British Virgin Islands: Zero Tax Or Low Tax ? What´s Your Preference

The British Virgin Islands are well known for International Business Companies for which one of the main features is that they offer zero taxation. However the Income Taxes Ordinance, Cap. 206 of the British Virgin Islands contains provisions whereby companies registered under the Companies Act, Cap. 285 can be taxed at the very low rate of 1%.

Following is a discussion of the procedures for incorporation and the basic features of the two options.

The International Business Companies Ordinance was passed in August 1984. Since then it has been one of the major factors contributing to the success of the BVI as an offshore financial centre.

In fact the British Virgin Islands are currently the world's leading offshore corporate domicile. There are currently over 300,000 IBC's registered and this figure increases by more than 2,000 companies per month.

An IBC is a corporate entity, which is totally exempt from BVI income tax and stamp duties. It is very flexible in its nature making it an ideal corporate vehicle for international trading, asset protection, investment management, trustee arrangement and e-commerce.

The basic procedures for incorporation are:

• The words "Limited", "Corporation", "Incorporated", "Société Anonyme", "Sociedad Anonima" , or their usual abbreviations must be part of the name.

The Government registration fees are:

• US$300 for authorised share capital of less than US$50,000;
• US$350 if authorised share capital consists of no par value shares or
• US$1,000 if the authorised share capital is greater than US$50,000.

• The memorandum of association must contain the name and address of the BVI registered agent.

An IBC is prohibited from carrying on any business with persons residing in the BVI and from owning an interest in real property in the BVI.

However the following are not construed as carrying on any business in the BVI.

• Maintaining a bank account.
• Using the services of a professional firm.
• Maintaining accounting records.
• Holding meetings of shareholders and directors.
• Holding a lease of property for use as an office.
• Holding shares or other securities in another BVI company.

Apart from being tax free, IBC's have other features which many offshore professional advisors and end user clients find to be attractive:

• Only one founder, shareholder, and director is required, which can be a corporate entity.
• The minimum issued and paid up capital can be one share.
• Bearer shares can be issued, as well as shares with variable voting rights and they can acquire their own shares.
• Shares can be denominated in any currency and have no par value.
• There is no requirement to file any information with the Registrar of Companies relating to shareholders, mortgages and charges, deeds and other instruments of transfer.
• There is no requirement to disclose any particular information on the Company's letterhead.
• Flexibility to re-domicile. Continuation into and out of the BVI are very simple procedures under the IBC act.
• There are no requirements to prepare financial statements or appoint auditors.

An "offshore trading company" is one that is resident in the British Virgin Islands. Accordingly there are no restrictions imposed on its ability to carry on business with persons resident in the British Virgin Islands. It is also not restricted from owning an interest in real property in the British Virgin Islands.

The Act under which an offshore trading company is incorporated is the Companies Act Cap 285 and the basic procedures for incorporation for a limited liability company are as follows.

The memorandum of association shall contain the following:

• The name of the proposed company with the addition of the word "Limited" as the last word in the name. (Note that it must be fully spelled out so its usual abbreviation of "Ltd" is not acceptable)
• The place within the Territory in which the registered office will be located.
• The objects for which the proposed company is to be established
• A declaration that the liability of the members is limited
• The amount of capital with which the company proposes to be registered divided into shares of a certain fixed amount, provided that:
• No subscriber shall take less than one share
• Each subscriber of the memorandum of association shall write opposite to his name the number of shares being taken.

The memorandum of association shall be signed by each subscriber and be attested by at least one witness.

It is standard practice for the memorandum of association to be accompanied when registered by the articles of association, which detail the particular rules and regulations for the company that the subscribers deem expedient. These must also be signed by the subscribers and be attested by at least one witness.

The Government registration fees are:

• US$200.00 for nominal share capital not exceeding US$10,000.
• If the nominal share capital exceeds US10,000 the additional charges are US$15.00 for every additional US$10,000 of nominal capital or part thereof.
• In Section 2 of the Income Taxes Act Chapter 206, an offshore trading company is defined. It reads as follows:

"Off-shore trading company" means a company which is resident in the Virgin Islands and has satisfied the Commissioner that

1. It carries on trade or business the gains or profits of which are chargeable to tax.
2. At least 90 percent of the gains or profits of the trade or business so chargeable arise from trading or business transactions carried on wholly and exclusively outside the British Virgin.

Section 26. 3 of the Income Taxes Act further states that all gains and profits of an off-shore trading company that are chargeable to tax, are chargeable at the rate of 1%.

Unlike an IBC however, an off-shore trading company must have at least two members and it must file annual returns each year with the Registrar of Companies which give details of its directors and shareholders. As a result there is no confidentiality.

Furthermore there is a requirement each year to prepare financial statements although they do not necessarily need to be audited if the company is a private company. These financial statements need to be filed each year with the Commissioner of Inland Revenue.

Given the flexibility and the features of the IBC, in most circumstances it will be the corporate vehicle of choice that is used for offshore planning purposes.

However there may be those unique circumstances where an off-shore trading company vehicle may prove to be a better option.

Whether your preference is Zero Tax or Low Tax the British Virgin Islands is an excellent jurisdiction for your offshore corporate domicile. However, before making a final decision on one of the above options given your specific circumstances, it is always wise to seek sound tax advice.