International Business Companies Act
Encyclopedia
Statute
A statute is a formal written enactment of a legislative authority that governs a state, city, or county. Typically, statutes command or prohibit something, or declare policy. The word is often used to distinguish law made by legislative bodies from case law, decided by courts, and regulations...
of the British Virgin Islands
British Virgin Islands
The Virgin Islands, often called the British Virgin Islands , is a British overseas territory and overseas territory of the European Union, located in the Caribbean to the east of Puerto Rico. The islands make up part of the Virgin Islands archipelago, the remaining islands constituting the U.S...
which permitted the incorporation of International Business Companies
International business company
An international business company or international business corporation is an offshore company formed under the laws of some jurisdictions as untaxed company which is not permitted to engage in business within the jurisdiction in which it is incorporated...
(IBCs) within the Territory. The Act played in a huge role in the economic and financial development of the Territory in the 1990s.
The original Act was copied widely by other offshore financial centre
Offshore financial centre
An offshore financial centre , though not precisely defined, is usually a small, low-tax jurisdiction specializing in providing corporate and commercial services to non-resident offshore companies, and for the investment of offshore funds....
s.
Enactment
The Act was drafted principally by five people: Lewis Hunte, the then Attorney GeneralAttorney General
In most common law jurisdictions, the attorney general, or attorney-general, is the main legal advisor to the government, and in some jurisdictions he or she may also have executive responsibility for law enforcement or responsibility for public prosecutions.The term is used to refer to any person...
of the British Virgin Islands; Neville Westwood, Michael Riegels
Michael Riegels
Michael Riegels, QC was the inaugural chairman of the Financial Services Commission of the British Virgin Islands. He is a qualified barrister and was formerly the senior partner of Harneys from 1984 to 1997, and he also served the president of the BVI Bar Association from 1996 to 1998 and as...
and Richard Peters, who were partners at the law firm, Harneys
Harney Westwood & Riegels
Harney Westwood & Riegels was founded in 1960 is a law firm based in the British Virgin Islands . It also has offices in the Cayman Islands, London, Hong Kong, Cyprus and Montevideo. It offers advice in Anguillan, BVI, Caymanian and Cypriot law.The firm began in 1960 when Harold Harney formed the...
; and Paul Butler, a partner from the U.S. law firm of Shearman & Sterling
Shearman & Sterling
Shearman & Sterling LLP is a law firm headquartered in New York City with 20 offices located in major financial centers around the world founded in 1873. It is well known for both its litigation and transactional capabilities, especially in International Arbitration, Capital Markets, Finance, and...
. The Act was subsequently amended several times, but most significantly in 1990.
The Act was passed in a partial response to the cancellation by the U.S. government of a double taxation
Double taxation
Double taxation is the systematic imposition of two or more taxes on the same income , asset , or financial transaction . It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country...
relief treaty
Tax treaty
Many countries have agreed with other countries in treaties to mitigate the effects of double taxation . Tax treaties may cover income taxes, inheritance taxes, value added taxes, or other taxes...
between the British Virgin Islands and the United States. The British Virgin Islands was not alone in this regard; this was part of a policy of mass-repeal by the United States of double tax relief treaties with "microstate
Microstate
A microstate or ministate is a sovereign state having a very small population or very small land area, but usually both. Some examples include Liechtenstein, Malta, Monaco, Nauru, Singapore, and Vatican City....
s".
Despite the British Virgin Islands being an English common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
jurisdiction, the Act drew heavily upon elements of Delaware
Delaware
Delaware is a U.S. state located on the Atlantic Coast in the Mid-Atlantic region of the United States. It is bordered to the south and west by Maryland, and to the north by Pennsylvania...
corporate law
Delaware corporation
The Delaware General Corporation Law is the statute governing corporate law in the state of Delaware. Delaware is well known as a corporate haven. Over 50% of U.S...
. This reflected the market for British Virgin Islands companies prior to the repeal of the double-tax treaty. The essence of the Act was that a company incorporated
Incorporation (business)
Incorporation is the forming of a new corporation . The corporation may be a business, a non-profit organisation, sports club, or a government of a new city or town...
under that legislation was prohibited from conducting business with people resident within the Territory (ie. it was for International Business), and in exchange the company was exempt from all forms of British Virgin Islands taxation and stamp duty
Stamp duty
Stamp duty is a tax that is levied on documents. Historically, this included the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions. A physical stamp had to be attached to or impressed upon the document to denote that stamp duty...
.
Parts of the Act were quite radical for the time. The Act abolished the concept of ultra vires
Ultra vires
Ultra vires is a Latin phrase meaning literally "beyond the powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is...
for companies, considerably restricted the requirement for corporate benefit
Corporate benefit
The interest of the company is a concept that the board of directors in corporations are in most legal systems required to use their powers for the commercial benefit of the company and its members...
, it permitted companies to change their corporate domicile
Domicile
*In architecture, a general term for a place of residence or "permanent residence" in legal terms*Domicile , the zodiac sign over which a planet has rulership...
from one jurisdiction to another, it allowed "true merger" of two different corporate entities, and introduced the concept of voting trust
Voting trust
A voting trust is a trust whereby the shares in a company of one or more shareholders and the voting rights attached thereto are legally transferred to a trustee, usually for a specified period of time . In some voting trusts, the trustee may also be granted additional powers...
s to the jurisdiction.
