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International Offshore Jurisdiction Review: British Virgin Islands BVI as a Tax Haven

Intro

The British Virgin Islands (BVI) have established themselves as a prominent tax haven, leveraging their strategic location and legal framework to attract international businesses and investors. Known for its favorable tax policies, including no capital gains, inheritance taxes, or sales tax, BVI offers financial confidentiality and minimal regulatory interference, making it an alluring destination for offshore company formations and financial services.

The state, an overseas territory of the United Kingdom, is situated east of Puerto Rico and comprises more than 50 islands, islets, and cays. It has managed to maintain strong political ties and global relations while providing a stable and appealing environment for foreign direct investment. Despite its attractiveness, the BVI has faced challenges and controversies around subjects like transparency, alleged corruption, and the role it plays in global tax evasion.

Key Takeaways

  • BVI's legal structure and tax policies make it a favored destination for offshore finance.
  • The territory's economy benefits significantly from foreign direct investment and the financial sector.
  • Ongoing global scrutiny regarding tax evasion challenges the BVI's future outlook on transparency.

The Work Toward Transparency

While the BVI tax haven offers considerable tax benefits, it's essential to remember that the world's regulatory environment has been working to combat tax evasion, money laundering, and other financial crimes. As a result, the BVI has been working to increase transparency and adhere to global norms established by institutions like the Financial Action Task Force (FATF) and the Organisation for Economic Co-operation and Development (OECD).

The British Virgin Islands (BVI) has an open economy that is driven largely by the financial sector, as well as tax laws coupled with a strict governance and regulatory framework that highly favors doing business activities in the territory.

The BVI is a member of the International Organization of Securities Commissions (IOSCO), the Caribbean Financial Action Task Force and the Organization for Economic Cooperation and Development (OECD), and has been 'whitelisted' by all three organizations and continues to remain in good standing with all other international financial bodies. 

British Virgin Islands Global Tax Haven Environment

The British Virgin Islands as a tax haven has proven to be one of the most attractive places in the world for establishing an offshore business. This British territory has up-to-date company laws and regulations that have been specifically designed to attract offshore investors.

A tax haven is a state or territory that provides beneficial tax and financial privileges to foreign nationals and corporations. These incentives typically consist of strict financial privacy regulations, low or no tax rates on specific forms of income, and lax reporting requirements. Because of their low tax rates and other financial incentives, tax havens like the British Virgin Islands can attract foreign direct investment.  

BVI's Offshore Industry

The BVI island's offshore company formation industry is governed by the BVI Business Companies Act, enacted in 2004 which has revamped the country's company legislation. The country receives nearly 1/3 of its GDP from offshore formation licensing fees and other financial services such as opening bank accounts and remains an important aspect in the country's future development.

It has incorporated nearly 40% of the world's offshore companies and has formed over 600,000 companies since it began forming non-resident companies. It has recently signed the Multilateral Convention on Mutual Assistance in Tax Matters, is compliant with the FATF and OECD and has never been blacklisted.

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Financial Landscape

It has signed the Common Reporting Standards (CRS) in 2017 and continues to follow international guidelines on KYC laws and money laundering initiatives.The passing of the new BOSS Act (Beneficial Ownership Secure Search Act) makes it difficult for beneficial owners to remain anonymous as they are uploaded into the government's registry.

The British Virgin Islands is a compliant jurisdiction, which has never been blacklisted by the FATF and the OECD. It has started to implement OECD’s automatic exchange of information for tax purposes (AEoI) through the Common Reporting Standard (CRS) in 2017.

The British Virgin Island economy is the most prosperous in the Caribbean. Together with a well-established offshore banking and offshore investment environment together with a strong legal and accounting presence, the BVI's give you everything you could ask for in an offshore financial jurisdiction.


   

 
 
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Benefits

  • A BVI offshore company pays zero income tax. There is no British Virgin Islands tax on capital gains tax, nor are there gift taxes, inheritance taxes, sales taxes, or value-added taxes.
  • Leading international legal and accounting businesses have a strong presence in the BVI and enjoy a strong international reputation in the Funds and Investments, Corporate Business, Ship and Aircraft Registration, Captive Insurance and Trust and Estate Planning.
  • The BVI has signed over 17 Tax Information Exchange Agreements (TIEAs), including agreements with Britain, France, Germany, Italy, and Spain.
  • The BVI has a sub-tropical climate, pristine waters and is a premier destination for those who love yachting, water sports or cruises.
  • The BVI enjoys strong ties with the U. S. Virgin Islands as well as with Puerto Rico. The U.S. dollar is the currency used within the BVI. Being a member of the British Commonwealth, the BVI has strong ties both with the UK and the EU.
  • Although both the BVI population and the size of the GDP is smaller than is the case with most nations, its per capita GDP exceeds US$38,000 (2008 estimate).
  • The government of the British Virgin Islands is noted for its stability. The law in the territory is based on British common law.
  • The BVI offers a significant amount of flexibility in the way that corporate mergers and acquisitions can take place. BVI companies and foreign companies are allowed to merge and existing companies are allowed to transfer to or from the BVI.
  • International banks having a presence in the British Virgin Islands include the London International Bank and Trust Company Ltd., The Bank of East Asia (BV) Ltd., Scotia Bank, and the First Caribbean National Bank

Is the British Virgin Islands a Tax Haven?

