Setting up an offshore company is always preceded by choosing a suitable jurisdiction. Two perhaps the most popular offshore jurisdictions right now are Seychelles and the British Virgin Islands (BVI). They have very much in common, but at the same time have some differences that can affect your final choice. Here you will learn about main specifics, advantages and shortcomings of the said jurisdictions.
Geographically, both countries are almost equally distant from Europe or the CIS. Seychelles is an island country in the Indian Ocean, and the British Virgin Islands – in the Caribbean (therefore the BVI are much closer to the United States).
When choosing a “classic” offshore jurisdiction the factor of its location or ease of travel is usually irrelevant or is not given much attention. Offshore companies being entirely intended for international business are virtually not bound to their country of incorporation, except for a registered office address and a registered agent who performs necessary formalities for the company before the local registration authority.
Some changes in this field have occurred just recently (in 2018 – 2019), when “economic substance” requirements have been introduced for companies engaged in certain activities (which we will discuss below). If your business does not fall under such requirements, then the geographical location of a jurisdiction will not matter to you.
In the terms of international law, the status of the two countries is not the same. Where the Republic of Seychelles is an independent state, the British Virgin Islands, by contrast, is a British Overseas Territory. We should dwell on this feature of the BVI.
The status of an Overseas Territory means that the BVI are formally under the sovereignty of the United Kingdom, but enjoy the widest possible self-government, in particular, have their own corporate laws and tax regime.
This raises two questions: 1) how real is the influence of the UK on the BVIs’ affairs and 2) whether belonging to the UK is an advantage of this territory when it comes to registering a business?
The answer to the first question has been obvious until recently. For more than half a century, the influence of the UK central government declined, while the degree of independence of the Islands increased. However, in recent years, the opposite “messages” have appeared.
For example, in 2018 the United Kingdom exerted its authority over the Overseas Territories, despite objections from the latter, particularly in relation to their low-tax regimes. The UK actually compelled its Crown Dependencies and Overseas Territories, including the BVI, to start developing registers of beneficial owners of companies incorporated there.
The result is that the BVI company beneficiaries register exists, although is not yet public and can only be accessed by the local regulator, court or law enforcement agencies. Not satisfied with this, the UK is now working with the BVI to establish public access to information from the register.
It should be noted that almost any information from the BVI is already available to the British competent authorities. There is an Agreement between Governments of the UK and the BVI for the exchange of information related to taxes (2008), and the BVI must provide the required information held by local registered agents or public authorities upon request from the United Kingdom.
And here is the news, which appeared at the time of writing this article: the British Virgin Islands, subject to some reservations, have confirmed their commitment to make the information on beneficiaries accessible to public by 2023 (the relevant press release was published on 22 September 2020 on the BVI Government’s website).
The second question is what advantages brings the BVIs’ affiliation with the UK? One of apparent advantages for business is the English law on which the BVI legal system is based. It is convenient in organizing corporate and contract relationships, as well as in resolution of disputes. The court of final appeal in the BVI court system is the Judicial Committee of the Privy Council of the UK.
On the other hand, the British Virgin Islands in some cases have to follow not only the English law, but also the EU standards, which the UK continues to adhere to despite Brexit (in particular this applies to tax transparency and anti-money laundering Directives).
Seychelles, as opposed to the BVI, have full sovereignty. This means that the country, when determining its policy and legislation, does not depend on the will of any other state or supranational body.Seychelles have historical ties with the UK as well, but merely in the form of membership in the Commonwealth, which does not fundamentally affect legislative or tax policy.
The independence, of course, does not mean that the country is never criticized by international organizations such as OECD or the EU or even by single countries, concerning its tax regime or AML/CFT legal framework. In the globalized world such an influence is inevitable, and relevant reforms are important to improve the country’s competitiveness as an international financial center.
Seychelles is characterized by political and economic stability, and in recent years this jurisdiction is becoming more and more popular against the background of its “competitors”. Thanks to the reforms of recent years, the Seychelles are step by step getting rid of the image of an offshore zone, while maintaining and developing the most important advantages for international business, including tax ones.
Corporate services industry
Speaking of an offshore company incorporation, we should mention the local corporate and trust services industry. If only because every company must by law have a local registered agent and a registered office.
There are over 60 licensed registered agents (corporate service providers) in Seychelles, while only 22 of them hold a trustee services license, and 18 – a foundation services license. The state regulator is the Financial Services Authority (FSA). The number of law firms is relatively small. 9 local banks operate in the country.
In the BVI the industry exists historically longer (since 1984) and therefore is wider – around 100 registered agents and more than 50 law firms (including offices of international legal and audit companies) offer their services. The state regulator is the Financial Services Commission (FSC). Only 7 banks are licensed in the BVI.
The main product
Now about the main product of the corporate services sector offered in each of the countries, and the principle of taxation of its profits.
The main corporate vehicle of the British Virgin Islands is a Business Company (BC). This status is common both for companies operating in the local market and companies carrying out their business only outside the Islands. BVI BCs do not pay taxes, except for the annual fee to renew their active status in the register.
In Seychelles the main product is an International Business Company (IBC), governed by the IBC Act, 2016. This is a special status distinguishing international (“offshore”) companies from local companies established under the Companies Ordinance, 1972 designed to operate in the domestic market. Profit of such local (not IBC) companies is subject to normal taxation on a progressive scale: 25% for the first million SCR and 33% for excess amounts.