The Act was passed into law by the Territory's legislature
Legislature
A legislature is a kind of deliberative assembly with the power to pass, amend, and repeal laws. The law created by a legislature is called legislation or statutory law. In addition to enacting laws, legislatures usually have exclusive authority to raise or lower taxes and adopt the budget and...
on 15 August 1984.
Growth
Initially, market response to the legislation was slow, but by 1988 a steady core of incorporation work was evident. However, in 1990 the U.S. invaded PanamaPanama
Panama , officially the Republic of Panama , is the southernmost country of Central America. Situated on the isthmus connecting North and South America, it is bordered by Costa Rica to the northwest, Colombia to the southeast, the Caribbean Sea to the north and the Pacific Ocean to the south. The...
and arrested General Manuel Noriega
Manuel Noriega
Manuel Antonio Noriega Moreno is a Panamanian politician and soldier. He was military dictator of Panama from 1983 to 1989.The 1989 invasion of Panama by the United States removed him from power; he was captured, detained as a prisoner of war, and flown to the United States. Noriega was tried on...
. At the time, Panama had been one of the market leaders in the provision of offshore companies
Offshore company
The term offshore company is ambiguous. It may refer to either:# A company which is incorporated outside the jurisdiction of its primary operations regardless of whether that jurisdiction is an offshore financial centre i.e...
. However, the invasion badly shook investor confidence in Panama, and incorporations in the British Virgin Islands under the Act soared from 1991 onwards.
From 1991 the Act was remarkably successful generating large numbers of incorporations. The Companies Registry in the Territory had to be expanded twice to cope with the volume of incorporations. The Act was then copied widely by other Caribbean offshore financial centres.
Despite its American focus, the key market for IBCs incorporated within the Territory developed in Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
. Use of British Virgin Islands IBCs became so ubiquitous in Hong Kong, that in commercial jargon offshore companies generally were generically referred to there as "BVIs".
In 2000, KPMG
KPMG
KPMG is one of the largest professional services networks in the world and one of the Big Four auditors, along with Deloitte, Ernst & Young and PwC. Its global headquarters is located in Amstelveen, Netherlands....
were commissioned by the British Government to produce a report on the offshore financial industry generally, and the report indicated that nearly 41% of the offshore companies in the world were formed in the British Virgin Islands, making the British Virgin Islands one of the world's leading offshore financial centres. As a direct result the Territory has one of the highest incomes per capita in the Caribbean.
| Year | Incorporations |
|---|---|
| 1984 | 1,000 |
| 1985 | 1,500 |
| 1986 | 1,700 |
| 1986 | 1,700 |
| 1987 | 2,000 |
| 1988 | 7,000 |
| 1989 | 9,500 |
| 1990 | 14,000 |
| 1991 | 15,000 |
| 1992 | 19,000 |
| 1993 | 27,000 |
| 1994 | 31,000 |
| 1995 | 30,000 |
| 1996 | 40,000 |
| 1997 | 60,000 |
Repeal
In 1999, a series of international initiatives were commenced against tax havenTax haven
A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....
s by supra-national bodies such as the OECD, including an initiative against what was termed "unfair tax competition". One of the concerns of the OECD was that jurisdictions such as the British Virgin Islands had a "ring fenced" tax regime, whereby companies could be incorporated under the International Business Companies Act which could not actually trade in the Territory, but would also be exempt from most British Virgin Islands taxes
Taxation in the British Virgin Islands
Taxation in the British Virgin Islands is relatively simple by comparative standards; photocopies of all of the tax laws of the British Virgin Islands would together amount to about 200 pages of paper. Taxation in the British Virgin Islands is mostly notable for what is not subject to taxation...
. After a series of discussions, the British Virgin Islands government agreed to repeal the ring-fencing provisions in its tax legislation.
Because of the sheer volume of companies involved, the transition to a new legislative framework was accomplished over a two year transition period. To protect the offshore business, the British Virgin Islands abolished both income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
and stamp duty
Stamp duty
Stamp duty is a tax that is levied on documents. Historically, this included the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions. A physical stamp had to be attached to or impressed upon the document to denote that stamp duty...
on all transactions except those relating to land in the Territory. Then the government enacted the BVI Business Companies Act
BVI Business Companies Act
The BVI Business Companies Act is a statute of the British Virgin Islands relating to the formation of all companies in the British Virgin Islands, both offshore companies and local companies...
(No 16 of 2004). The slightly cumbersome name was designed to slightly reflect the name of the earlier statute and cash-in on the "IBC brand" which had grown under the former legislation. From 1 January 2005 to 31 December 2005 the two Acts ran in parallel, and it was possible to incorporate a company under either form of legislation. from 1 January 2006 until 31 December 2006, one could no longer incorporate a company under the International Business Companies Act, and all new incorporations had to be conducted under the BVI Business Companies Act. During 2006 detailed transitional provisions were enacted to allow companies formed under the old legislation to adapt to the new legislation without having to significantly amend their constitutional documents
Constitutional documents
In relation to artificial persons, the constitutional documents of the entity are the documents which define the existence of the entity and regulate the structure and control of the entity and its members...
.
The International Business Companies Act was then finally repealed in full on 31 December 2006.
A special arrangement between the BVI government and one of the key trust companies
Trust company
A trust company is a corporation, especially a commercial bank, organized to perform the fiduciary of trusts and agencies. It is normally owned by one of three types of structures: an independent partnership, a bank, or a law firm, each of which specializes in being a trustee of various kinds of...
in the Territory meant that the last company incorporated under the Act was named "The Last IBC Limited". It was company number 690583.