Comparison with Other Tax Havens

When compared to other tax havens like the Cayman Islands and Panama, the BVI maintains a similar level of appeal in terms of tax benefits and confidentiality. However, since the exposure of the Panama Papers, the BVI has taken steps to comply with international transparency standards championed by entities such as the OECD while still preserving the privacy of businesses.

The BVI’s financial sector is distinct in its infrastructure which allows a significant number of companies to operate, oftentimes providing them with more than just a postal address. This allows it to stand out among other jurisdictions and contributes to its competitive nature within the offshore financial services industry.

Legal and Regulatory Framework

The British Virgin Islands (BVI) has evolved to present a professional legal and regulatory environment, specifically designed to align with global expectations for transparency while maintaining attractive tax laws and exemptions advocated for by offshore investors.

Tax Laws and Exemptions

The BVI's tax law is notable for providing no corporate tax, no estate tax, no inheritance tax, and no sales tax or value-added tax. The jurisdiction has attracted businesses largely due to these tax exemptions. Furthermore, the BVI has updated company laws and regulations to continue to be a competitive offshore financial center.

Anti-Money Laundering Efforts

Compliance with anti-money laundering (AML) standards is a crucial aspect of the BVI's regulatory framework. The territory adheres to the AML regulatory standards set by international bodies, incorporating due diligence and know-your-customer (KYC) procedures to prevent the misuse of its financial system for illicit activities.

Beneficial Ownership and Transparency

The BVI has taken steps towards increasing transparency, including the introduction of a public register of beneficial ownership. This decision aligns with EU requirements and global norms, reflecting an effort to shed its image as a secretative tax haven. The public register aims to enhance the sharing of information and cooperation with international tax authorities, while also responding to global calls for increased transparency in financial dealings.

Shell Companies and Offshore Structures

In the BVI, shell companies and offshore structures are widely used for a variety of financial maneuvers, some legitimate and others less so. These instruments serve as vehicles for holding assets and are frequently criticized for possible tax evasion due to their anonymity and lack of transparency. The revelation of the Mossack Fonseca papers illuminated the extent to which these entities can obscure the true ownership of assets. Despite reforms, anonymous companies can still be used to funnel money undetected due to the territory's corporate tax rate policies, which are perceived to encourage tax evasion.

Key Characteristics of Shell Companies in BVI:

  • Anonymity: Owners often remain undisclosed.
  • Tax Neutrality: Profits are not taxed locally, encouraging their use to avoid higher taxes elsewhere.
  • Ease of Setup: BVI's up-to-date laws facilitate the quick establishment of offshore entities.

International Blacklists and Reforms

BVI's reputation as a tax haven has not gone unnoticed by international authorities. It has been placed on various international blacklists, with organizations pushing for greater transparency and fair taxation. The FinCEN Files investigation, among others, has impelled calls for rigorous reforms. These efforts are aimed at dismantling the secrecy that enables tax evasion and promoting fair taxation. Yet, the BVI maintains a complex network of treaties designed to share tax information selectively, which could be seen either as a step towards cooperation or a maintaining of its discreet stature to preserve its financial services industry.

Reform Efforts Include:

  • Bi-lateral and Multilateral Treaties: Enhancement of information exchange mechanisms.
  • Regulatory Changes: Aimed at increasing transparency among BVI-registered companies.
  • Global Pressure: Spearheaded by entities advocating for tax justice and fair taxation practices.

These measures are part of an ongoing tug-of-war between the forces advocating for financial secrecy and those pushing for transparency in tax matters. While the BVI has taken steps towards aligning with global standards, the effectiveness of these actions in curbing tax evasion remains subject to international scrutiny.

Principal Corporate Legislation

It is worth pointing out that the BVI government takes some pains to avoid the use of the term ‘tax haven’ lest investors look upon the jurisdiction as a place where tax evasion is practiced, which is illegal, rather than a place where tax avoidance is practiced, which is legal.

The principal statute for BVI company law is the BVI Business Companies Act 2004. This statute supersedes the International Business Companies Act, which was based on Delaware Company law. This newer statute is based on the New Zealand statute and applies to both local and offshore businesses. The passage of the Act was designed to make BVI more attractive as an offshore financial center.


