Forms of vehicle
What legal form of vehicle is typically used for private equity funds formed in your jurisdiction? Does such a vehicle have a separate legal personality or existence under the law of your jurisdiction? In either case, what are the legal consequences for investors and the manager?
Private equity funds in the British Virgin Islands (BVI) have historically favoured establishment as a company. Since 2017, however, it has been possible to use a limited partnership structure very similar to those in other jurisdictions and this is becoming increasingly popular.
A BVI company is incorporated under the BVI Business Companies Act 2004 with separate legal personality. As at 30 June 2020, there were 375,832 active companies registered in the BVI. A BVI company established for use as a private equity fund will typically have a range of share classes, allowing for the shares held by the manager (or its affiliates) to have different rights from those of investors. Shares can be issued with or without a par value. As shareholders in a BVI company, investors’ and managers’ liability will be limited to an extent.
Segregated portfolio companies
Previously limited to certain regulated entities and open-ended funds, the Segregated Portfolio Companies (BVI Business Company) Regulations 2018 allow closed-ended funds and other BVI entities to be structured as segregated portfolio companies (SPCs). An SPC is a single company whose assets and liabilities can be allocated and ring-fenced between separate sub-funds or segregated portfolios, similar to the concept of ‘protected cell’ or ‘segregated account’ companies in other jurisdictions. Shares may be issued in respect of a certain portfolio, and investors will be entitled to receive distributions from that portfolio alone. Similarly, creditors may contract with a particular portfolio, and only have recourse to assets from that portfolio. This development allows private equity funds to house multiple funds within one centralised body, providing cost and administration savings.
While a common structure for funds in other jurisdictions, the limited partnership (LP) has traditionally been underused in the BVI partly as a result of outdated and imprecise legislation. The BVI’s Limited Partnership Act 2017 (the LP Act), which came into force on 11 January 2018, sought to address this by introducing commercial and flexible provisions, aimed at both private equity and open-ended mutual funds. As at 30 June 2020, there were 948 active limited partnerships registered in the BVI.
Under the LP Act, an LP can be established either with or without separate legal personality, making them suitable for both funds and carried interest distribution vehicles. For LPs established after the LP Act, the choice of whether or not the LP has legal personality is irrevocable. All LPs in existence prior to the new LP Act coming into force may be re-registered with or without legal personality, at the election of the general partners.
Investors join as limited partners. Subject to the fund’s limited partnership agreement (LPA), a limited partner may, but is not required to, make a contribution to the LP. Save in circumstances where limited liability is lost, a limited partner’s liability for the debts and liabilities of the LP will be limited to the amount of the limited partner’s contribution or unpaid commitment to the LP, if any.
An LP must also have at least one general partner, often controlled by the fund manager, who will be responsible for managing the partnership. The general partner is liable for the unpaid debts and liabilities of the LP incurred while they are a general partner. Where there are multiple general partners, each general partner is jointly and severally liable. Provided the LPA does not provide otherwise, a general partner will only be liable for the debts and liabilities of the LP to the extent that the LP cannot itself pay those debts or liabilities.
In most cases, the general partner will be a company with limited liability, acting as a ‘liability blocker’ to prevent liability from flowing higher up the chain of ownership. There is no requirement for the general partner to be established within the BVI.
Unit trusts are recognised under BVI trust law. Unit trusts are not separate legal entities and are established by way of a deed of trust. The principal benefit of offshore unit trusts for private equity vehicles (being that units could be redeemed without issuing new shares) has been reduced with the ability of companies to issue shares with no par value.
Forming a private equity fund vehicle
What is the process for forming a private equity fund vehicle in your jurisdiction?
Incorporation of an entity
Once the constitutional documents (being memorandum and articles for a company, and a written LPA for an LP) and any other commercial matters are agreed between any interested parties, a company or an LP can be established relatively quickly (normally within one to two working days). The incorporation of a company will require the filing of the following with the BVI Registrar:
- memorandum and articles; and
- a document from the proposed registered agent, consenting to their appointment.
If the company is to be incorporated as an SPC, prior approval from the BVI Financial Services Commission (FSC) must be obtained. We would expect this to take one to two weeks.
The formation of an LP will require the filing of the following with the BVI Registrar:
- a statement confirming the LP’s name, address, registered agent, name and address of each general partner and a confirmation of whether the LP has an unlimited duration or a fixed term;
- if desired, an election by the general partners for the LP to be formed without legal personality (the default position being an LP with legal personality); and
- a document from the proposed registered agent, consenting to their appointment.
The LPA is not filed and is not otherwise made public.
A registered agent within the BVI will need to be engaged in order to establish either a company or an LP. Only a registered agent is permitted to file registration documents with the BVI Registry. Provided the BVI Registrar is satisfied that the registration requirements for the company or LP (as applicable) have been complied with, it shall issue a certificate of registration, being conclusive evidence that the requirements have been met and that the company or LP (as applicable) has been established.
