Offshore Asset Protection
A fresh look at offshore techniques in conjunction with recent developments in law relating to fraudulent transfer in the Isle of Man
by Charles A. Cain
For some years, the favoured mechanism of Asset Protection vehicles, that is to say, vehicles for the protection of the assets of US persons from litigious creditors, has been the offshore trust. Indeed, it had almost reached the point where nothing else was ever mentioned, in spite of the fact that there always have been a variety of mechanisms available.
The original reason for this was a tax reason. At that time, and indeed, still today, the objective was to establish a vehicle into which assets could be placed which
· protected the assets from attack through the US judicial system
· would be able to make the assets available, if necessary, to the client and/or his family
· would at worst be entirely tax neutral and at best enable routine Estate Tax planning to be done.
To achieve the first objective was comparatively simple - just get the assets out of the USA into a jurisdiction which had no Reciprocal Enforcement of Judgements Agreement1.
The actual holding mechanisms available then had to be selected.
At that time, the Limited Liability Company (LLC) was not available. In addition, the older classification rules of the IRS were still in force, and had not been replaced by the Check-the-Box Regulations, which were introduced in 19972.
All offshore Corporate forms were, as a consequence, ruled out because an overseas holding corporation would have been a Controlled Foreign Corporation3. Quite apart from the enhanced reporting requirements implicit in a Controlled Foreign Corporation (CFC) with Sub-Part F income, a Foreign Personal Holding Company (FPHC)4, a Passive Foreign Investment Company (PFIC)5 and the other implications of being caught up in Prof. Harvey Dale’s renowned five armed Pentapuss (now six-armed with the addition of the PFIC), there is a distinct penalty provision in relation to Basis step-up for Capital Gains Tax, derived from the rules in IRC s.1246(e) and 1291(e). The tax consequences of using a CFC for asset protection were therefore prohibitive.
The Limited Partnership was another vehicle which was used extensively inside the USA, but in those days, few offshore jurisdictions had them, although they have been in the statute book in the Isle of Man since 1909 (Partnership Act, 1909).
Many US Practitioners then looked at Trusts for Asset Protection. They found that there was a rich tradition of Trusts being used for ‘Asset Protection’ in a more general sense - indeed, there is scarcely any other purpose for a Trust.
For tax purposes, they were brilliant, since a trust established by a US person which he was also capable of benefiting from was a Grantor Trust6, and therefore entirely transparent for income and capital gains tax purposes. Thus the offshore trust was tax neutral, but was still capable of being structured for basic estate tax planning.
There were, of course, some drawbacks. Firstly, the establishment of a foreign trust, even though a Grantor Trust, led to enhanced reporting. This could, in theory be cured, by making the trust a domestic trust. This could be done by providing as a joint trustee, a US trustee, and by ensuring that the provisions of IRC s. 7701(a)(30) were met. The trustee would resign the moment the heat was turned up, but until that time it could be argued that the trust to argue was a US domestic trust for tax purposes, notwithstanding that the proper law was overseas, as were the assets, and the actual management of those assets.
The second drawback was the desirability of having a holding company below the trust. Such a company immediately plunged the structure back into the CFC problem. There were three solutions to these CFC problems. Either the assets were transferred direct into a bank ‘street’ name or nominee company. Or, they were held in a US corporation, which because of the tax attribution back to the Grantor, could be a transparent S-corporation7, or, thirdly, the assets were held in a foreign corporation which, although owned by the Trustee, was arguably a nominee company, relying on the decision in Commissioner v Bollinger 108 S.Ct 1173(1988).
None of these was very satisfactory. Not all assets can be held in a “street name”. The use of a US S-corporation immediately brought the ownership of the assets back into the USA, where they could be frozen and/or sequestrated. But the use of a nominee company correctly made it impossible to use the company as a mechanism for the day-to day management of the assets by the client.
The problem remained until the advent of the offshore LLC, which, by being classified as a partnership8 instead of a corporation enabled the Tax Transparent trust to have a Tax Transparent LLC beneath it, with the client as Manager of the LLC.
There were also other problems derived from the fundamental character of trust law itself, and from the so-called ‘Statute of Elizabeth’9. The most serious problem of all was perceived to be the issue of fraudulent transfer, and this still remains the biggest problem for a foreign trustee.
