC was incorporated in the first or second six months of the calendar year, respectively. Payment of fees up to two months late will result in a 10% penalty and payment over two months late will result in a 50% penalty. Failure to pay for an entire year will result in an IBC being struck from the register of companies.

In addition to the tax exemptions for the IBC itself mentioned above, a shareholder of an IBC who is non-resident in the BVI is exempt from BVI tax on dividends, interest, royalties or other amounts received from an IBC and on capital gains, estate, inheritance, and gift taxes in respect of an IBC's shares. Finally, deeds and other instruments relating to the transfer of property to or by an IBC or in respect of its shares, debt obligations, and business transactions are all exempt from the BVI stamp duty.

In order to be eligible for IBC status, and to thereby enjoy the tax benefits described above, an IBC may not:

  • Carry on business with BVI residents (except that the holding of directors or shareholders meetings in the BVI, maintaining deposits with BVI banks, keeping financial accounts in the BVI, and similar activities are not considered to be the carrying on of business in the BVI).
  • Own real property situated in the BVI.
  • Carry on a banking, trust, company management, or insurance business unless appropriately licensed by the BVI authorities.
  • Carry on the business of providing a registered office or registered agent for BVI companies.

For taxation purposes, CAP 285 companies are classified as either resident or non-resident. Non-resident companies are those which are managed and controlled outside the BVI. Management and control is determined by the residence of a majority of directors. A non-resident CAP 285 company is not taxed on its income from sources outside the BVI held outside the BVI. BVI source or remittance income is taxed at 15%. Non-resident shareholders are generally not taxed on gains on the disposition of the stock of a non-resident CAP 285 company, unless the company holds BVI real estate. Non-resident CAP 285 companies are required to pay an annual license fee of $250.

Resident CAP 285 companies are taxed at 15% generally. Non- BVI trading income is taxed at 1%.

USVI - Federal Taxation, Exemption and Requirements.

The income tax law applicable in the USVI is the United States Internal Revenue Code applied to the territory as a "mirror code." Under the mirror code, the Internal Revenue Code serves as a separate territorial income tax but with the words "United States" replaced by the name of the territory. As applied to USVI companies generally (other than exempt companies), the mirror code would require that the USVI government impose a tax at the generally applicable United States corporate rate.

The federal authorization for the establishment of USVI Exempt Companies excepts such companies from the general prohibition that prevents the USVI government from reducing mirror system income tax liability. Under the federal authorization, in order to qualify for a tax exemption as an Exempt Company, at least 90% of the ownership and control of the stock must be by persons other than United States persons. Also, only income derived from sources outside the United States and not effectively connected to a United States trade or business is eligible for exemption. Therefore, any income of a USVI Exempt Company from United States sources or effectively connected to a United States trade or business will be subject to tax in the USVI at the standard United States rates. It should be noted however, that interest earned on deposits in banks or bank branches located in the United States can be earned by a USVI Exempt Company without being subject to tax.

USVI - Territorial Tax Exemptions, Requirements and Fees.

The USVI Exempt Company Law provides that exempt companies are not subject to any of the following local taxes:

  • USVI income taxes on all income from sources outside the United States and the Virgin Islands.
  • USVI gross receipts taxes.
  • USVI withholding taxes on dividends, interest and all other types of passive income paid to shareholders and other persons.

An Exempt Company also need not obtain a USVI business license. An Exempt Company may obtain a twenty-year contract from the USVI government guaranteeing that its tax benefits will not be reduced.

In addition to providing for exemption from all local taxes except the annual franchise tax, the USVI Exempt Company Law includes provisions designed to prevent persons engaged in local business from using an Exempt Company as a means of avoiding local taxes. An Exempt Company may not conduct business in either the United States or the USVI unless it qualifies as an exempt international banking facility or an exempt insurer. An Exempt Company which so qualifies may conduct business in the U.S. Virgin Islands if it obtains the appropriate license from the Commissioner of Banking and Insurance.

USVI Exempt Companies are required to pay a flat annual franchise tax of $1,000 at the time that they file their annual report. Unless an Exempt Company earns income from United States or USVI sources, or income that is effectively connected to a trade or business in one of those jurisdictions (i.e., income which is not exempt from tax), an income tax return need not be filed.