BVI entities will need to pay a fee to the BVI Registrar on registration and an annual fee each year thereafter. Registry fees for a company will depend on the number of shares the company is authorised to issue. For companies authorised to issue 50,000 or fewer shares, the initial registration fee is currently US$450, with an annual fee of the same amount thereafter. For companies authorised to issue over 50,000 shares, the initial registration fee is currently US$1,200 and the annual fee the same thereafter. Non-regulated SPCs must pay an additional application fee to the FSC of US$450, plus an additional US$400 for each segregated portfolio and US$250 on approval, and annual fees of US$450 for the company and US$400 for each segregated portfolio for each year thereafter.
For LPs, registry fees are currently US$500 and the annual fee the same thereafter. Additional costs (such as legal fees and fees for the registered agent) will depend on the complexity of the transaction, including the level of negotiation for the formation documents, the timescale and the number of parties involved.
Closed-ended funds (whether companies or LPs) do not have any minimum capital requirements.
Recognition of the fund
Prior to 2020, closed-ended funds were not regulated in the BVI. On 31 December 2019, the BVI amended legislation in order to bring closed-ended funds within the regulatory regime. As such, as of 31 December 2019, closed-ended funds will be required to obtain recognition from the FSC.
In order to obtain recognition, the fund will need to submit to the FSC an application in the approved form, accompanied by copies of:
- the fund’s constitutional documents, register of directors (where applicable) and certificate of incorporation, formation or registration;
- the fund’s valuation policy;
- the fund’s offering document or term sheet, where the fund intends to issue such document; and
- CVs or biographies of each director, general partner or trustee, or the underlying individuals where such entities are bodies corporate.
Where the fund does not intend to issue an offering document or term sheet, the fund must provide its reasoning for doing so and explain how investors will receive pertinent information concerning the fund. Any offering document or term sheet must include information prescribed by the Private Investment Fund Regulations (the PIF Regulations) (including a disclaimer, the investment objectives and details of any fees).
Application fees for recognition of a private investment fund are currently US$700, with a further US$1,000 (or, if approved after 30 June in any year, US$500) payable upon approval. Renewal fees thereafter are currently US$500 per annum. On approval, the fund shall be issued with a certificate of recognition, which will remain valid until cancelled or revoked by the FSC.
Once an entity is incorporated, it can operate as a private investment fund for a period of 14 days before submitting the application to the FSC for recognition, provided that:
- the fund is lawfully incorporated;
- the fund’s constitutional documents specify that either it:
- is authorised to have no more than 50 investors;
- invites investors to subscribe for, or purchase, fund interests on a private basis only; or
- only issues fund interests to professional investors, each with a minimum initial investment of US$100,000; and
- the fund otherwise meets the requirements of the PIF Regulations, which are detailed throughout this chapter.
Is a private equity fund vehicle formed in your jurisdiction required to maintain locally a custodian or administrator, a registered office, books and records, or a corporate secretary, and how is that requirement typically satisfied?
Functionaries and board
BVI closed-ended funds are required to nominate entities or individuals (known as appointed persons) responsible for undertaking:
- the management;
- the valuation; and
- the safekeeping, each of fund property.
Such appointed persons can be the directors, partners or trustees of the fund, the fund manager or other appointed functionaries, independent third parties or both.
The person responsible for managing fund property must be independent from the person responsible for valuations, save that one person may be appointed for both if the fund:
- identifies, manages and monitors any potential conflicts of interest that may arise; and
- discloses to its investors that one person fulfils both roles, and provides details of how conflicts will be managed.
The safekeeping arrangements required will depend on the type of assets held. The FSC guidance provides that the appointment of a traditional custodian or prime broker would not be considered necessary for private equity investments, provided that a sufficiently experienced person is responsible for ensuring that documentation with respect to the fund’s ownership of such assets is maintained and safeguarded.
A private equity fund vehicle (as with any BVI-registered company or a limited partnership) is required to maintain both a registered agent and a registered office in the BVI. In almost all circumstances, the registered office of the entity will be that of the registered agent, who will be one of a number of registered agents operating and licensed in the BVI. There is no requirement to maintain a corporate secretary.
BVI closed-ended funds are further required to appoint an authorised representative who will act as an intermediary between the fund and the FSC. The authorised representative must be licensed and is usually provided by the fund’s registered agent.
A private investment fund established as a company is required to appoint at least two directors, one of whom must be an individual.
Books and records
Unless an exemption is granted by the FSC, BVI closed-ended funds must file audited accounts. The FSC has indicated a number of scenarios in which an exemption may be considered appropriate including:
- where the fund has limited business activities (generally a net asset value of less than US$1 million, with less than 30 investors); and
- where the fund is a feeder fund, investing all assets into a master fund that produces audited accounts.