Under normal English Common Law principles, the principles set out in the so-called Statute of Elizabeth (Fraudulent Conveyances Act 1571 (13 Eliz I Cap 5) are now contained in the UK’s Insolvency Act 1986) have been adopted in one way or another by every country which looks to England for the source of its law (in the USA, the Uniform Fraudulent Transfer Act 1984). This is not, technically, a matter of trust law, but is a matter of bankruptcy law. Where a person effects a transfer to a trust with the intent to defeat any future creditor, the transfer can be set aside and the trust declared void.
Virtually every jurisdiction which had adequate equity-based trust law (anything else was and is far too risky in terms of dealing with the unknown) had also absorbed the principles of the Fraudulent Conveyances Act 1571 (13 Eliz I Cap 5).
There is one jurisdiction, however, which while being an absolutely traditional Common Law jurisdiction, has never been afflicted by the problems thrown up by the Statute of Elizabeth.
In the Isle of Man there was considerable uncertainty concerning fraudulent transfer, and, in consequence, after a promising start in the Asset Protection business, the Isle of Man fell by the wayside. But, in 1999 came the case of Re Heginbotham’s Petition 199910. In that case, it was determined that the Statute of Elizabeth had never been accepted into Manx law. Different Manx legislation applied, and in consequence Asset Protection Trusts or other structures established in the Isle of Man are now safe, provided that, at the time of establishment, the Settlor was solvent, was able to meet all his known and ascertainable creditors, and had no intent to defraud creditors. We shall examine this case in a little more depth later on.
Elsewhere, the Asset Protection Trust has been running into problems, largely derived from the equitable character of trust law, and the extreme reluctance of the courts to allow an equitable remedy to be used to deny equity to another party. Notwithstanding aggressive legislation in certain jurisdictions (which has caused some commentators to wonder whether trust law now actually exists in such jurisdictions, have been replaced entirely by bailments14, the courts have shown a determination to uphold basic rules of equity.
In consequence, we have the excitements of the Orange Grove11 case in the Cook Islands, the Lawrence case12 and the more recent Anderson case13, where the settlor went to prison for contempt for failing to return the funds to the USA. Effectively, the trusts were treated as bailments.
As all this was happening, there were changes to the law too. In August 1996, the USA enacted the Small Business Jobs Protection Act 1996, which, under the wing of a fairly innocuous piece of social security legislation, fundamentally altered the tax rules relating to foreign Grantor Trusts. As far as Asset Protection Trusts are concerned, it abolished the charade of the foreign trust being a ‘US Trust’ for tax purposes, and thereby forced the reporting regime for foreign trusts on all offshore Asset Protection Trusts. It also greatly enhanced that reporting regime, including a requirement on the offshore trustee to provide information, and appoint an agent in the USA for that purpose. This latter has caused real difficulties in situations where there are beneficiaries resident outside, as well as inside the US tax net.
Finally, the Check-the-Box Regulations2 that came into force on 1st January 1997, changed the whole classification mechanism for entities, and thus the arguments that had been stitched together in favour of the use of the offshore Asset Protection Trust all came apart.
Let us go back to first principles. We need to park assets offshore into an entity which is both transparent for tax purposes, and which provides substantial asset protection capability. We now know that the trust is subject to many difficulties, but these do not afflict the LLC. A properly designed LLC can provide tax transparency, as well as powerful Asset Protection features, which are not vulnerable to shifting sands of trust law.
The offshore LLC, though, has its limitations. It cannot be used to do Estate Tax planning in the USA. It cannot cope with complex family inheritance issues. For such matters, a trust is needed. Such a trust, however, does not need to be offshore – it can easily be established in the USA itself, in a suitable state, as a domestic trust. Since the Asset Protection planning is being done in the offshore LLC, the domestic trust need not concern itself with asset protection. Thus, the preferred solution now is a domestic trust in which all the estate tax planning is effected, and, below it, an appropriately designed LLC, in which all the asset protection planning is done.
In the Isle of Man, the LLC is a legal entity created under the Limited Liability Companies Act 1996. It is not a Trust. No US court will have jurisdiction. Only the Isle of Man Courts have jurisdiction. An order made by a US court requiring the US Client to instruct the overseas Trustee to instruct the LLC to distribute the assets will not be enforced in the Isle of Man15.