In 1993, the USVI amended the Exempt Company law to permit election of an alternate taxing scheme. Under the election, an Exempt Company may choose to pay a tax of 1% on its net income from sources outside the United States and the Virgin Islands, subject to a credit for the $1,000 annual franchise tax.

Costs of Registration, Continuation, Incorporation and Qualification

BVI.

Upon the establishment of an IBC or a CAP 285 company, the BVI government charges a registration fee of $300 or $350 if the authorized capital does not exceed $50,000 and the company has either par value shares or share without par value, respectively. If authorized capital exceeds $50,000 then the registration fee is $1,000. Upon organization of a new IBC, management companies and law firms typically charge a set fee which includes the fees for the preparation and filing of all required documents.

BVI law also provides for the continuation, as BVI IBCs, of CAP 285 companies and of companies organized in other jurisdictions. The government fee for filing the required articles of continuation for companies with capital not exceeding $50,000 is $250 for CAP 285 companies, and $500 for foreign companies. The filing fee for both CAP 285 companies and foreign companies with capital exceeding $50,000 is $1,000. The IBC law also provides for continuation that will become effective upon notice to be provided at a later date.

USVI.

The USVI government charges an incorporation fee of $400 upon the filing of the articles of incorporation of a USVI Exempt Company. Management companies and law firms will charge a set fee which varies depending on whether or not a voting trust or other special documentation is required. The same $400 government filing fee is charged for the qualification in the USVI of an Exempt Branch of a foreign corporation.

The 1993 amendments to the USVI Exempt Company Law allow a foreign corporation to transfer its domicile and be continued as USVI Exempt Company for a government filing fee of $500. Registration for permanent or temporary transfer of domicile into the USVI, to become effective upon later notice, is also permitted by the amendments.

Practical Uses

BVI.

BVI IBCs are often used as holding companies and financing vehicles by Asian businesses, especially those based in Hong Kong. One of the advantages of using an IBC in this situation is that the corporate mechanics and corporate law in the BVI are quite similar to those in Hong Kong as both jurisdictions are Crown Colonies. Another advantage is that the Hong Kong stamp tax on share transfers does not apply to BVI or other non-Hong Kong entities. It is primarily for this reason that many of the shares traded on the Hong Kong stock exchange are those of Bermuda companies. While, at present, BVI IBCs are not eligible for listing on the Hong Kong stock exchange, and Bermuda companies are eligible, the shares of BVI IBCs are traded regularly on other exchanges such as the NASDAQ in the United States. For non-public companies, BVI offers several distinct advantages over Bermuda including substantially lower company set up and annual operating costs, as well as the option to have bearer shares or registered shares or both as discussed above.

In addition to using BVI IBCs as top level holding companies, Asian companies with multiple lines of business often utilize several BVI IBCs as second level or intermediate holding companies into which they place their various operations. For example, assume the case of a Hong Kong based importer of washing machines, dryers, and steel with markets in China, Taiwan, and Southeast Asia. Because the company is listed on the Hong Kong stock exchange, and because of the present policy of the exchange, the top level holding company would be incorporated in Bermuda. To reduce its financial and business risk, and perhaps to open up new financing opportunities, the company decides to divide its importing and sales operations into separate mid-level holding companies with local operating subsidiaries, or directly into separate operating subsidiaries. Likewise it might place each of its sales territories into a separate company. BVI IBCs, with their flexibility, low cost, and minimum of corporate formalities, are an ideal vehicle for this type of intermediate level holding company or operating subsidiary.

Privately held businesses also can take advantage of the benefits of a BVI IBC. Unlike in a Bermuda company, the identity of the shareholders of an IBC need not be publicly disclosed and bearer shares are available. As with the publicly held company, the similarity of the corporate law to Hong Kong, limited liability, and stability, are all reasons for choosing a BVI IBC. IBCs have been used in the private context in such instances as:

An international jewelry group headquartered in Hong Kong with manufacturing activities in China plans to embark on a new earring manufacturing venture in China. They establish a BVI IBC to provide single business risk protection for the group and to preserve their financing options.

