In keeping with its reputation for being one of the most flexible and user friendly offshore jurisdictions, the British Virgin Islands (BVI) has managed to strike the ‘right’-touch regulation, successfully balancing the implementation of the Alternative Investment Fund Managers Directive (AIFMD) and preparing for the requirements of the US Foreign Account Tax Compliance Act (FATCA), with the needs of the industry to maintain the ease and convenience of transacting that the BVI has become so well known for.
The BVI is home to the second largest number of regulated investment funds globally, and is becoming increasingly popular as a jurisdiction for the establishment of offshore investment funds, and in particular of professional and private funds. Following the implementation of the Securities and Investment Business Act (SIBA) and Mutual Funds Regulations (MF Regulations) in 2010, the BVI continues to offer an efficient framework for establishment of professional and private funds to operate as stand-alone corporate of limited partnership vehicles, or as a part of the master/feeder structure.
The most commonly used regulated funds vehicle is a BVI business company, with a wide range of flexibility offered by the BVI legislation and regulatory framework. There are no residency requirements for directors of a BVI fund, and the frequency and place of shareholder meetings are not mandated by the legislation. BVI funds may be structured to issue participating shares which can, subject to certain restrictions, be redeemed, as well as voting ‘management’ shares, allowing convenience and ease of management of the affairs of the fund.
The management and supervision of a BVI fund is undertaken by the directors, with the day to day management commonly delegated to various functionaries. The rights and obligations of the shareholders, the terms of redemption and method of valuation are set out in the fund's Memorandum and Articles of Association and the offering documents and are not prescribed by the legislation. In addition, the recognition process is streamlined, with the approval generally granted by the BVI Financial Services Commission (the Commission) in less than seven days.
In accordance with SIBA and MF Regulations, BVI private and professional funds are required to appoint and at all times have an administrator as well as an investment manager and custodian (collectively the functionaries), unless exempted by the Commission from the requirement to do so. Once established, professional and private funds are required to file audited financial statements with the Commission, submit any amended offering or constitutional documents to the Commission, and provide prior notification of any changes to the fund's functionaries, namely the investment manager, administrator and custodian.
The regulatory requirements imposed on BVI private and professional funds are not onerous, but do establish very important culture of regulation and disclosure, paving the way for implementation of the requirements AIFMD and FATCA.
The BVI Investment Business (Approved Managers) Regulations 2012 (the Approved Managers Regulations) and the Approved Investment Manager Guidelines, aimed at non-institutional investment managers of BVI private and professional funds, came into effect in December 2012 and provide an alternative streamlined regulatory framework for BVI investment managers previously required to be licensed under SIBA.
The on-going obligations under the new regime are significantly less onerous than those under SIBA and the approval process is streamlined, with the Commission being able to raise objection to the application only during the seven day period following the filing of the application, after which period the manager can commence business pending the Commission approval.
To be eligible to be an approved investment manager the applicant must be a BVI company or a BVI limited partnership and must meet the Commission's ‘fit and proper’ test, and act as an investment manager or an investment advisor to:
· a BVI private or professional fund recognised under SIBA; or
· a BVI domiciled close-ended fund (with characteristics similar to a private or professional fund); or
· a foreign fund investing substantially all of their assets in a BVI domiciled fund.
The application must be filed not less than seven days prior to the intended commencement of business.
The approved investment manager is limited to having no more than US$400 million aggregate assets under management in respect of open ended funds, and no more than US$1 billion in aggregate capital commitments in case of closed ended funds. Where an investment manager manages both an open ended fund and a closed ended fund, the aggregate assets under management in relation to the open ended fund and the amount prescribed for the closed-ended fund must be segregated and treated separately.
BVI investment managers now have a choice of being licensed under SIBA or seeking approval as an approved manager. The approved manager regulatory framework has already proven to be efficient and cost effective whilst still being in line with international regulatory standards and it is not surprising that it has appealed to start-ups and smaller investment managers.
Impact of AIFMD and FATCA on regulation ‘right’
BVI’s status as a ‘tax-neutral’ or “tax-efficient’ jurisdiction provides an added advantage to using BVI vehicles however, it is important to note that the BVI has never had secrecy laws and has never promoted itself as a secrecy jurisdiction. Tax-neutrality or tax-efficiency of a BVI fund means nothing more than that each investor pays the appropriate taxes in the place where the investor is based or where investment is made, as the case may be, without an additional layer of taxes imposed in the BVI.
In line with its commitment to OECD principles of transparency and information exchange relating to tax matters, the BVI has signed TIEAs with 22 countries, including the United States and a number of EU member states, and is in negotiations with more than 10 others. The BVI also implemented the EU Savings Directive in July 2005.
On 11 July 2013 the Commission announced that it had entered into a Memorandum of Understanding (MOU) concerning consultation, cooperation and the exchange of information related to the supervision of alternative investment funds managers with 25 EU and EEA member states, including the UK, Ireland, the Netherlands, Belgium, France, Luxembourg and Liechtenstein, to name a few. The signing of the MOUs was an important pre-condition to allowing non-EU based mangers of BVI funds to continue to market in to the EU after 22 July 2013, and it demonstrates the recognition and importance of BVI investment funds in the global funds industry.
On 4 April 2013, the BVI Government announced that it would be pursuing Model 1B bilateral intergovernmental agreement (IGA) with the United States for the implementation of FATCA. The BVI has also confirmed its commitment to similar information sharing agreements with the UK and other EU states.
Model 1B IGA assumes the pre-existence of a TIEA and is essentially an expansion of the BVI’s cooperation with the United States already in place. Model 1B IGA provides that information will be submitted within nine months of the end of the calendar year to which it relates, and in accordance with the BVI-United States TIEA information supplied and received is required to be kept confidential and the disclosure and use of such information is limited by reference to the tax related matters within its scope.
Whilst AIFMD will introduce enhanced reporting requirements, this will be limited to those managers and BVI funds that market into EU. FATCA compliance is consistent with the BVI’s existent culture of compliance and right touch regulation and is not seen as threat to BVI’s competitive advantage as one of the most flexible and user friendly offshore jurisdictions and an offshore jurisdiction of choice for many investment funds structures.
About the Author:
Marianne Rajic is a partner in Walkers' Global Finance and Corporate and Investment Funds Groups.
Marianne joined Walkers' British Virgin Islands office in 2008 where she heads up the BVI funds practice. She focuses on investment funds and in particular structure and operation of hedge funds, real estate funds, private equity arrangements and other alternative investment products, including innovative hybrid and crossover funds, investing in a diverse range of assets.