British Virgin Islands offshore tax and legal regimes

The BVI Business Companies Act has effectively removed the distinction between offshore and onshore companies, but the new legislation is expected to be just as popular to 'offshore' investors and clients. Prior to the BVI BC Act, the main forms useful for offshore operations in the British Virgin Islands were the International Business Company, the various types of non-resident Cap. 285 company, the International Limited Partnership, and the Trust.

Forms of Offshore Operation

Under the 2004 Business Companies Act, several different types of companies can be incorporated including:
Companies limited by shares. Likely to remain the most popular form of BVI company.
Companies limited by guarantee not authorised to issue shares.
Companies limited by guarantee authorised to issue shares.
Unlimited companies authorised to issue shares.
Unlimited companies not authorised to issue shares.

See Forms of Company for a fuller description of the 2004 BVI BC Act.

Under the old IBC Act, offshore operations took place within the following forms:

Click on any entity for a description of its legal basis in Forms of Company. See Domestic Corporate Taxes for the general principles of BVI corporate taxation.

Tax Treatment of Offshore Operations

See Domestic Corporate Taxes for the general principles of BVI corporate taxation, which also apply to offshore entities except as indicated below. NB As from 2006, corporate income tax in the BVI has been abolished (see below).

Until 2006, offshore BVI companies were taxed as follows (stamp duty exemptions remain in force):

Non-resident limited liability companies (whether limited by shares, by guarantee or both, ie hybrid) were exempt from income tax on foreign-derived income, but paid BVI income tax at 15% on any chargeable income derived locally or remitted to the BVI.
Resident limited liability companies which obtained not less than 90% of their net profit from trading outside the BVI (known as offshore trading companies) paid 1% income tax on their chargeable profits.
International Business Companies were exempt from income tax and from stamp duty.
International Limited Partnerships were exempt from income tax and from stamp duty.
Trusts without BVI beneficiaries, local land holdings or business activities were exempt from income tax and stamp duty.

Almost all captive insurance companies, mutual funds and foreign investors use the Business Company, Limited Partnership or Trust formats; thus, they were exempt from local taxation. License fees are payable as follows in addition to registration and incorporation fees (for which see Forms of Company):

Insurance Companies: Application fee $500; Annual license fee $1,000 (Credit Life Companies), $2,000 (LongTerm/General Companies);
Mutual Funds: Application fee $350 (Private and Professional Funds), $500 (Public Funds); annual license fees are the same.

In October 2004 Chief Minister Orlando Smith informed the country’s Legislative Council that a two-year transition period would be put in place to smooth the changeover to the proposed new Business Companies Act, which has lowered the income tax rate to 0% for both local and International Business Companies.

The new legislation, which took effect on 1st January 2005, has been drafted to ensure the territory is fully compliant with the European Union (EU) Savings Tax Directive and EU Code of Conduct on Business Taxation, as required by the United Kingdom of all its Overseas Territories.

Under the transition arrangements announced by Dr Smith, new incorporations were still possible under old legislation throughout 2005. From 2006, new incorporations must be made under the new Business Companies Act, although companies already on the register were permitted to operate under the old IBC Act or Companies Act for an additional year. From 1st January 2007, all companies should be operating under the new legislation.

The Act will require companies to use a registered agent to ensure compliance with the new laws.

Under the new legislation, the current income tax system for employees will also disappear. However, in its place, a new payroll tax is to be levied at a rate of 14%, 8% of which will be paid by the employee and the remainder by the employer, although the first $7,500 of income will remain tax free. However, the contribution for small business, defined as those employing less than seven people and with a payroll of less than $150,000 per year, will be only 2% whilst all other businesses will contribute 6%.

Furthermore, local firms will be required to pay annual licence fees.

Taxation of Foreign Employees of Offshore Operations

There are no special rules applying to the foreign or BVI employees of offshore operations. The various exemptions from income tax described above do not apply to employees. See Domestic Personal Taxes for the general principles of individual taxation in the BVI, which also apply to the resident employees of non-resident entities.There are no special privileges or exemptions for expatriate workers, indeed they pay higher land taxes than BVI residents.

Exchange Control

The British Virgin Islands have no exchange controls.

Offshore Activities

The BVI BC Act 2004 has removed the distinction between offshore and onshore companies.

Under the former legislation, International Business Companies (and International Limited Partnerships) were permitted certain local activities:

Make and maintain deposits with banks;
Professional contacts with solicitors, barristers, accountants, book-keepers, trust companies, administration companies, investment advisers etc (not to be cynical, anyone who charges fees!);
Prepare or maintain books or records;
Hold meetings of directors or members;
Hold a lease of property to use as an office for other permitted purposes;
Hold shares, or other securities, in another IBC;
Hold shares, or other securities, in a company owned by a BVI resident or a BVI-incorporated company.

Non-resident Companies Act (Cap. 285) Companies were permitted to do business locally but paid income tax on the profits.

Employment and Residence

In order to work in the BVI, a work permit is needed, except for 'Belongers', naturalised citizens and holders of a certificate of residency. Work permits are issued only when there is no suitable local applicant for the job.

Under a new labour code introduced in 2002, it was proposed that 'non-belonger' workers in the Islands will no longer be granted an initial work permit of more than five years. Permits will be issued for up to one year at a time and then be considered for a renewal or an extension. A new five-year limit will be introduced under which workers who have held work permits for five years must leave the BVI with their dependents and remain outside the territory until they can be considered for either re-employment or new employment. The proposals were resisted by business interests.

In order to lease or purchase land, non-Belongers must obtain an Alien Landholding Licence. Applications for a Licence must be accompanied by two personal financial references, one bank reference, two character references, police record, application fee of $50 (individual) or $75 (company), and licence fee of $150 (individual) or $200 (company). Licences carry a 2 or 3 year commitment to develop unimproved land.

In December, 2004, the government outlined the details of a new immigration policy framework in a bid to clarify the rules surrounding applications for residence and ‘belonger’ status. Chief Minister Orlando Smith explained that the Board of Immigration would make recommendations in 2005 concerning those who applied for residence status before January 1 2003 and had lived in the territory continuously for the last twenty years. In June, 2005, 92 of these individuals received residence and belonger certificates.

Approvals for those applying for residency status after January 1 2003 are limited to no more than 25 persons per year. The government also stressed that in all cases, individuals cannot be away from the BVI for more than 90 days in any calendar year if they want to qualify for residency status.

Smith acknowledged that controlling immigration in the territory represented a “very serious challenge” for the government, and explained that a balance must be struck between welcoming outsiders and protecting the privileges afforded to BVI citizens.