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Background Information

Location

The British Virgin Islands are located in the Eastern Caribbean. The territory lies to the east of Puerto Rico and is in close proximity to the northeast of the US Virgin Islands. There are approximately 60 islands and islets in the BVI of which 16 are inhabited. The total land area is 151 square miles and the largest island is Tortola, which is where the capital and commercial center is located. The islands that make up this British Territory are either flat coral islands or steep and hilly volcanic islands. Constant trade winds make the BVI climate both subtropical and pleasant.

Political Structure

The BVI is an internal self-governing overseas territory of the United Kingdom. The Chief of State is the Queen of England who is represented by the BVI Governor. The BVI Prime Minister is the head of government. The Prime Minister’s cabinet, the Executive Council is appointed by the Governor from members of the Legislative branch’s House of Assembly. The leader of the majority party (or of a majority coalition) in the House of Assembly is normally appointed by the Governor, who takes the Prime Minister position.

The House of Assembly is a unicameral body consisting of 13 elected seats together with one non-voting member, the attorney general. Members are elected by popular vote and serve four-year terms. The highest court is the Eastern Caribbean Supreme Court.

Economy and Infrastructure

The British Virgin Islands features one of the most prosperous economies in the Caribbean with a per capita GDP that ranks within the top 20 in the world. Approximately 60% of the BVI economy is based on financial services, primarily offshore financial services, with the bulk of the remainder based on tourism as the BVI’s have become a cruise ship destination in recent years.

There were nearly 448,000 active BVI companies in 2012, with company incorporation fees accounting for nearly half the BVI’s annual revenues. The territory is amongst the largest in the world for the formation of offshore investment funds, second only to the Cayman Islands. Similarly, the islands attract a huge amount of foreign direct investment and is second only to Hong Kong with current estimates amounting to upwards of US$125 billion a year.

   

 
 
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Population, Language and Culture

What is now the British Virgin Islands was first sighted by Christopher Columbus in 1493. The Dutch were the first to establish a European presence on the islands but came under British rule in 1666.

English is the official language as well as the language of business and commerce as well as the most widely spoken language in the islands. The BVI population was estimated to be at 32,000 in 2013. Approximately a third of the population lives in the capital Road Town while 41% of the population lives in an urban setting. A large majority of the population is of Afro-Caribbean origin (82%) with Caucasians (6.8%) and the remainder coming from either Indian or of mixed descent.

The national holiday in the BVI is Territory Day, which is celebrated on July 1. Among the various events and festivals of importance, the most important is the Emancipation Festival, an annual event celebrating the end of slavery in 1843. The love of water sports that is characteristic of the islands' inhabitants makes itself known during the Spring Regatta. There is also an annual Music Festival, an Easter Festival, and a Christmas on Main Street event held each year in the capital. The close ties between the BVI and the US Virgin Islands are celebrated once a year on BVI/USVI Friendship Day.

All BVI citizens are British citizens and can travel on a UK passport and work in the UK and in the EU. The citizens of the Territory are called British Virgin Islanders. Approximately 85% of the population is Protestant while 10% is considered to be Roman Catholic. The literacy rate of the population over 15 years of age in the BVI is 98.2%. Exchange Control

The British Virgin Islands has no exchange controls. The US dollar is both legal tender and the standard local currency. There are no restrictions on the movement of dollar funds into or out of the BVI. Holders of US dollars may freely convert them to other currencies.

The BVI Financial Services Commission is the single financial services regulator in the territory and in conjunction with the British Virgin Islands corporate registry is responsible for authorizing and registering companies or individuals to conduct business in the territory.

Type of Law

The British Virgin Islands law is based heavily on English Common Law. The territory's laws that apply to BVI companies, including offshore companies, are modern and up-to-date and reflect the rapidly changing international financial landscape that includes regulations that address the use of e-commerce.

British Virgin Islands company law is regarded by international investors as being extremely sophisticated and is therefore subject to being copied by other offshore jurisdictions. Much of British Virgin Islands company law addresses financial services, key statutes being the Securities and Investment Business Act 2010, the Companies Management Act 1990, and the Financing and Money Services Act 2009. The British Virgin Island law provides a stable framework for the formation of offshore companies and for all foreign investors.

 

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***Please Note: If you are a resident of a country that is a signatory of the Common Reporting Standard (CRS) (or a US citizen) your tax reduction possibilities are limited. Due FATCA, CRS, and CFC laws you may not be able to completely eliminate your taxes without moving your residence (or US citizenship.) While opening an offshore company can increase privacy and asset protection, your tax obligations remans tied to your ownership of overseas entities. Offshore company's are often not taxed in the country where they are incorporated, rather you as the owner are obligated to pay taxes in the country where you reside. Please make sure you know your tax obligations, as we are not tax advisors. Please seek a local tax professional for help regarding your situation. 

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