updated act also gives Domestic firms a zero rate of taxation
The British Virgin Islands has seen off a threat to the future of its popular International Business Companies Act (IBC), ensuring that international investors will continue to benefit from a zero rate of taxation.
In response to the pressure from the OECD to equalise the tax treatment of offshore and onshore vehicles, the Caribbean jurisdiction is to reduce all corporate tax rates to zero, a mirror of moves made by The Isle of Man, Jersey and Guernsey.
The official position has been laid out by the Financial Services Commission (FSC) in the new BVI Business Companies Act. The act, which will come into force in January 2005, will consolidate the International Business Companies (IBCs) Act and the domestic Companies Act under a single, zero tax regime.
Since the passing of the IBC Act in 1984, it is estimated that more than 500,000 such structures have been established with an average of about 53,000 in each of the last three years. According to the FSC, which was established in 2002, there are around 400,000 IBCs in existence.
Chris McKenzie, partner at Maples and Calder, said the new act is in response to various international initiatives, in particular the requirement of the OECD to end "unfair tax practices". To comply, offshore centres have to have the same rate of tax for both domestic and international entities. He added that the BVI was also responding to calls to improve the existing IBC Act so it could "gain more credibility for the purposes of listing BVI companies on international stock exchanges."
According to McKenzie, IBCs have unti1 31 December under their existing structure, at which point they will be converted to the new Act. "The Act still retains the important characteristics of the old IBC Act. But inconsistencies and outdated concepts have been removed while providing more flexibility in the capital structure, added products and more investor and minority shareholder protection," said McKenzie. "Restricted purpose companies and segregated portfolio companies will prove attractive, especially for the establishment of hedge funds."
The new act incorporates five types of companies including those limited by guarantee and hybrid companies. Investment funds may be established as segregated portfolio companies, which until now have only been permitted within captive insurance, and restricted purpose companies may also be set up.
McKenzie argued that the main advantage of using segregated portfolio companies for investment funds is to "ring fence assets and avoid cross liability between different classes of shares in the same company. It will no longer be necessary to state the authorised share capital in the Memorandum of Association but rather just the maximum number of shares a company is permitted to issue.
"The par value of a share may be a fraction of the smallest denomination of the currency in which the share is issued and classes of shares can be sub-divided into series. The act also specifies default rights attaching to shares subject to specific rights set out in the Memorandum and Articles."
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