Understanding Offshore Financing

Offshore financial centres such as the British Virgin Islands (BVI) provide a neutral platform for cross-border investment and act as a conduit for global capital flows. They enable investors from different parts of the world to invest in vehicles such as a holding company or limited partnership that can pool capital and then invest in companies in different jurisdictions in a tax neutral way. Further, the BVI’s flexible and efficient regulatory framework make it the world’s most popular domicile for offshore incorporation, and it is increasingly attractive for mergers and acquisitions, and banking and finance transactions. The BVI also meets international compliance standards promoting transparency and cooperation regarding anti-money laundering and anti-terrorism financing.

Tax neutrality

“When we say tax neutrality,” explains Nicholas Kuria, a counsel at Conyers, a leading law firm in the BVI, “what we’re essentially saying with the BVI is that there is no corporation tax, wealth tax, capital gains tax or any other tax applicable to BVI companies. There is no stamp duty on share transactions.”

But that doesn’t mean there are no tax implications when a BVI entity is used. If the BVI holding company invested in, for example, a mining company in Ghana, that company would still be required to pay local taxes in Ghana. Likewise, any money that flows through to the investors would be taxable in their home jurisdictions.

“Using a BVI company doesn’t cancel out the obligation to pay local taxes,” says Kuria.

Business-friendly regulation

One of the attractions of using the BVI as a venue for these types of vehicles is because the island has established itself as a corporate transactional jurisdiction, similar to how the Cayman Islands is popular with hedge funds and Bermuda is popular with insurance companies.

BVI legislation is based on a combination of Delaware law and English law, taking the best of both, says Kuria, allowing parties to tailor their corporate governance structures to meet their particular needs. Mergers are straightforward and there is no standalone takeover code, so if a BVI company is listed on a major exchange such as the London Stock Exchange, it does not need to worry about adhering to two sets of regulations.

High international compliance standards

The BVI also has stringent legislation around anti-money laundering and anti-terrorism financing. BVI lawyers have legal obligations to report suspicious activity in relation to money laundering to the BVI’s Financial Investigation Agency. Only registered agents are able to incorporate companies in the BVI and, in doing so, are required to carry out strict KYC checks on a company’s beneficial ownership.

Furthermore, the BVI has a decades-long track record of incorporating companies for multiple cross-border transactions, with BVI entities frequently listed on both the London and New York stock exchanges.

“BVI entities are very familiar to institutional investors around the world,” says Kuria.

Given those credentials, the BVI is ideally positioned to help facilitate investment into Africa. For investors, it provides opportunities to back African companies without having to invest directly in individual companies in individual countries. For African entities, it is a way to incorporate in a neutral jurisdiction with the potential to raise capital in the world’s largest financial markets via a vehicle that is underpinned by a judicial system based on English law.

“Having judicial independence is quite attractive when you’re bringing parties together from different locations around the world, and as Africa looks externally for capital to drive growth, this provides a great avenue for it,” says Kuria.

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