There are three members of such an LLC. The US person will have a 99.9% interest, and two offshore members will have (genuinely and beneficially) an 0.01% interest between them (there are no de minimis rules.) All decisions have to be made unanimously.
The parties attacking the US Client will first have to demolish the US domestic trust. After that, they will have to take the action to the Isle of Man courts15, and endeavour to obtain a charging order over the US Client’s beneficial Interest. But that will achieve nothing, since they cannot obtain any access to funds in the LLC, while now having a tax liability commensurate with their 99.9% interest16. This means that no transferee can force a distribution. He can only wait until the members unanimously decide to make a distribution. This could be never.
Furthermore, in consequence of the decision in Re the Petition of Christopher Jollian Heginbotham 199910, the transfer to the LLC cannot be attacked, even though the trust may have been set aside in the USA. Asset Protection LLCs established in the Isle of Man are now safe in Manx law, provided that, at the time of establishment, the Settlor was solvent, was able to meet all his known and ascertainable creditors, and had no intent to defraud creditors.
For many years, there has been considerable uncertainty in the Isle of Man relating to the law of fraudulent transfer. This arose because the Isle of Man, as a jurisdiction is, and always has been separate and distinct from that of England, and thus English law was never ‘received’ in the same way as, for example, it was received into former English colonies, including the USA. The infamous ‘Statute of Elizabeth’, or more properly, the English Fraudulent Conveyances Act 1571 (13 Eliz I Cap 5) was never adopted in the Isle of Man. The earliest legislation on the subject in the Isle of Man is the Fraudulent Assignments Act 1736 of which, today, just one section remains in force. This reads as follows:
“(4) And that all fraudulent Assignments or Transffers [sic] of the Debtor’s Goods of Effects shall be void and of no effect against his just Creditors, any Custome or Practice to the contrary notwithstanding.”
The only other reference in Manx legislation is to found in the The Bankruptcy Code 1892.
Section 30 of that Act reads:
“Avoidance of voluntary Settlements
(1) Any Settlement of property, not being a settlement made before and in consideration of marriage, or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration, or a settlement made on or for the wife and children of the settlor of property which has accrued to the settlor after marriage in right of his wife, shall, if the settlor becomes bankrupt within two years after the date of settlement, be void against the trustee1, and shall if the settlor becomes bankrupt at any subsequent time within ten years after the date of the settlement, be void against the trustee 17 unless the parties claiming under the settlement can prove that the settlor was at the time of making the settlement able to pay all his debts without the aid of the property comprised in the settlement, and that the interest of the settlor had passed to the trustee of such settlement on the execution thereof.
(2) .........
(3) ‘Settlement’ shall for the purposes of this section, include any conveyance or transfer of property.”
Thus the whole situation relating to future creditors, (i.e. creditors not existing or being ascertainable at the time of the settlement is effected and arising subsequent to such a settlement having been made) was unknown.
This is of great significance because the Isle of Man was one of the pioneer jurisdictions for asset protection trusts, but fell by the wayside because of uncertainty on this point. In addition, the Isle of Man turned its face against the type of ‘debtor’ protection legislation as was adopted in many other jurisdictions, to the extent that the Isle of Man does not even feature on a list of jurisdictions favored for asset protection work.
However, as a result of the judgement in Re the Petition of Christopher Jollian Heginbotham 199910, the uncertaint has been resolved. The note of the Editor of the International Trust and Estate Law Reports 18 (Philip Baker) states:-
“The issue decided by this case had not previously been settled in Isle of Man jurisprudence. The issue is of relevance because the Isle of Man has eschewed specific asset protection legislation. This case now establishes (subject to any contrary decision of a higher court) that a transfer of asset to a trust, for example, cannot be set aside at the instance of creditors whose debts were not known and ascertained at the time of the transfer. Thus so long as the transferor is not in a ‘state of insolvency’ at the time of the transfer - that is, he can pay all his known and ascertained debts, including those falling due on a future date - the transfer cannot be set aside.
