Shining More Light on the BVI for High Net Worth Individuals
If you’ve been following my posts recently it will come as no surprise that I’m returning to one of the hot topics of the moment: the BVI. As a tax haven of sorts for many decades, the BVI has often been seen as a soft touch by regulators. The problem for high net worth individuals is that this is changing thanks to the increased complexity and depth of the regulation. But as my next round of pertinent questions will aim to show you, this is not without its problems.
To keep things simple, we’re going to ask straightforward questions to help introduce and frame the legalese. Let’s get started…
What are the income requirements for a pure equity holding company?
We know already that a holding company will be said to be receiving income if it receives income from a relevant activity during the financial period in question. The problem is that there are several categories of activity that need to be looked at:
- Holding businesses: you have to have earned some dividends or capital gains within this period. If for example the business which is held is lying dormant, not trading, and not appreciating in value in any way, then this requirement would not be met
- IP businesses: if on the other hand it’s IP that you’re holding, you need to derive actual income from it during the financial period for the requirement to be met
- The other 7 activities are where things get complicated. In short, it’s not income that matters but gross income. If it is not earned during the financial period, no substance will be required
Sadly what you’re holding isn’t the only thing you need consider — we also need to think about how it is held and managed…
How do you tell the difference between active and passive management?
If an equity participation sat dormant and didn’t do anything like vote, sell, reinvest, or collect a dividend then it is said to be passive. Otherwise it will be classed as active as something will have been consciously done on behalf of the equity participation.
Why does this matter? Because Rule 8.5 means that only people with suitable backgrounds and training can manage your equity participations, and that they must be based in suitable premises in the BVIs. The goal of this is to stop holding companies operating in other regions who simply add a forwarding mail address in the BVI.
How does this all fit with a private trust?
In general a trust will have a holding company which houses all of its assets. This is a separate matter to the issue of how the holding company defines its own economic substance. This is where things get complicated…
It can be argued that the trustee, in running the trust, cannot themselves also be acting as a private equity holding company — an argument by definition. This then means that the trust cannot be accruing anything for its own gain, and also cannot be carrying out any other business from which it would obtain benefit. This would then mean that any fees would belong to the trust and not the assets of the trust, and therefore lie beyond the scope of the holding business that sits directly underneath.
What’s the take home point?
The part of the tax system in which offshore holding companies and trusts start to interface with one another is notoriously complex. No 5-minute read would be able to do the rich variety of options and considerations justice, but instead serves to highlight the complexity of the issues at hand. The key point being that to make the best decisions in the longterm: consult directly with an expert.
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