Cayman Islands: Summary Of Regulations Enabling Exempt Private Trust Companies To Be Established In The BVI

INTRODUCTION

The Financial Services (Exemptions) Regulations, 2007 came into effect on 1 August 2007.

The Regulations exempt British Virgin Islands ("BVI") companies from obtaining trust licences under the BVI's Banks and Trust Companies Act, 1990 (as amended) (the "BTCA") if they satisfy certain conditions.

In order to qualify for the exemption a company (an "exempt PTC") must satisfy each of the conditions which are summarised in paragraphs 2.1 to 2.8 below.

CONDITIONS WHICH AN EXEMPT PTC MUST SATISFY

The company must be a BVI company that was originally incorporated under the BVI Business Companies Act (the "BCA"), but certain companies which were originally incorporated under the International Business Companies Act and which were voluntarily or automatically re-registered under the BCA will also qualify¹.

The company must be a limited company (whether limited by shares or limited by guarantee and whether or not, in the case of a company limited by guarantee, it is authorised to issue shares).

The company's name must include the designation "(PTC)". This must be placed before one of the permitted endings for the name of a BVI company (such as "Limited", "Ltd" or "Inc").

The company's memorandum must state that it is a private trust company.

The registered agent of an exempt PTC must hold a class 1 trust licence under the BTCA. (All BVI companies which are incorporated under the BCA, whether or not they are exempt PTCs, are required by that Act to have registered agents and most, but not all, of them have class 1 trust licences.) The company must at all times ensure that the registered agent has such a licence.

The company must not solicit trust business from members of the public.

The company must carry on no business other than that of being the trustee, protector or administrator of trusts (or of managing or administering trusts). However activities which are incidental or ancillary to trusteeship and trust administration should not disqualify the PTC from falling within the exemption.

All of the company's trust business must either be "unremunerated trust business" or "related trust business", but an exempt PTC is permitted to carry on a mixture of unremunerated trust business and related trust business. If at any stage it carries on trust business which is neither unremunerated trust business nor related trust business it will no longer be eligible for the exemption and will need to obtain a trust licence. "Unremunerated trust business" is considered further in paragraphs 3.1 to 3.5 below and "related trust business" is considered further in paragraph 4 below.

UNREMUNERATED TRUST BUSINESS

"Unremunerated trust business" is defined by paragraph 2(1) of the Regulations as trust business which is carried on "if no remuneration is payable to, or received by, the [exempt PTC], or any person associated with [it], in consideration for, or with respect to, the services that constitute trust business".

"Remuneration" includes money or any other form of property and includes remuneration payable or received out of the assets of the trust (or its underlying assets), from the settlor or a beneficiary, or from any other person pursuant to an arrangement with the settlor or a beneficiary.

Persons who will be regarded as being "associated with" an exempt PTC for the purposes of the definition in paragraph 2(1) of the Regulations include those who have a legal or beneficial interest in it, its directors and employees and its former directors and employees.

If remuneration is paid to a director of a PTC it will be treated as being remuneration which is paid to a person who is "associated with" the PTC within the meaning of the definition in paragraph 2(1) of the Regulations unless two conditions are satisfied. The conditions are that it must be paid in relation to professional director services provided to the PTC and that the director must not otherwise be associated with the PTC (eg as a result of having a direct or indirect beneficial interest in it). These requirements are designed to prevent abuse.

Payments made to a PTC to cover its costs and expenses will not be regarded as "remuneration" within the meaning of paragraph 2(1). Accordingly payments that are made to cover the Government's incorporation and annual renewal fees, and (in most cases) the registered agent's fees, will not disqualify a company from being regarded as carrying on "unremunerated trust business".

RELATED TRUST BUSINESS

A PTC will be treated as carrying on "related trust business" if it acts as trustee of (a) a single trust, all the beneficiaries of which are charities or have certain specified blood, marital or adopted relationships to the settlor or (b) more than one trust, each of the settlors of which have those relationships to each other and all the beneficiaries of which have those relationships to the settlors of the trusts (or are charities). It is likely that a PTC will only rarely² be carrying on "related trust business", but, in an exceptional case in which it is doing so, it will not be disqualified from the exemption if remuneration is received by the PTC itself or by its directors (or indeed by anyone else associated with it).

APPLICATION TO PROTECTORS

The above provisions apply to BVI companies which act as protectors as well as those which act as trustees.

VISTA TRUSTS

An exempt PTC cannot be the trustee of a VISTA trust (ie one established under the Virgin Islands Special Trusts Act, 2003) since it is a requirement of VISTA that the sole trustee of such a trust must have a licence under the BTCA.

However it is in many cases considered appropriate for shares in exempt PTCs to be held by the trustee of a VISTA charitable trust or by the trustee of a VISTA non-charitable purpose trust (which is set up under section 84 A of the BVI's Trustee Act). This is the case for the following reasons:

(a) one of the features of charitable and non-charitable purpose trusts is that there is no beneficial owner of the assets of the trust and this can have certain advantages in the context of the ownership of shares in PTCs;

(b) the office of director rules in VISTA trust deeds provide an effective "succession mechanism" for directorships in PTCs (and the succession to directorships is often crucial since it will, in effect, be the directors who exercise the PTC's discretionary trustee powers);

(c) the shares of the PTC will be incapable of being sold or disposed of without the requisite consents; and

(d) the trustee of the VISTA trust will largely be disengaged from the need to monitor (or intervene in) the management of the PTC's affairs (with the result that the PTC's discretionary powers can be exercised by its directors free from such supervision or possible intervention by the trustee-shareholder).

FEES

The Government's fees are very modest. The fee which applies to change the name of an existing BVI company so that it becomes an exempt PTC is $425.00.

