Taxation

Tax obligations

Would a private equity fund vehicle formed in your jurisdiction be subject to taxation there with respect to its income or gains? Would the fund be required to withhold taxes with respect to distributions to investors? Please describe what conditions, if any, apply to a private equity fund to qualify for applicable tax exemptions.

As a tax-neutral jurisdiction, the British Virgin Islands operate a zero-rated income tax regime for all entities established in the BVI. Similarly, there is no capital gains tax payable in the BVI on any gains realised by a BVI entity or with respect to any shares, debt obligations, partnership interests or other securities of a BVI entity. Furthermore, no withholding tax on interest or distributions paid by BVI entities to investors.

If the fund employs anyone within the British Virgin Islands, such person will be subject to payroll tax of between 10 and 14 per cent (8 per cent being paid by the employee, and the remainder paid by the employer) on remuneration (including severance pay, bonuses and money paid under profit-sharing scheme) for services rendered wholly or mainly in BVI. Contributions are also required to social security and national health insurance. It is rare that a BVI fund would have employees within the territory.

If the fund invests in real estate within the British Virgin Islands, it would be required to pay BVI stamp duty at a rate of 4 per cent for ‘belonger’ entities and 12 per cent for ‘non-belonger’ entities on the appraised value of the land. ‘Non-belonger’ companies, in simplified terms, are those with over one-third of its members being non-BVI citizens or with any directors that are not BVI citizens. Similarly, the transfer of shares or partnership interests in a BVI entity that holds, directly or indirectly, an interest in land situated in the British Virgin Islands would attract BVI stamp duty at the same rate.

Local taxation of non-resident investors

Would non-resident investors in a private equity fund be subject to taxation or return-filing requirements in your jurisdiction?

Provided the fund does not invest in BVI land, non-resident investors in a private equity funds will not be subject to any taxation or return-filing requirements in the BVI. Stamp duty payable on transfers of interests in BVI land-holding entities is discussed in question 17.

Local tax authority ruling

Is it necessary or desirable to obtain a ruling from local tax authorities with respect to the tax treatment of a private equity fund vehicle formed in your jurisdiction? Are there any special tax rules relating to investors that are residents of your jurisdiction?

It is not necessary to obtain a ruling from local tax authorities with respect to the tax treatment of a private equity fund vehicle formed in the BVI. If a fund requires further comfort, a certificate of tax exemption can be requested from the BVI Inland Revenue Department.

Aside from differing stamp duty rates for ‘belonger’ and ‘non-belonger’ companies on transfer of their interests (see question 17), there are no special tax rules relating to BVI-resident investors. BVI residents will similarly be exempt from tax on any distributions from the fund and any gains on their interests.

Organisational taxes

Must any significant organisational taxes be paid with respect to private equity funds organised in your jurisdiction?

There are no organisational taxes to be paid with respect to private equity funds organised in the BVI. However, see question 2 regarding registration and annual fees payable by BVI entities and question 12 regarding annual licence fees for licensed entities.

Special tax considerations

Please describe briefly what special tax considerations, if any, apply with respect to a private equity fund’s sponsor.

Save as discussed above and below, there are currently no special BVI tax considerations with respect to a private equity fund’s sponsor. With no value added tax or similar fees payable in the BVI, any management fee can be paid by the fund to the manager as a service fee, rather than distribution as a profit share to the general partner.

Tax treaties

Please list any relevant tax treaties to which your jurisdiction is a party and how such treaties apply to the fund vehicle.

While the BVI has not focused on entering into double taxation treaties, it has entered into nearly 30 tax information exchange agreements, including with Australia, Canada, China, the United Kingdom, the United States and a number of EU member states. The BVI is also a party to the Convention on Mutual Administrative Assistance in Tax Matters, which allows for the exchange of information upon request to facilitate tax avoidance and evasion among over 100 signatories.

The BVI has also entered into a non-reciprocal intergovernmental agreement with the United States under the US Foreign Account Tax Compliance Act (FATCA) and has adopted the Organisation for Economic Co-operation and Development’s (OECD) Common Repor­ting Standards (CRS), in each case for the automatic exchange of tax information between the United Kingdom and other OECD members (save for the United States). BVI private equity funds will need to establish if they are reporting financial institutions under these agreements.

A legacy double taxation agreement between the United Kingdom and Switzerland, which was extended to the BVI in 1963, remains in place. However, given the limits on taxes in the BVI and the scope of the agreement, it is not regarded as having practical effect.

Other significant tax issues

Are there any other significant tax issues relating to private equity funds organised in your jurisdiction?

There are no other significant tax issues relating to private equity funds organised in the BVI.