Taiwanese investors establish a BVI IBC to hold their interest in a Hong Kong manufacturer of consumer electronics goods with operations in China. The identity of the investors need not be publicly revealed.

Hong Kong real estate investors establish a BVI IBC to hold a Hong Kong company which in turn will own the real estate. This structure shields the identity of the owners and provides limited liability.

USVI.

A USVI Exempt Company should generally be utilized, rather than a BVI IBC, when United States flag protection is either desirable or essential to the purposes of the company, so long as the Exempt Company ownership requirements can be met. Because the USVI Exempt Company is the only type of tax free entity which may be established under the United States flag, the preference or need for an entity with United States nationality will usually be the key factor in choosing a USVI Exempt Company.

For some potential owners of USVI Exempt Companies, the most important trade off for United States status will be the inability to completely shield the identity of the beneficial owner. While the owner's identity may be shielded from the public eye, it may be required to be revealed to the United States or USVI tax authorities in order to maintain the company's tax exempt status. Therefore, if complete secrecy is an important factor, choice of a BVI IBC is more appropriate.

One example of a situation in which a USVI Exempt Company may be ideal involves aircraft registration. Non-U.S. persons who want to register their aircraft with the United States Federal Aviation Administration in order to obtain an "N" registration number, must use an entity incorporated in the United States as the ownership vehicle and the entity must be controlled by United States persons. The only United States incorporated entity that is not subject to U.S. income tax is a USVI Exempt Company, making it an ideal choice for this purpose. In order to meet the domestic control requirement of the Federal Aviation Administration regulations, a voting trust is usually created to hold the stock of the aircraft- owning exempt company.

Another use for a USVI Exempt Company is as a holding company. For example, a wealthy Hong Kong individual is planning to expatriate to Malaysia. He wants to remove his liquid assets from Hong Kong but he does not want to hold them personally in Malaysia. He prefers to place his assets in a holding company in the most stable jurisdiction available that does not charge tax on investment income. Holding such assets through a USVI Exempt Company would allow tax free accumulation of income along with United States flag security and protection from expropriation under United States laws and treaties.

In various situations a foreign person may wish to obtain the benefits of a treaty of friendship, commerce and navigation ("FCN treaty") entered into between the United States and a third country. Prior to the availability of a USVI Exempt Company, such benefits could only be obtained by establishing a domestic corporation in one of the United States and suffering the attendant U.S. tax consequences. However, United States FCN treaties generally apply to the USVI (and companies incorporated there) -- but not to any other jurisdiction where beneficial tax exemptions are available. Therefore a non-American investor may establish an Exempt Company in the United States Virgin Islands to take advantage of the United States FCN treaty with a third country, if permitted under the FCN treaty, while avoiding any United States or USVI tax consequences.

Another use for an exempt company is where there is a desire to have access to United States courts for dispute resolution. The United States courts located in the Virgin Islands generally have jurisdiction over disputes involving a company incorporated in the USVI notwithstanding the fact that its business activities take place elsewhere. Some of the advantages of having legal disputes adjudicated in the USVI include the applicability of a modern commercial code and of a fee-shifting statute that protects successful litigants.

Exempt Companies are also useful as financing entities for foreign persons who are required by banks to keep accounts in U.S dollars in order to borrow money. This would be particularly appropriate if the country where the investment is to be made requires local entities to keep accounts in local currencies.

Other uses for Exempt Companies may include many of those to which offshore entities established in other jurisdictions have traditionally been put, such as the offshore accumulation of income from foreign investments in order to avoid tax on repatriation to the home country. They may also include, quite simply, situations where a company incorporated in another offshore jurisdiction, which is actively engaged in commercial activities, finds that its ability to do business with United States companies is hampered by the place of its incorporation.

The BVI IBC and the USVI Exempt Company provide two alternative forms of offshore company which are complementary to each other. The BVI provides a modern corporate law combined with ease of incorporation which has made it one of the premiere offshore jurisdictions in the world today. The USVI provides a modern corporate law with ease of incorporation that provides the protection of the United States flag and United States flag benefits together with the benefits of operating in a non-secrecy offshore environment. Both jurisdictions offer entities which corporate planners and tax practitioners will find quite useful.