When setting up a joint venture involving parties from different countries, the international angle makes the choice of jurisdiction for the incorporation of the joint venture company (“JVC”) a crucial one.

Rather than using the home jurisdiction of one of the parties, or the jurisdiction where the JVC’s business is to be located, seeking a neutral choice to provide a level playing field for all parties is becoming more important and this is where going offshore provides the ideal solution.

The primary motivation for choosing an offshore jurisdiction is often to take advantage of favourable tax regimes that do not levy a corporation tax on profits of the JVC, thus producing a tax neutral position for all participants.

Historically other influential factors mitigating in favour of one jurisdiction over another include: whether it is considered to be a stable and well governed jurisdiction; how the jurisdiction is viewed by the international regulators; whether it had an established and independent judicial system; the existence of a highly skilled labour force; and whether it had a good corporate governance regime.

This briefing looks at some of the reasons why the British Virgin Islands (or “BVI”) is a popular choice for incorporating an offshore joint venture.

Its reputation

The BVI is an overseas dependent territory of the United Kingdom and has successfully developed its reputation as a centre of offshore excellence over the last thirty years, its popularity being more than adequately demonstrated by the fact that the BVI is the place of incorporation for over 800,000 companies.

It is a politically stable jurisdiction with free and fair elections contested and held when constitutionally due. It has a judicial system based upon long-established English legal principles (and has recently established a separate commercial court).

In step with worldwide sentiment, the BVI has also been putting itself at the forefront of corporate regulation, bringing new anti-money laundering regulations into force to ensure that while legitimate tax reduction can be achieved by JVCs based in the territory, only legitimate businesses will be acceptable. A recent report by the Caribbean Financial Action Task Force confirmed that BVI was in line with international best practice in law enforcement and regulation to combat money laundering and terrorist financing.

These higher standards have not come at the cost of the BVI having to compromise or dilute the expected benefits of doing business offshore. As well as the absence of corporation tax, anonymity for the participants in BVI companies has also been maintained. There is no mandatory requirement to keep a public record of the directors or shareholders of a BVI company, nor any requirement to file public accounts.

Flexible company law

Limited liability companies incorporated in the BVI (the usual vehicle for JVCs, although others, such as limited partnerships, are available) are governed by the BVI Business Companies Act, 2004 (as amended) (the “Act”).

This legislation is designed to provide a flexible “lighttouch” corporate governance regime.

Its flexibility enables persons to use a BVI corporate vehicle for any scenario, whether it was being asked to be a listing vehicle, property holding company or a JVC, as the constitutional documents of the company can be easily adapted to fit the required circumstances. The matters which a BVI company is required or prescribed by statute to have in its constitution are kept to a minimum (or at least the ability to opt out of them exists) unlike in many other jurisdictions. They can also be supplemented by a private contractual shareholders’ agreement where necessary to preserve confidentiality or deal with commercial matters.

There is also little difficulty importing concepts from other legal systems into the constitution of a BVI company so as to ensure all parties are comfortable and familiar with how their JVC will be governed in practice.

Amongst the specific opportunities that the Act provides are that decision-making on almost any topic can be done at either board or shareholder level, so the underlying investors can delegate as much or as little as they see fit to the directors, depending on the level of involvement they require. This ability to remove the need for shareholder consent on a wide variety of matters helps keep the administrative burden to a minimum. Further, if it is agreed to be appropriate, directors who are specific appointees of specific parties can be empowered to act in the best interests of their appointer, rather than the company as whole, in order to protect their position to the fullest extent. This contrasts with the position under English law, for example, where a director must always act in the best interest of the company as a whole, regardless of the effect on his appointer’s position.

There is also a simplified regime regarding dividends and distributions (such as the buy-back or redemption of shares), making it easier to remit profits back to the participants. There is no concept of share capital maintenance, or a distinction between distributable or other types of profits, and so as long as the company passes a solvency test, monies from any source can be used to fund distributions to shareholders.

Other considerations

Corporate insolvency in the BVI is governed by the Insolvency Act 2003 and Insolvency Rules 2005. The laws are closely based on the English Insolvency Act 1986. The key current insolvency procedures are liquidation, creditor arrangements, receivership and administrative receivership. The similarities to the UK legislation will provide comfort to JV parties who will be able to tailor their affairs accordingly.

BVI law has also with the Act increased the statutory protections available to minority shareholders. A minority shareholder can bring derivative actions in exceptional circumstances which include where a company or a director of the company engages in, or proposes to engage in, conduct that contravenes the Act or the memorandum or articles of the company. The Act also permits a member who feels the affairs of the company have been, or are likely to be, conducted in a manner that is likely to be oppressive, unfairly discriminatory or unfairly prejudicial to him as a member, to apply to court for an order restraining a particular action by the company or other appropriate relief.

All of this means that there are substantial advantages to be gained from incorporating your JVC in BVI. Whilst the expected tax benefits will undoubtedly remain the initial draw, the other, sometimes intangible, factors including its political stability, the flexibility of BVI company law and the established expertise of its practitioners should not be underestimated.