An overview of investment funds and asset protection in the British Virgin Islands (BVI) and the Cayman Islands
The BVI and the Cayman Islands have long been recognised as two of the world's leading offshore financial centres. Both jurisdictions offer a wide range of investment products and services, including open-ended and close-ended funds, to meet the diverse needs of investors from around the globe. Offshore fund vehicles are highly flexible, tax-efficient, appropriately regulated structures that allow you to issue fund interests to investors from different parts of the world, which can be established quickly and cost-efficiently to ensure you meet both your budget and timeline.
Investment funds established in the BVI and the Cayman Islands fall into two broad categories: open-ended funds and closed-ended funds.
Open-ended funds provide investors with voluntary redemption or repurchase rights, whereas closed-ended funds do not provide investors with those rights. Typically, open-ended funds will invest in liquid assets which can be readily realised to fund redemptions (eg listed, liquid, tradable securities) and closed-ended funds will invest in non-liquid assets requiring time to liquidate/realise value (eg real estate, unlisted growth companies).
Investment funds are regulated by the Financial Services Commission (the FSC) in the BVI and by the Cayman Islands Monetary Authority (CIMA) in the Cayman Islands.
Approximately one-quarter of all offshore hedge funds established worldwide have been domiciled in the BVI.
Due to the flexibility and sophistication of the relevant legislation and the FSC, the BVI is becoming the home for more niche investments such as crypto-currency funds, hybrid funds and crowdfunding platforms.
The BVI offers five open-ended fund products and one closed-ended fund product, which makes it a suitable home for everyone: from the start-up manager looking to take the first step towards testing their investment strategy or running a small friends & family fund, all the way through to well-established institutional fund managers with billions of assets under management and a long-term track record looking to capitalise on the widespread international recognition for the BVI structures.
The Cayman Islands is the leading jurisdiction for the offshore investment funds industry due to its combination of flexible and appropriate regulation, an approachable and effective regulator, professional service provider expertise, high reputation among investors and a tax-neutral regime.
The jurisdiction maintains a tax-neutral standing towards corporate, income and capital gains, paving the way ahead for increased opportunities for foreign investment.
A leader in global tax information sharing, the Cayman Islands has fully adopted legislation to implement US FATCA and the OECD global common reporting standard.
Cayman Islands law, derived from English common law and supplemented by local legislation, ensures that Cayman Islands investment funds are structured as internationally accepted vehicles.
Funds in both the BVI and the Cayman Islands can be structured as a standalone company, a segregated portfolio company or a partnership (limited partnership in the BVI and an exempted limited partnership in the Cayman Islands) to meet different investor needs and investment strategies. Sometimes, we also see a unit trust being established for domestic tax purpose (eg Japan).
BVI VISTA Trust
Aside from setting up an offshore fund, some general partners, limited partners and investors also invest into, or co-invest with, the offshore fund via a trust for asset protection and estate planning purpose.
We have seen that over the last few years that there has been an increase in the use of BVI trust structures by investors in Asia to hold and make investments (including investments into offshore funds). We have seen a change in attitude of High Net Worth (HNW) families perceive succession planning, and they now acknowledge the importance and value of such planning in preserving and protecting wealth for generations and beyond.
The BVI has a wide variety of succession planning options that appeals to a HNW family, especially if there is a need for the settlor to maintain control of the underlying companies until his/her passing. For the purpose of this article, we will only be discussing one of the more popular structures in Asia – the BVI VISTA trust.
The BVI specialist trust legislation is the Virgin Islands Special Trusts Act (VISTA). Once established, a VISTA trust will directly hold shares in a BVI company (which can own any assets, including crypto and other digital assets). The BVI company can then act as the investment vehicle, make investments into offshore funds, and/or hold other assets.
The VISTA disapplies certain traditional trustee duties in relation to certain trusts that own shares in BVI companies. For instance, although a BVI company’s shares are held in a VISTA trust, the directors of that company are free to administer the company as they see fit, without intervention from the trustee (except in certain limited circumstances). Further, key family members may, subject to local laws and tax advice, be involved in the management and control of the BVI company by taking up board seats on the BVI company. In addition, key family members may also take up the role of an Office of Director Rules Appointor (the Appointor). This role is a specific feature of a VISTA trust and allows the Appointor, which can be a committee of family members or trusted advisors, to have control over the members of the board of the BVI company. The BVI VISTA Trust therefore addresses the need for families looking to have succession planning in place whilst retaining some level of control of the underlying companies.
From a confidentiality and asset protection perspective, the counterparty of the BVI company will only see the trustee as the legal owner of the BVI company and the settlor’s details will not appear in any public documents.
Both the BVI and the Cayman Islands offer versatile solutions for investments, estate planning and asset protection. With a wide range of products catering to differing investor needs and preferences, BVI and Cayman Islands will continue to be attractive jurisdictions for investments and asset protection.
This article was originally published on the Institutional Asset Manager.