Closed-ended funds are required to keep such records and underlying documentation that are sufficient to:
- show and explain its transactions;
- enable, at any time, the financial position of the fund to be determined with reasonable accuracy; and
- make such filings as are outlined above. Such records must be maintained for at least five years.
All BVI companies are required to maintain their registers, memorandum and articles and all notices and other documents filed by the company in the past 10 years (in each case, or copies thereof) at the office of its registered agent. BVI LPs are required to maintain their registers (or copies thereof) at the office of its registered agent.
Access to information
What access to information about a private equity fund formed in your jurisdiction is the public granted by law? How is it accessed? If applicable, what are the consequences of failing to make such information available?
The FSC maintains a list of any recognised funds. Access to further information about entities established in the BVI is limited and, where information is available publicly, such documents are generally only accessible through the BVI FSC’s online database, which requires registration with the FSC to access and the payment of fees. Such available information includes registered office and agent details, name and registered number and any publicly registered charges over its assets. For companies, the memorandum and articles (and any resolutions amending these) will also be available. For LPs, the identity of general partners will be available (but not the LPA). Entities are required to keep filed information up-to-date and any failure to do so may result in a fine.
A BVI company is also required to file a copy of its register of directors (and any changes thereto within 30 days) with the BVI Registrar. The Business Companies (Amendment) Act (BC Amendments) and the Business Companies (Amendment) Regulations, 2022 (BC Regulations) came into force on 1 January 2023. The BC Amendments and the BC Regulations provided a number of reforms to the Business Companies Act, 2004 (as amended) including a requirement for all BVI companies to file the names of the directors of the company with the Registrar of Corporate Affairs which will enable users of the BVI VIRRGIN service to access the names of directors for a search fee. The names of director’s who have resigned at the time of the search will not show on the public list of that company’s directors.
The identities of shareholders in a company and limited partners in an LP, and the amounts of their capital commitments, are not publicly available. However, both a limited partner and a member of a company is entitled to inspect, on giving written notice, the records, the register of limited partners (in the case of an LP and subject to the LPA) and the registers of members and directors (in the case of the company). For an LP, the LPA may restrict these inspection rights. For a company, subject to its memorandum and articles, a director may refuse an inspection request if they are satisfied that it is contrary to the company’s interests. The articles of a company, or the LPA for an LP, may allow for further inspection or information rights for investors.
In 2017, the BVI introduced a centralised system for recording the beneficial owners of BVI entities (being persons who ultimately own or control more than 25 per cent of an entity). While open-ended mutual funds and any licensed BVI entities are exempt from this regime, closed-ended funds are not. The system is not available to the public and can only be accessed following a formal request from the BVI Financial Investigation Agency, the FSC, the BVI International Tax Authority or the Attorney General’s Chambers, who will in turn be bound by strict confidentiality rules. Non-compliance can result in a fine, imprisonment or both.
The valuation policy of the fund must include details on how valuation information and reports shall be disseminated to investors, but there are no minimum requirements for such reports.
Limited liability for third-party investors
In what circumstances would the limited liability of third-party investors in a private equity fund formed in your jurisdiction not be respected as a matter of local law?
A BVI company is treated as an entity separate from its investors and the limited liability of shareholders will generally be respected. An investor’s liability in a company will generally be limited to:
- the amount, if any, unpaid on the shares it holds;
- any liability expressly set out in the memorandum and articles of the company; and
- any liability to repay a distribution.
A shareholder will be liable to repay a distribution if, at the time of the distribution, the company was insolvent, unless the shareholder received the distribution in good faith, without knowledge of the company’s insolvency, has altered its position in reliance of the distribution and it would be unfair to require repayment.
Similarly to other English-law-based jurisdictions, there may be extremely unusual circumstances where the BVI courts ‘pierce the corporate veil’ and seek to find shareholders liable for debts of a company, such as cases involving fraud or a deliberate attempt to evade legal obligations. English case law regarding this topic will have persuasive effect in the BVI.
Limited partners will be liable for the debts and liabilities of the LP only if:
- the limited partner takes part in the management of the LP; and
- at the time the liability was incurred, the person to whom the liability was incurred:
- knew that the limited partner took part in the management of the LP; and
- reasonably believed, based on the limited partner’s conduct, that the limited partner was, in fact, a general partner.
This two-step process provides additional certainty to limited partners.