Seychellois IBCs do not pay any taxes unless their income is derived from sources in Seychelles. In other words, Seychelles now have a territorial tax system, not a purely tax-free regime. If all the company’s income was received outside the jurisdiction (which is the case nearly always), such income is not subject to taxation in Seychelles. The only payment charged by the government is a small annual fee to renew the company in the register.
It is noteworthy that despite being exempt from tax in countries of incorporation, profits of offshore companies may be subject to tax in the country of source of their income or in the country where a company actually operates or in the country where the company’s controlling person is resident for tax purposes (provided that such a country has legislation on controlled foreign companies).
Both BVI and Seychelles companies may carry out any lawful business and enter into any transactions. Some activities (primarily – financial services) require a license. While Seychelles IBCs from 2019 may operate not only outside but also within Seychelles.
A special issue when setting up a company is the availability of its name, since company names should not be duplicated in the register. As far as the International Business Companies’ regime in Seychelles is a bit “younger” than its BVIs’ equivalent, there is a greater chance that the name proposed for preliminary check will be available in Seychelles.
The obvious advantage of Seychelles companies compared to BVI ones is the lower cost of incorporation and annual renewal, and generally cheaper maintenance.
Besides companies, BVI provides for registration of limited partnerships under the Limited Partnership Act, 2017, as well as special trusts under the Virgin Islands Special Trusts Act, 2003 (known as VISTA).
Seychelles provides an opportunity to establish international trusts under the International Trusts Act, 1994, and private foundations under the Foundations Act, 2009 (these foundations have a status of a separate legal entity). The said vehicles may be used for various purposes, including international corporate structuring, asset protection and management, ensuring the desired order of succession.
Economic substance requirements
“Economic substance” or presence in the country of incorporation is a requirement to companies with certain activities that already exists in a number of low-tax jurisdictions. Such companies must be managed from the territory of the country of incorporation, maintain personnel and assets there, as well as bear expenses adequate to the type and scale of their business.
From this perspective, the difference between the two jurisdictions is quite significant.
In the BVI the Economic Substance (Companies and Limited Partnerships) Act, 2018 is in force.The Act covers BVI companies engaged in banking, distribution and service center business, insurance, fund management business, finance or leasing business, headquarters business, shipping, intellectual property business. To continue such activities in compliance with the law, the companies must be present in the BVI not only legally (as an entry in the company register), but also economically.
The BVI companies must report activities that fall within the economic substance requirements and disclose the related information as prescribed by law. Failure to comply with economic substance requirements carries penalties ranging from fines and company strike off to imprisonment of persons responsible for the violation.
In Seychelles, unlike the BVI, there is currently no legislation on economic substance of a broad scope. For the moment, substantial activity requirements are provided only for companies licensed under the Securities Act, 2007 and the Mutual Fund and Hedge Fund Act, 2008.
Thus, for ordinary Seychelles companies (IBCs) there is no requirement to be economically present in the jurisdiction, and accordingly, there is no additional compliance burden, reporting and penalties deriving from this. However, this does not mean that the situation cannot change in future.
Tax treaty network
For the BVI, double tax treaties do not play a significant role as there is no corporate taxation. For example, there is an Agreement for avoidance of double taxation with respect to taxes on income between the UK and the BVI, however it applies only to individuals. At the same time, the BVI have around 20 tax information exchange agreements (TIEA) and participate (through the UK) in the Convention on Mutual Administrative Assistance in Tax Matters.
The Republic of Seychelles entered into double taxation treaties with 28 countries including those playing significant role in the international trade – China, Malaysia, Indonesia, Singapore, South Africa, Kenia, Cyprus, Luxembourg and others. Besides this, Seychelles participate in 11 tax information exchange agreements and in the mentioned Convention on Mutual Administrative Assistance in Tax Matters.
Being tax-free jurisdictions, both the BVI and Seychelles are periodically included in the so-called “blacklists” issued by separate countries or their associations.
For example, in October 2020 Seychelles are listed in the well-known European Union’s list of “non-cooperative” tax jurisdictions. The country has been included into the list in February 2020 only due to the fact that, in the opinion of the EU financial authorities, it was unable to implement the recommended measures in a timely manner.
|Blacklists (for October 2020)||OECD||FATF||EU|
|British Virgin Islands||No||No||No|
Summarizing the above, both jurisdictions reviewed are similar in many ways. Companies of both countries are widely used around the world and remain to be essential vehicle in international business. They are almost equally characterized by:
- modern and advanced corporate law;
- simple incorporation and renewal of companies;
- no corporate taxation;
- no requirements to file financial statements and carry out an audit (with the simultaneous obligation to keep accounting records);
- non-public beneficial ownership information;
- participation in automatic exchange of financial information (CRS), as well as bilateral exchange of tax information upon request;
- option of redomiciliation, i.e. transfer of a company from one jurisdiction to another to continue operations.
Which country to choose when setting up an offshore company?
If you value the affiliation with the UK and the English law, maximum transparency in interaction with the EU and longer history of the offshore industry, you may decide in favor of the British Virgin Islands.
But if you need low cost of company incorporation and renewal, moderate regulatory requirements and independence from supranational regulation, Seychelles will definitely be the best choice.