BVI Considerations You Need to Know About By Matthew Ledvina
Even a cursory glance at tax minimization and asset protection will bring up those 3 little letters: BVI, but what do you really need to know about investing through the British Virgin Islands? Over the years we’ve seen a gradual tightening on the activities of high net worth individuals, as well as a commensurate increase in complexity of schemes designed to minimize exposure to taxation. While you may well think that you have to have a decade in legal practice behind you to make sense of what’s going on, I want to show you that by asking the right questions you can get the broad overview that makes all the difference. So, without further ado, let’s start asking those all-important questions…
Why is the Code being revised in the first place?
Governments want you to pay your fair share of tax is the simple answer to this one. Given the global financial outlook and the increasing numbers of young, often lower income, individuals reaching voting age, there is more pressure on governments and legislators to extract every dollar and cent from those who are better off. As a specialist in tax law I understand the opposite sentiment: wanting to be able to pass the fruits of your labor down to the next generation to help secure their financial future. There’s certainly nothing wrong in that, and going about it the right way is the key thing to do here.
Over the years there have been far too many examples of high net worth individuals occupying more than enough gray areas when it comes to shielding themselves from tax. With growing discontent about these practices, regulators are tightening up on how tax havens like the BVI can be used.
Can you be ‘too clever’ with the way you interpret the Code?
You certainly can, especially if you end up creating a culture of regulatory arbitrage that plays different parts of the Code off against one another. While certain gray areas may appear like they are there to be utilized to your advantage, taking a moment to ask yourself whether what is being done is really within the spirit of the rules will shed a lot of light on the best way forwards. If in doubt, speak to a specialist with a reputation for integrity and longterm results, rather than someone who miraculously seems to be able to save you double what anyone else is suggesting.
What is the full story with BVI Rule 3?
Here’s Rule 3 if you’re not already familiar with it: “A legal entity will be treated as carrying on a relevant activity in the Virgin Islands during any financial period in which it receives income from that activity.’’
It seems simple enough when you put it like that, and at first there doesn’t appear to be any gray areas that you need to be aware of. Now, take a step back, pause for a moment, and think about what the converse of this rule would imply. Can you simply say that if no income is derived during said period that no relevant activity was carried out in the BVI?
The answer is complex and far from straightforward, but the quick response is that a lack of income is only one factor in determining a lack of activity. If you want to fully prove that your BVI structure isn’t relevant to your tax liability within a given period, speaking to a specialist is always the way I would advise moving things forwards. It will help you remove those gaps and gray areas that can easily come back to cause problems in the months and years ahead.
What really are holding companies?
It’s a term that means a variety of subtly different things the more you look into it, so we’re going to focus on one specific area and build out from there. A pure equity holding company is a legal entity whose only role is to hold equity in other businesses. It’s only source of income comes in the form of capital gains and dividends paid out by the companies it holds. But when you look into how these can be split into two distinct camps, it becomes more complicated again…
How about holding companies for large businesses?
These types of holding companies will typically have large equity slices of the businesses they are holding, with the businesses under their management being treated very much like subsidiaries. This is common practice and something that any specialist will be able to guide you through. Why are we mentioning it? To make the following distinction…
How does a high net worth individual use a personal holding company?
Imagine now that rather than a business managing subsidiaries, you are a high net worth individual looking to manage your investments and shares of a multitude of different businesses. You would then create a single overarching holding company that acts like a portfolio containing all of your various holdings.
How does part year reporting work in the BVI?
This is another key question that needs to be asked when you’re trying to structure your finances the right way. The truth is that the simpler approach will be to assume that part year reporting will always be required, regardless of how small a proportion of the time window it occupies. The safest and clearest option will be to own any non-equity investments for the entirety of the financial period. This will simplify things and allow you to navigate areas that are still highly open to interpretation.
Why is para 104 of the Code so important?
For a private individual looking to reduce tax exposure it can be tempting, at a first look, to simply do the minimum required to base your financial affairs in a country with the lowest tax exposure. The problem with this is that para 104 gets specific on what constitutes being based in the BVI in the first place. For example, if a holding company is designed to actively manage your assets, 104 states that you should have suitably trained and qualified individuals in the BVI to carry out these functions. The idea being that you have to have a physical presence on the ground, rather than simply a forwarding address.
What’s the take home point?
In an era where the financial affairs of high net worth individuals are under increased scrutiny, it has never been more important to ask simple questions rather than diving headfirst into an overly complicated arrangement. Familiarizing yourself with the basics and the overall ideas is the best way to prepare for a meeting with a specialist. Armed with the right background information, you will be able to work with them to arrive at an arrangement that successfully navigates all gray areas and matters of interpretation, while at the same time shielding yourself from unnecessary tax obligations.
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