The legislation provides for a number of safe harbours to the loss of liability, including the following activities, which do not constitute ‘taking part in the management’ of the LP:
- holding an office (including a directorship) or interest in (including as a shareholder or partner), acting as a consultant, contractor or agent for, being an employee of, or being engaged in business with a general partner;
- consulting or advising a general partner about the business or activities of the LP, including as a member of an investment or advisory committee of the LP;
- acting as a surety or guarantor for the LP;
- serving on, or appointing a person to, or removing any person from, any board or committee of the LP or calling, requesting, attending or participating in any meeting of the partners; and
- giving advice in regard to, consenting or withholding consent, to any action proposed with respect to the LP, in accordance with the LPA or taking part in decisions concerning the winding up of the LP, any amendments to the LPA, the acquisition or disposal of any assets or businesses by or of the LP, whether to approve or veto investments in the capacity of a member of an investment or advisory committee of the LP, incurrence of debt, appointment or removal of a general or limited partner, change in senior employees of the LP or the general partner.
The carve-out for membership of an investment or advisory committee provides greater certainty for investors who have representatives on such committees. If limited liability is lost, a limited partner will be liable to the same extent as a general partner.
A limited partner who has been repaid all or part of their contribution, or who has been released from their commitment to fund the LP, may have renewed liability for that amount or commitment if the LP was insolvent at the time of and immediately following the repayment or release and the limited partner was aware of this insolvency. The limited partner will only be liable to the extent that the renewed liability is necessary in order to discharge a debt or liability of LP incurred while the contribution or commitment represented an asset of the LP. Further, the risk of renewed liability expires six months after the date of the repayment or release. Both of these requirements provide a level of certainty to the limited partner. Aside from the above, as further provided in the LPA or in the event of fraud committed by or with the consent of the limited partner, the limited partner has no liability in respect of a contribution repaid or a commitment released by the LP.
Fund manager’s fiduciary duties
What are the fiduciary duties owed to a private equity fund formed in your jurisdiction and its third-party investors by that fund’s manager (or other similar control party or fiduciary) under the laws of your jurisdiction, and to what extent can those fiduciary duties be modified by agreement of the parties?
Where the fund is established as a limited partnership, the fund manager or the appointed person responsible for fund management will typically be the general partner. A general partner is required to act at all times in good faith and, subject to the anything agreed in the LPA to the contrary, in the interests of the partnership. Further responsibilities of the general partner may be agreed upon in the management agreement.
Where the fund is incorporated as a company, management duties will be performed by its directors, the appointed persons or both. Under statute, directors must:
- act honestly and in good faith and in what the director believes to be in the best interests of the company;
- exercise powers as directors for a proper purpose and not act in a manner that contravenes BVI company law or the company’s memorandum and articles; and
- exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances (taking into account, among other things, the nature of the company, the decision and the position and responsibilities of the director).
These statutory duties do not exclude any duties under common law and, as such, a director could be found liable for negligence, or for putting himself or herself in a position where his or her duties and own interests conflict. Where expressly permitted in the memorandum or articles of the company, the directors may act in the interests of its wholly owned parent company or, if not wholly owned, in the interests of any of its majority shareholder (provided it has the prior agreement of its other shareholders), even where such actions may not be in the best interest of the company.
Where the appointed persons are not the general partner or directors of the fund, such persons will not be subject to statutory fiduciary duties, but will be subject to any contractual requirements between such persons and the fund and any requirements imposed by any authority regulating such persons.
An appointed person (whether a director, partner or otherwise) is required to ensure that any BVI private investment fund it acts for has been recognised as a private investment fund under the Securities and Investment Business Act 2010 (SIBA). Any person acting in breach of this requirement may be liable to a penalty on summary conviction of US$40,000 and on indictment of US$75,000.
Both LPs and companies can indemnify their partners or directors, as relevant, for any judgments, claims or demands made against any partner or director in that capacity, provided that this does not extend to claims, in the case of LPs, arising out of the fraud or gross negligence of the partner and, for companies, where a director did not act honestly, in good faith and in what he or she believed to be the best interests of the company. The indemnity provisions will typically be set out in the LPA for LPs and in the articles for companies. There are no statutory limits on the indemnification of authorised persons acting in that capacity.
Does your jurisdiction recognise a ‘gross negligence’ (as opposed to ‘ordinary negligence’) standard of liability applicable to the management of a private equity fund?
It is common for a fund’s constitutional documents to include provisions limiting a director’s liability, except where gross negligence (or some other default) has occurred.
The LP Act states that indemnities for general partners will not extend to claims arising out of fraud or gross negligence of a partner. The term ‘gross negligence’ is left undefined and a conclusive definition of the distinction between the concepts of ‘gross’ and ‘ordinary’ negligence has not been arrived at by the BVI courts. In line with English case law, which has persuasive effect in the BVI, the courts will likely look to the intentions of the parties in referring to ‘gross’ as opposed to ‘ordinary’ negligence and will regard gross negligence as connoting negligence of a more serious type than a mere failure to exercise due care and skill.
