The BVI and Cayman Islands are tax-neutral jurisdictions. What does this mean for your fund?
The BVI and Cayman are often referred to as "tax neutral" and you might have been told that, for this reason, it would be advantageous to establish your fund in either jurisdiction. What does this actually mean and what does it mean for your fund?
Primarily, it means that BVI and Cayman companies are not subject to corporate taxation on income, capital gains or share transfers. Instead, the BVI and Cayman governments raise revenue through other means such as income taxes on resident individuals (in the BVI), real estate taxes, sales and import duties and, in relation to corporate vehicles, through incorporation and licence fees. In Cayman the government goes one step further and will issue a tax exemption certificate to a typical Cayman fund (in return for a fee) confirming that for a period of 20 years (where the fund is a company) the fund will not be subject to certain Cayman taxes irrespective of any change in law.
The fact that BVI and Cayman companies have no corporate taxes can make them particularly useful in fund structures, as one or more corporate vehicles can be used to pool investor funds without adding additional layers of taxation. Investors are still taxed in the jurisdictions in which they are tax resident on any income and gains generated from investment into the fund, but there is no corporate taxation at the fund level. This is subject to certain exceptions where the BVI or Cayman fund may be subject to taxation in another jurisdiction as a consequence of the location of its investments and/or its investors (for example, under US FATCA).
The attraction of tax neutral jurisdictions is not quite as simple as it may sound and it is not always favourable from a tax perspective for all investors for funds to be domiciled in tax neutral jurisdictions. As I set out in more detail in my previous post on fund structures, while some groups of investors would prefer to invest in an offshore, tax-neutral, fund, for others it is advantageous to invest in a domestic onshore fund. For example, U.S taxable investors prefer to invest into domestic U.S. funds structured as partnerships which are “pass through” entities for U.S. tax purposes.
And, it’s not all about tax. There are numerous reasons to use BVI and Cayman funds apart from being tax-neutral. Phil has touched on this before in his previous post but, as a recap, both jurisdictions have a modern corporate law, which is supported by hundreds of years of English common law, and a sophisticated court system with ultimate recourse to the Privy Counsel of the United Kingdom. They both offer a range of fund products, suited to different uses and with appropriate regulation and competent and experienced regulators (the British Virgin Islands Financial Services Commission and the Cayman Islands Monetary Authority). In addition, both jurisdictions are home to world-class service providers and Cayman is the fifth-largest banking center worldwide. This makes the BVI and Cayman extremely attractive jurisdictions in which to establish a fund.
If you think that you would benefit from using a BVI or Cayman fund and you would like to discuss the options in more detail, please get in touch.
The original author of this post is no longer with Harneys. For more information on this topic, please reach out to the contact listed above.