The fee which is payable on incorporating a new exempt PTC which is authorised to issue no more than 50,000 shares is $750.00 (rather than the usual fee of $350.00). The annual renewal fee thereafter is also $750.00 (rather than $350.00).

7.3 The fee which is payable on incorporating a new exempt PTC which is authorised to issue more than 50,000 shares is $1,500.00 (rather than the usual fee of $1,100.00) and the annual renewal fee thereafter is also $1,500.00 (rather than $1,100.00).

BVI service providers which provide registered agent services for exempt PTCs are also likely to charge fees in excess of their usual fees to reflect the additional work which needs to be done and the added responsibility which the Regulations impose on them. In most cases it is probable that these additional charges will be relatively modest depending on the particular circumstances that prevail.

THE REGISTERED AGENT'S OBLIGATIONS AND CONFIDENTIALITY

The Regulations impose on the registered agent of the exempt PTC the obligation to satisfy itself that the conditions which the PTC needs to comply with in order to be eligible for the exemption are met. It must do this both at the outset and on a continuing basis thereafter.

The Regulations require the registered agent, at the outset, to take all reasonable steps to satisfy itself that the conditions summarised in paragraphs 2.6, 2.7 and 2.8 above are complied with. The registered agent must then on a "periodic basis take all reasonable steps to satisfy itself" that the PTC continues to fulfil these conditions and the "frequency with which [it] reviews compliance... should be determined by [it] on the basis of its assessment of the risk that the [PTC] may fail to comply". The registered agent is also obliged to notify the Financial Services Commission (the "Commission") in writing if at any time it forms the opinion that these conditions are not satisfied.

The registered agent is also required to take all reasonable steps to ensure that up to date copies of the following records are kept at its office in the BVI in relation to each PTC for which it acts as registered agent:

(a) (for each trust of which it is trustee) the trust deed or any document creating or evidencing the trust (and any deed or document varying its terms); and

(b) the documentation and other information on which it has relied to satisfy itself that the PTC complies with the conditions summarised in paragraphs 2.6, 2.7 and 2.8 above.

It is important to note that the copies of the documents listed in paragraph 8.3 above will be retained by the registered agent and these do not need to be filed with the Commission and, contrary to indications which were given in a press release which was issued by the Commission on 31 October 2006³, the exemption will be automatic if the PTC satisfies the conditions which are summarised in paragraphs 2.1 to 2.8 above. The only documents which will be publicly filed will be the exempt PTC's memorandum and articles: although registered agents are obliged to keep registers of directors and registers of shareholders of all companies which are incorporated under the BCA at their offices in the BVI (or to keep copies of these documents at their offices in the BVI), there is no requirement to file these publicly.

GENERAL EXEMPTION FOR COMPANIES WHICH ACT AS BARE TRUSTEES AND NOMINEES

The Regulations provide that companies which act solely as bare trustees or nominees do not require trust licences under the BTCA. This will be the case regardless of whether or not they satisfy all or any of the conditions which are summarised in paragraphs 2.1 to 2.8 above.

FURTHER ANTI-ABUSE PROVISIONS

In order to protect the integrity of the BVI as a well-regulated jurisdiction which provides a diverse range of financial services for its international client base, the Regulations contain a number of further anti-abuse provisions. These include provisions which contain restrictions on the permitted names of PTCs, provisions enabling the Commission to request information and documents where this is required by it to discharge its functions, or to ensure compliance with regulatory legislation, and enabling it to take certain enforcement action against exempt PTCs⁴.

REVOCATION OF THE 1991 DIRECTIONS AND TRANSITIONAL PROVISIONS

The Banks and Trust Companies (Application Procedures) Directions, 1991 (the "Directions") - which (inter alia) sought to identify circumstances in which a BVI company would not be carrying on "trust business" (as defined in the BTCA) - have been revoked.⁵ However pursuant to the Financial Services (Exemptions) (Amendment) Regulations, 2007 which were made by the BVI Cabinet on 27 December 2007⁶, companies which have been relying on paragraphs 7 (c) and (d) of the Directions have effectively been given until 31 July 2008 to take such action as is necessary as to ensure that they are compliant with BVI law. In the vast majority of cases this will involve ensuring that they become exempt PTCs and that the conditions listed in paragraph 2 above are satisfied.

Footnotes

1. These include (a) companies which were originally incorporated under the International Business Companies Act and which re-registered voluntarily under Part II of Schedule 2 to the BCA (ie pursuant to an application for re-registration which was made between 1 January 2005 and 4 pm on 30 November 2006) and (b) those which were automatically re-registered under the BCA with effect from 1 January 2007 (pursuant to paragraph 6(1)(a) of Part III of Schedule 2 to the BCA) and in respect of which an election to disapply Part IV of Schedule 2 to the BCA has been registered (ie those which were automatically re-registered under that Act and which essentially have "fully BCA-compliant" memoranda and articles of association).

2. It is considered that most PTCs will not be carrying on "related trust business" for instance because they will not be regarded as doing so if the settlor is one of the beneficiaries of the trust or trusts of which it is trustee or because one or more of their beneficiaries will not be charities or have the necessary specified relationship to the settlor.

3. Press Release No. 8 of 2006.

4. Eg if they are in contravention of the Regulations or the BTCA, if they are carrying on or are likely to carry on business in a manner which is detrimental to the public interest (or the interests of beneficiaries of the trusts of which they are trustees) or if a liquidator of the PTC is appointed or if it is dissolved.

5. It is however considered that the relevant Directions were probably ultra vires in any event.

6. However they were deemed to have come into effect retrospectively on 2 August 2007.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.