Other special issues or requirements
Are there any other special issues or requirements particular to private equity fund vehicles formed in your jurisdiction? Is conversion or redomiciling to vehicles in your jurisdiction permitted? If so, in converting or redomiciling limited partnerships formed in other jurisdictions into limited partnerships in your jurisdiction, what are the most material terms that typically must be modified?
Redomiciling vehicles into the BVI is permitted for both companies and LPs, provided that this is permitted under the laws of the original jurisdiction. Redomiciliation into the BVI has no effect on the existing debts of, or claims against, the LP or company that existed prior to the redomiciliation. Similarly, BVI LPs and companies can redomicile out of the BVI, provided that this is permitted under the laws of jurisdiction to which the entity wishes to relocate.
The LPA, in the case of an LP, or the memorandum and articles, in the case of a company, will usually be amended upon redomiciliation to address BVI law. However, given the lack of special requirements in the BVI, this should not have any material effect on the commercial terms of the fund.
Redomiciling entities could submit their application for recognition prior to redomiciliation, to have effect upon redomiciliation, or after (benefiting from the grace period).
There is a default position for BVI companies that, other than by way of security or otherwise than in the ordinary course of business, any disposal of more than 50 per cent in value of the assets of the company requires majority shareholder approval. However, this requirement can be contracted out of under the fund’s constitutional documents or limited to votes of the managing entity. No such requirement applies to limited partnerships.
Valuations of fund property must be carried out in accordance with the fund’s valuation policy. Valuations must be conducted on an annual basis.
A BVI closed-ended fund must provide written notification to the FSC of any change in its place of business or any amendment to its constitutional documents, offering memorandum, term sheet or valuation policy. FSC guidance requires such notice to be provided within seven days of the change (although the PIF Regulations allow for 14 days). A fund must also notify the FSC of any changes to the safekeeping arrangements for the fund’s assets.
Fund sponsor bankruptcy or change of control
With respect to institutional sponsors of private equity funds organised in your jurisdiction, what are some of the primary legal and regulatory consequences and other key issues for the private equity fund and its general partner and investment adviser arising out of a bankruptcy, insolvency, change of control, restructuring or similar transaction of the private equity fund’s sponsor?
Subject to any conditions on each fund’s recognition by the FSC, there are no express consequences for a BVI private equity fund, its general partner or investment adviser arising out of a bankruptcy, insolvency, change of control, restructuring or similar transaction of the private equity fund’s sponsor. Where such an event results in a general partner resigning, or otherwise being replaced, a notice of change of general partner must be filed with the BVI Registrar within 14 days of a person ceasing to be, or becoming, a general partner in the limited partnership. Such person remains liable as a general partner of the partnership until this notice has been registered.
Where a change of control results in the need to replace an authorised person, the fund must inform the FSC within seven days of such appointed person ceasing to act, and provide the FSC with seven days’ prior notice of the appointment (unless a shorter period is accepted by the FSC) of any replacement.
The LPA (where the fund is structured as an LP) or the memorandum and articles (where the fund is structured as a company) should be consulted to determine any additional consequences specific to that fund.
Principal regulatory bodies
What are the principal regulatory bodies that would have authority over a private equity fund and its manager in your jurisdiction, and what are the regulators’ audit and inspection rights and managers’ regulatory reporting requirements to investors or regulators?
Prior to 2020, closed-ended funds were not regulated in the British Virgin Islands (BVI). On 31 December 2019, the BVI amended the Securities and Investment Business Act 2010 (SIBA) to bring ‘private investment funds’ into the scope of the regulatory regime. Private investment funds are defined as companies, partnerships, unit trusts or any other BVI bodies that:
- collect and pool investor funds for the purpose of collective investment and diversification of portfolio risk; and
- issue fund interests, which entitle the holder to receive an amount computed by reference to the value of a proportionate interest in the whole or in part of the assets of the entity.
For the purposes of this chapter, we have assumed that private equity funds will hold diversified assets and fall within the definition of private investment funds for the purposes of SIBA. Closed-ended entities that do not fall within the above definition will not be regulated under BVI law.
SIBA is the primary legislation regulating funds in the BVI and is monitored by the Financial Services Commission (FSC). SIBA is supplemented by regulations, including the Private Investment Funds Regulations.
Further regulations apply to open-ended funds. As private equity funds are typically closed-ended, this chapter focuses on closed-ended structures only.
As a BVI entity, a fund (whether open- or closed-ended), if structured as a company, will be registered with the BVI Registry of Corporate Affairs and its corporate affairs will be governed by the BVI Business Companies Act 2004 (as amended). BVI entities structured as an limited partnership (LP) will be registered with the BVI Registrar of Limited Partnerships and its corporate affairs will be governed by the Limited Partnership Act 2017 (the LP Act).
