March 2023 update for investment managers operating BVI domiciled fund structures and SPVs
The recent decision by the European Union to temporarily add the BVI to its list of non-cooperative jurisdictions for tax purposes, otherwise known as the blacklist, may cause some initial puzzlement given the jurisdiction’s long-standing commitment to meeting international standards. In practice however, it has been observed that its inclusion was due to a technical foot-fault (in common with a number of other leading fund domiciles) and is expected to be rectified in due course. The current position is likely to have very limited – if any – practical impact upon BVI funds, BVI managers (including BVI approved managers), their investors and underlying SPVs.
So do I need to know more about the EU’s “defensive measures” on tax?
The defensive measures are tax rules within the EU member states designed to make trade with blacklisted jurisdictions less beneficial for EU persons, typically through the imposition of increased EU taxes. As such, they are only relevant to BVI funds or BVI managers where there is an EU nexus of some sort. Consequently, the vast majority of BVI funds and BVI managers, which operate without an EU nexus, will be able to, essentially, disregard the defensive measures.
To state the obvious the overarching main principle is that, outside of the EU, EU law has no direct application and as such the temporary inclusion of the BVI on the blacklist will not automatically trigger any adverse legal, regulatory, or tax consequences for BVI funds or BVI managers.
Within the EU, inclusion on this list may conceivably result in certain payments between BVI entities and EU member states triggering so-called “defensive measures” under local tax laws. We explore this further in our EU tax specific blog posts – please see here. However it should be stressed that this will only be relevant where the BVI fund or BVI manager has some degree of EU nexus. Importantly however, for funds with a global investor and investment base outside of the EU, these measures will not apply and it is simply business as usual. To provide more specifics:
- Any issue with accepting subscriptions? Provided the proposed investor is based outside of the EU, the defensive measures cannot apply. It is highly likely that there will also not be any issues for investors within the EU making subscriptions, but we would be happy to discuss that further if relevant.
- Any issue with redemptions? Provided the relevant investor is based outside of the EU, the defensive measures cannot apply. Again, there is very unlikely to be any issue where the investor is based within the EU either, but do feel free to reach out.
- Can we make payment of fees to the manager and/or other service providers? In the event that the BVI fund or BVI manager makes payments to an EU based manager or service provider (such as management/advisory fees, administration fees, custody fees, legal fees etc), such payments should not be subject to the defensive measures either. Again, nothing to consider where the relevant payment is made outside the EU.
- What about the underlying portfolio? We are sure that any manager of a BVI fund takes professional advice in relation to tax efficiencies before acquiring or disposing of its fund’s underlying portfolio. That should simply continue in relation to this aspect as well. It should be noted though that where a BVI fund is heavily exposed to underlying EU based positions, in particular in private equity, care should be given where receiving dividends in the ordinary course or indeed upon disposal of those assets during the period of the blacklisting. Equally, if your BVI domiciled fund will be engaging in subscriptions or redemptions in kind with EU based assets, again please do discuss this with your tax advisors prior to continuing with these processes.
EU mandatory disclosure requirements?
Finally, it should be recalled that the EU’s mandatory disclosure regime, known as DAC6, may be triggered by EU based intermediaries (such as tax planners) dealing with entities on the EU blacklist, including BVI Funds. In short however, where the investors and service providers are based outside of the EU, the disclosure requirements will not apply.
For more on DAC6 please see here.
The above commentary is for information purposes only and should not be considered legal advice.