Caribbean IFCs, Emerging Economies and Shifting Goalposts

By Lorna Smith OBE, MA, TEP, LGS & Associates, Tortola, British Virgin Islands (01/02/2013)

In an article on the future of Caribbean IFCs last year, I concluded that relevant Caribbean jurisdictions continue to be proud of the contribution they make to the management of global wealth and financial markets and that the future remains bright. Since then the landscape has changed somewhat with significant challenges posed from ‘onshore’ - notably within the European Union.  However, my sense of optimism remains firm, albeit with a degree of caution.  

Business between Caribbean IFCs and emerging economies remains robust, but at this point it would be over reaching to describe this as 'increasing'.  For instance, preliminary figures for 2012 released by the BVI FSC would suggest that company incorporations compared favourably with the previous year.  It would therefore be more accurate to say that business is approaching the pre global financial crisis. 

Significantly, although various Caribbean IFC structures - similar to London, Switzerland and elsewhere - are used for legitimate tax planning, they are used equally for a multiplicity of other purposes as will be established later. 

While I cite a number of global examples to demonstrate the use of Caribbean IFCs in wealth creation, I will concentrate on the use of BVI and Cayman Islands entities in China, as it still presents the largest potential for continued growth.  I also consider Russia, as another of the four emerging economies.  Time does not permit any substantial discussion on the other two countries - India and Brazil - although they are no less important to the future of the Caribbean IFCs 

The Caribbean Continues to Reign

The BVI's Corporate Register, which dominates the global international financial services landscape, continues to be one of its primary advantages.  The Registry is the second largest of its kind in the world (Delaware, US is the largest), with state of the art technology.  With over 450,000 active companies, one can almost guarantee that in any international business configuration there will be a BVI business company somewhere within that structure. 

A wide range of applications is possible using a BVI company, including: investment, property holding, financial management, trading and copyrighting and/or licensing.  International financial institutions including those that lend to other institutions and actively support the alleviation of poverty, multinationals, high net worth individuals as well as ordinary persons, all use BVI companies for investment purposes because of their unique qualities including ease of use, flexibility, and cost effectiveness. 

But besides the strength of its Register, the reputation of the BVI is of paramount importance.   The fact is that year on year the BVI’s legal and regulatory regime has come in for high praise from the international standard setters. The IMF, in completing its most recent comprehensive review of the BVI, publicly recognised the strength of its regulatory regime and its ‘willingness to be a full partner in international information sharing and cooperation.’

The CFATF has praised the BVI in a similar vein.  There is no doubt then that this is the comfort and confidence that an investor needs and finds in deciding to do business with the BVI.  In selecting the BVI, Caymans and one or two other top ranking jurisdictions in the Caribbean, investors are also looking for qualities such as the stability that comes from being a British Overseas Territory, a legal system that is based on the common law, strong human capital and competitive costs.

Indeed OIL in its most recent 2020 report on Opportunities and Challenges Facing the Offshore Sector addresses the might of the BVI by stating that (for BVI and Cayman) "...the key issue is habit.  Cayman Islands and BVI are so entrenched, their structures and services so well known and well used, that it would take a massive shift in client sentiment to displace them." 

The same study continues that BVI ranked first for asset protection and estate planning, individual tax planning and special purpose vehicles, while Cayman tied with Luxembourg for first place in fund management.  BVI also leads with investment holdings for corporations and Cayman leads in listing vehicles for IPOs in Hong Kong. 

The fact is that between 1979 and 2011, US$1.2trillion entered China as FDI: US$112billion was channeled through BVI companies, placing it with the second highest share behind Hong Kong (US$533bn).  Cayman, although not in the top five, also fared well.

BVI, China and Wealth Creation

There is strong empirical evidence that IFC structures used in the structuring of international transactions in developed countries enhance wealth rather than the opposite. This debate is not the focus of my article but it is an important point to emphasise. 

An advocate with many years experience in the use of offshore structures, Grant Stein in a recent article unequivocally states that investors using offshore structures are expected to pay taxes to their home tax authorities at all times.  Mr Stein describes IFC entities as the 'plumbing' in the global financial system. They ease financial flows by providing a tax neutral platform, those who use them avoid complex and 'cumbersome' infrastructure that often serves as a disincentive to completing various financial transactions.  

A tax neutral platform precludes the need for several different levels and layers of taxation.  For instance there could be a particular transaction involving four different nationalities each with their own level of taxation.  A tax neutral platform allows for a common platform to be used in the transaction and a peeling away of the complexities that would have otherwise occurred. 

I started this article by observing that BVI companies are used for much more than traditional tax planning purposes. A team of Conyers Dill and Pearman lawyers in the recent IFC Economic Report helpfully explain how BVI and Cayman structures are used in China for Private Equity (PE) investment purposes.  In a nutshell the PRC founders will hold their business operations through an IFC company, which will in turn hold all the shares of the PRC domestic company.  Various investment activities continue until there is either a sale or an IPO of shares on a stock exchange.  Details of how this process works are available through any of the several offshore law firms practicing in these territories.  

IFCs in the Caribbean are also used by the Chinese as investment vehicles in oil and gas exploration as well as in mining or to raise the requisite capital to fund these explorations.


Last year a Forbes Magazine study, and a BBC report carried in May of 2012, observed that the Russian capital of Moscow now boasts more billionaires than any other city in the world. There are 33 billionaires in the city compared to New York’s 31. The study also estimates that a quarter of Russia's wealth is now concentrated in the hands of just 100 people. The flexibility of the BVI corporate regime is known to be as attractive to Russians as is its cost effectiveness. 