Regulator’s audit and inspection rights
The FSC is entitled to inspect the premises, business and assets of a BVI-recognised closed-ended fund, whether inside or outside of the BVI, in order to monitor compliance with applicable compliance legislation. The FSC may, upon request by such authority and subject to certain conditions, allow a foreign regulatory authority to participate in such inspections.
Fund and manager’s reporting requirements
Closed-ended funds are required to file audited financial statements with the FSC within six months after the financial year end (unless an extension not exceeding 15 months is approved by the FSC, or the fund has obtained an exemption from the requirement to produce audited accounts).
Where the manager is regulated in the BVI, there are additional reporting requirements.
What are the governmental approval, licensing or registration requirements applicable to a private equity fund in your jurisdiction? Does it make a difference whether there are significant investment activities in your jurisdiction?
Private investment funds incorporated in the BVI, or operating in or from within the BVI, may only carry on business if either:
- they are recognised by the FSC under SIBA; or
- they are exempt from the requirement to obtain recognition, as a result of an order published in the BVI Gazette.
As at the time of writing, no orders had been published exempting any funds, or class of funds, from the requirement to obtain recognition.
The FSC will recognise a fund as a private investment fund if:
- the fund is lawfully incorporated, registered, formed or organised (whether in the BVI or elsewhere);
- the constitutional documents of the funds specify that either it:
- is authorised to have no more than 50 investors;
- invites investors to subscribe for, or purchase, fund interests on a private basis only; or
- only issues fund interests to professional investors, each with a minimum initial investment of US$100,000;
- the fund meets the criteria specified in the Private Investment Fund Regulations (PIF Regulations);
- on recognition, the fund will be compliant with SIBA, the PIF Regulations and any practice directions applicable to the fund (of which, as at the time of writing, there is none); and
- recognising the fund will not be against the public interest.
The FSC may impose any conditions to the recognition of a particular fund as it considers appropriate.
Save as set out above, there are no additional licensing requirements where the fund invests within the BVI, save that:
- any non-belonger entity that wishes to invest in land within the BVI must first obtain a landholding licence;
- any significant investment into businesses regulated by the FSC (for instance, investment, insurance or fiduciary businesses) will often require FSC approval; and
- businesses that operate physically within the BVI will, unless regulated by the FSC, require a trade licence and will be subject to any particular terms attached to that licence.
Registration of investment adviser
Is a private equity fund’s manager, or any of its officers, directors or control persons, required to register as an investment adviser in your jurisdiction?
Where fund managers, advisers, administrators or appointed persons are established outside the BVI, they (and their directors and officers) will not normally need to be registered or licensed in the BVI, provided that they have no physical presence in the BVI, and the fund has no presence in the BVI save for its registered office and agent.
Where a manager, adviser, administrator or appointed person is either BVI-incorporated or physically operates within the BVI, such persons will normally be required to obtain an investment business licence under SIBA. Licensees under SIBA are subject to requirements to, among other things, file audited financial statements and seek approval from the FSC for any change in its directors, officers or significant interest holders, for any business carried on outside the BVI and any establishment of a subsidiary.
For BVI-incorporated investment managers or advisers, an alternative option to SIBA licensing is to register as an approved manager under the BVI Investment Business (Approved Managers) Regulations, which impose lighter requirements (including no requirement to appoint an auditor). The approved manager regime is available for BVI-incorporated investment managers or advisers to closed-ended funds whose aggregate assets under management do not exceed US$1 billion (or its equivalent in another currency).
Registration under either SIBA or the approved manager regime will require payment of an initial application fee and recurring annual fee.
Fund manager requirements
Are there any specific qualifications or other requirements imposed on a private equity fund’s manager, or any of its officers, directors or control persons, in your jurisdiction?
Fund managers established outside the BVI will not normally require registration or licensing in the BVI, provided they, and the funds they manage, have no physical presence in the BVI save for the fund’s registered office and agent. There are no specific qualifications or other requirements on such unlicensed managers.
Where managers are required to be licensed under SIBA or the approved manager regime, the FSC must find the licensee to be ‘fit and proper’ to carry out their roles, taking into account, among other things, their reputation, financial soundness, experience and past conduct. Licensees or approved managers must have at least two directors (neither of which are required to be based in the BVI) and must satisfy itself that its directors and officers are also ‘fit and proper’ for their roles. Managers licensed under SIBA, and who claim tax residency in the BVI, must further comply with economic substance requirements in the BVI, which require certain entities to show a suitable level of physical presence in the BVI for their core activities.
Where managers are licensed under SIBA, they are required to notify the FSC within 21 days of commencing to act as an investment manager of a closed- or open-ended fund.
Describe any rules – or policies of public pension plans or other governmental entities – in your jurisdiction that restrict, or require disclosure of, political contributions by a private equity fund’s manager or investment adviser or their employees.
There are currently no specific rules in the BVI that restrict, or require disclosure of, political contributions by a fund manager, investment adviser or their employees. The Elections Acts 1994 (as amended) empowers the government to regulate the financing of election campaigns; however, to date no such regulations have been brought into force.
Use of intermediaries and lobbyist registration
Describe any rules – or policies of public pension plans or other governmental entities – in your jurisdiction that restrict, or require disclosure by a private equity fund’s manager or investment adviser of, the engagement of placement agents, lobbyists or other intermediaries in the marketing of the fund to public pension plans and other governmental entities. Describe any rules that require a fund’s investment adviser or its employees and agents to register as lobbyists in the marketing of the fund to public pension plans and governmental entities.
There are currently no such rules applicable to BVI closed-ended funds.
Describe any legal or regulatory developments emerging from the recent global financial crisis that specifically affect banks with respect to investing in or sponsoring private equity funds.
There have been no specific developments in the BVI following the global financial crisis aimed at regulating banks’ investment into, or sponsoring of, private equity funds. In general, non-BVI banks would need to have regard to any applicable overseas legislation that restricts investment in private equity funds.
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? 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 (BVI) 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 BVI, 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 BVI, 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. Property tax may also be payable on any BVI land held by a fund.
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 is also payable on transfers of interests in BVI land-holding entities.
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, 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.
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, registration and annual fees may be payable on incorporation and recognition of the fund.
Special tax considerations
Describe briefly what special tax considerations, if any, apply with respect to a private equity fund’s sponsor.
Securities and Investment Business Act 2010 (SIBA)-licensed fund managers, which claim tax residency within the BVI, will fall within the BVI’s economic substance requirements. Such requirements were introduced during 2019 in response to EU and Organisation for Economic Co-operation and Development’s (OECD) concerns over cross-jurisdiction profit allocation and require certain businesses, including SIBA-licensed fund managers, to conduct their core income-generating activities within the BVI and to provide annual filings to evidence this fact.
Save as discussed above, 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, management fees can be paid by the fund to the manager as a service fee, rather than distribution as a profit share to the general partner.
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 and has adopted the 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.
Legal and regulatory restrictions
Describe the principal legal and regulatory restrictions on offers and sales of interests in private equity funds formed in your jurisdiction, including the type of investors to whom such funds (or private equity funds formed in other jurisdictions) may be offered without registration under applicable securities laws in your jurisdiction.
Interests in private investments funds must only be offered on a private basis.
Non-British Virgin Islands (BVI) funds that wish to actively solicit investors within the BVI, or otherwise wish to operate in or within the BVI, must also seek recognition from the Financial Services Commission (FSC).
Types of investor
Describe any restrictions on the types of investors that may participate in private equity funds formed in your jurisdiction (other than those imposed by applicable securities laws described above).
In order to be recognised by the FSC, BVI private investment funds must either:
- be authorised to have no more than 50 investors;
- invite investors to subscribe for, or purchase, fund interests on a private basis only; or
- only issue fund interests to professional investors, each with a minimum initial investment of US$100,000 (or the equivalent in any other currency and subject to certain exemptions to be outlined by the FSC).
The fund’s constitutional documents must specify which of these restrictions apply to the fund.
Invitations made on a private basis include invitations that are made:
- to specified persons, not designed to result in fund Interests becoming available to other persons or to a large number of persons; or
- by reason of a private or business connection between the person making the invitation and the investor.
Professional investors are persons:
- whose ordinary business involves acquiring or disposing of the same type of property as (or as a substantial part of the property) held by the fund (whether for their own account or the account of others); or
- who, individually or jointly with their spouse, have a net worth in excess of US$1 million (or the equivalent in any other currency) (and has provided written confirmation of such fact) and consents to being treated as a professional investor.
Identity of investors
Does your jurisdiction require any ongoing filings with, or notifications to, regulators regarding the identity of investors in private equity funds (including by virtue of transfers of fund interests) or regarding the change in the composition of ownership, management or control of the fund or the manager?
Following any transfer of interests which result in any change in the beneficial owner of a fund (being persons who ultimately own or control more than 25 per cent of an entity), the centralised beneficial ownership system will need to be updated by the fund’s registered agent.
Further, if the fund is a reportable entity for the purpose of US Foreign Account Tax Compliance Act or the OECD Common Reporting Standards, such fund will be required update its filings to the relevant tax authorities.
Upon any changes to the directors, authorised representatives or auditor of a closed-ended fund, the FSC must be informed within 14 days and, in the case of directors only, an updated register of directors must be filed with the BVI Registrar. A fund must inform the FSC within seven days of any appointed person ceasing to act and provide the FSC with seven days’ prior notice of the appointment (unless a shorter period is accepted by the FSC) of any replacement.