At least two of the BVI leading law firms have formed an association with Cypriot law firms in order to offer services to Russia.  Additionally two BVI trust companies with Cypriot connections do substantial business with Russia.  BVI law firms as well as several other trust companies continue to do a thriving business with that country.  In its published OECD Peer Review Report the BVI is listed as a significant country with which Russia does business.  Further, an OECD Report released on 13 February 2013 cites the BVI as being among the top five investors in Russia 

In January, Tax News.Com reported on a huge merger and acquisition deal involving the BVI and Russia as follows:

"TNK-BP, Russia's third-largest oil producer, is owned by a holding structure established in the British Virgin Islands, reflecting the jurisdiction’s popularity as a domicile for international joint ventures. Robert Briant, the head of Conyers Dill and Pearman in the British Virgin Islands, which advised the consortium, commented that: ‘The TNK-BP sale was an exciting transaction to work on and underscores Conyers’s pre-eminence in the British Virgin Islands in advising on large and complex joint ventures and merger and acquisition transactions. Not only is this one of the largest deals of recent times, but the twin track sale process by AAR and BP and the complex corporate governance arrangements of the group made this unique and interesting.’ The acquisition of TNK-BP by Rosneft will result in it becoming one of the world’s largest oil producers, matching the output of Exxon. Completion of the transaction is expected in the first half of 2013 subject to approval from Russian and EU competition authorities. This transaction resulted in the acquisition by Rosneft of Alfa Group, Access Industries and Renova's (AAR) 50 per cent stake in Russian oil company TNK-BP, for USD55bn. "

Investment by Caribbean IFCs

The use of Caribbean IFC entities is not limited to the Far East and Russia.  Tax News.Com last year cited a number of transactions outside Asia in which BVI companies were involved including:

  • Canadian-based financial institution Scotiabank’s USD1bn acquisition of a 51 per cent stake in Colombia’s Banco Colpatria Red Multibanca Colpatria SA, that country’s fifth largest financial group, representing Scotiabank’s largest ever-international takeover;
  • UK private equity group CVC Capital Partners’ purchase of a 51 per cent controlling stake in Virgin Active - the fitness chain part of Richard Branson’s Virgin Group, valued at GBP900m;
  • Australian-listed diversified services company UGL Limited’s GBP77.5m acquisition of the trading operations of UK-listed property services company DTZ; and,
  • NYSE-listed global agri-tech provider, Monsanto Company’s acquisition of Beeologics, a start-up that researches and develops biological tools for targeted pest and disease control



This is an impressive array of business by any standards.  Quite understandably the managing partner of Ogier, the company involved, commented: "The array of blue-chip companies, geographies and industry sectors covered by these deals underscore Ogier BVI’s capabilities as a trusted advisor to international business on all types of corporate transactions" and further that “Ogier’s involvement in these arrangements also represent the continued confidence of the global financial community in the BVI as a stable and high-quality jurisdiction for structuring multi-national transaction". 

Never to be overlooked of course is the fact that Sir Richard Branson owns two islands in the BVI - Necker and Mosquito, the former being his home and base.

The Impact/Implications

Reputation becomes paramount if Caribbean jurisdictions are going to be increasingly used by emerging economies to create wealth. Any illegitimate or non transparent activities must be identified and eliminated.  Equally there is the need to stay ahead of the curve in terms of regulation.  

But in recent months there has been a new emphasis on tax avoidance that represents a real threat to Caribbean IFCs.  EU countries - especially the UK, France and Germany - are now pushing what they refer to as an ‘anti-aggressive tax avoidance agenda’A recent EU press release announced measures that go beyond the current international practices: it calls for measures such as placing 'tax havens' on black lists.  And these countries have redefined tax havens to make sure the definition continues to include Caribbean IFCs: “Tax havens are countries around the world that have traditionally treated tax planning as a legitimate practice”. According to the EU these countries effectively shift taxable profits towards states with beneficial tax regimes, etc. They are therefore encouraging members to legislate against these jurisdictions and to ignore arrangements that have been put in place that will lead to tax avoidance.  

So the spotlight is being beamed more intensely than ever on IFCs.  In February the OECD produced a report addressing ‘Base Erosion Profit Sharing’ that looks at the whole issue of transfer pricing.  The BVI is among several countries named as the biggest receivers and investors of FDI.  A plan will be drawn up within the next six months with the purpose of 'aligning rights to tax with real economic activity’.   I have no doubt that the impact on the BVI of any such plan will be minimal as every indication points to the fact that BVI companies are used for the most part for substantive activities. The fact that there are over a million companies registered in the BVI since 1984, and the number of active companies has held steady at below 450,000 for several years would bear this out. But that empirical evidence would have to come from the industry. 

Finally, it is well established that it is those jurisdictions that demonstrate that they add value to international transactions that are the ones that will be sustainable.   Tim Ridley said it last year better than anyone else can in a paper he presented at the STEP Caribbean Conference:

"... perhaps most importantly, OFCs should strive to have real economic activity carried out and value added within their jurisdictions by the vehicles domiciled there…that means warm bodies in seats in physical offices in the OFCs making substantive decisions. And not simply delegating all those functions to third party service providers. This requires the appropriate local infrastructure and the right immigration policies and procedures to welcome the necessary expertise and to provide an educated and motivated local labour force." 

This process has started but there is still a way to go.