Where any appointed person, investment manager, adviser, administrator is licensed under the Securities and Investment Business Act 2010 (SIBA), prior approval of the FSC must be sought for any change in directors or senior officers of, and any disposal or charge of any ‘significant’ interest in, the licensee. A ‘significant interest’ is any interest that allows a person to control 10 per cent of the voting or asset rights or to appoint one or more directors. Entities registered as ‘approved managers’ must notify the FSC of any changes in directors or interest holders.
Licences and registrations
Does your jurisdiction require that the person offering interests in a private equity fund have any licences or registrations?
An entity that arranges deals in, or provides advice regarding, investments in a BVI closed-ended fund will need to be registered under SIBA only if the promoting entity is established in the BVI or operates in or from within the BVI.
No person, including the fund itself, shall promote a private investment fund in or from within the BVI unless either:
- the fund is recognised by the FSC as a private investment fund (subject to the grace period); or
- the communication or advice is exempted by the Private Investment Funds Regulations (no such exempted communication having been specified to date).
Persons acting in breach of this requirement may be subject to a penalty on summary conviction of US$40,000 (for companies) or US$25,000 (for individuals) and on indictment of US$50,000 (for companies) or US$30,000 (for individuals).
Describe any money laundering rules or other regulations applicable in your jurisdiction requiring due diligence, record keeping or disclosure of the identities of (or other related information about) the investors in a private equity fund or the individual members of the sponsor.
The BVI has adopted money laundering regulations in line with the Financial Action Task Force standards. All BVI entities (including closed-ended funds) will be required to comply with the BVI Proceeds of Criminal Conduct Act, which sets out the key money laundering offences, including assisting in concealing criminal proceeds and failing to report suspicions.
As of 31 December 2019, the BVI Anti-Money Laundering Regulations 2008 and the Anti-Money Laundering and Terrorist Financing Code of Practice 2008 (together the AML Regulations) were extended to capture BVI closed-ended funds. The AML Regulations prescribe additional compliance requirements, including identification and verification procedures for investors and any significant ultimate beneficial owners of the sponsor, the maintaining of records, compliance manuals, registers and reports, staff training and penalties for non-compliance. Closed-ended funds are now required to appoint a money laundering reporting officer who will be responsible for ensuring that any incidents of suspicious activity are reported to the BVI Financial Investigation Authority.
Are private equity funds able to list on a securities exchange in your jurisdiction and, if so, is this customary? What are the principal initial and ongoing requirements for listing? What are the advantages and disadvantages of a listing?
There is currently no securities exchange operating within the BVI. Owing to the restrictions on public offerings of interests in private investment funds since 31 December 2019, a public listing would be unlikely to be suitable for a British Virgin Islands (BVI)-regulated closed-ended fund.
Restriction on transfers of interest
To what extent can a listed fund restrict transfers of its interests?
There is nothing under BVI law that would prohibit a fund from imposing transfer restrictions. Nevertheless, owing to the restrictions on public offerings of interests in private investment funds since 31 December 2019, a public listing would be unlikely to be suitable for a BVI-regulated closed-ended fund.
Legal and regulatory restrictions
Are funds formed in your jurisdiction subject to any legal or regulatory restrictions that affect their participation in private equity transactions or otherwise affect the structuring of private equity transactions completed inside or outside your jurisdiction?
There are no such restrictions.
Compensation and profit-sharing
Describe any legal or regulatory issues that would affect the structuring of the sponsor’s compensation and profit-sharing arrangements with respect to the fund and, specifically, anything that could affect the sponsor’s ability to take management fees, transaction fees and a carried interest (or other form of profit share) from the fund.
There are no specific legal or regulatory restrictions in the British Virgin Islands on the sponsor’s ability to take management fees, transaction fees, a carried interest or any other form of profit share from the fund. Such abilities will normally be governed by the terms of the fund and any restrictions in relevant onshore jurisdictions.
Key developments of the past year
What are the most significant recent trends and developments relating to private equity funds in your jurisdiction? What impact do you expect such trends and developments will have on global private equity fundraising and on private equity funds generally?
The Business Companies (Amendment) Act (BC Amendments) and the Business Companies (Amendment) Regulations 2022 (BC Regulations) came into force on 1 January 2023. The BC Amendments and the BC Regulations provided a number of reforms to the Business Companies Act 2004 (as amended), including a requirement for all BVI companies to file the names of the directors of the company with the Registrar of Corporate Affairs, which will enable users of the BVI VIRRGIN service to access the names of directors for a search fee. The names of directors who have resigned at the time of the search will not show on the public list of that company’s directors. Further, the BC Amendments and the BC Regulations will require BVI companies to file an annual financial return with the company’s registered agent. The filing will be due within nine months of the end of the company’s financial year.
*First published in The Lexology Private Equity (Fund Formation): Global overview 2023.