This case also confirms the general principle that a trust, bona fide established by a person who is not insolvent, is a perfectly good asset protection arrangement. In some instances, the use of a trust in a territory with strong asset protection legislation - such as in the Cook islands - is an indication that the transferor was not bona fide or knew of future debts he wished to avoid. On the outcome of creating an asset protection trust under such a regime, see FTC v Affordable Media 2ITELR 73.”
The case was a petition under the Fraudulent Transfers Act 1736 for an order that the petitioner could enforce a judgement against two Isle of Man companies. The Petitioner, a local Estate Agent (Realtor), Mr A, had sold out to a Purchaser, Mr W. The deal was structured so that the business was transferred to a new company, A Ltd, which was owned by Mr W. Because of local legislation, an Estate Agency business must have a qualified person in management. Mr A was so qualified. Mr W was not. Therefore, the services of Mr A were retained as a director of A Ltd.
There was a disagreement between Mr A and Mr W, and the terms of the agreement were not carried out. Mr W, needing a qualified person, did a deal with Mr M, who was so qualified. Part of the business was transferred into one of the companies; the other part, which required a qualified person to be involved, was transferred to the second company with which Mr M was associated.
Mr A obtained a judgement for specific performance of the agreement, but was unable to enforce it against A Ltd, since the asset had been transferred out of A Ltd to the two new companies. Mr A petitioned under the Fraudulent Assignments Act 1736 to have the transfers set aside as fraudulent transfers.
The Deemster (as a High Court Judge is called in the Isle of Man) rejected the Petition.
HELD
(1) For the 1736 Act to apply, there must be an intent to defraud creditors. This intent applies only to present debts, not contingent or future debts which may never materialise. Present debts include known and ascertained debts which are to fall due on a date in the future.
(2) At the time of the transfers to the two companies, the petitioner had not yet served his defence and counterclaim to the action. The judgement debt was not therefore a present debt. The transfers were bona fide and not contrived to defraud creditors.
The Deemster considered the implications of the ‘Statute of Elizabeth’ and the Fraudulent Assignments Act 1736 at great length. This included a judgement of the Judicial Committee of the Privy Council of 1859. He also considered the ‘obiter dicta’ of Deemster Kneen in the unreported case of Re Corrin’s bankruptcy (1908)19, which those who have followed the Isle of Man’s law in this area will be aware of.
What does all this mean in practice. It means that Asset Protection Trusts or LLCs established in the Isle of Man are now safe in Manx law, provided that, at the time of establishment, the Settlor was solvent, was able to meet all his known and ascertainable creditors, and had no intent to defraud creditors.
The conclusion of this is that the options for asset protection planning have substantially changed in the last year or two. There is now more choice, not less. For would be fraudsters, the options have diminished, For everyone else, the options have expanded.
1 Very few jurisdictions doing substantial offshore business have such agreements with the USA. Very few are subject to the Brussels and Lugano Conventions on the Reciprocal Enforcement of Judgements nor the Rome Convention on applicable contract law. See also note 15, infra.
2 Treas.Reg 301.770 as amended and in force January 1, 1997
3 Internal Rev Code, s.957
4 Internal Rev Code, s.552
5 Internal Rev Code, s.1296
6 Internal Rev Code, s.671 through 679
7 Internal Rev Code, s.1361. The prohibition of a Non Resident Alien from being a shareholder in an S-Corporation was ended in 1982, P.L. 97-354 §2.
8 Under the previous classification regulations, an LLC failed, by design, to meet the definitions of a corporation set out in the former Treas. Reg 301.7701 – 1(a)(i) but this was changed by the new Regs adopted on January 1 1997 (the Check-the-box Regulations). An LLC is now be a default corporation, because all its members have limited liability, (Treas.Reg 301.7701-3(b)(2)(B)) but it can make a one-off election by filing Form 8832 to be treated as a Partnership, and thus obtain transparency (Treas. Reg 301-7701-3(c)(1)).
9. Fraudulent Conveyances Act 1571 (13 Eliz I Cap 5)
10. Re the Petition of Christopher Jollian Heginbotham 1999 2ITELR 95
11. 515 South Orange Grove Owners Association and Others v. Orange Grove Partners and others (No.1) (1995) CA 1/95 and CA 1./96, Cook Islands, and 515 South Orange Grove Owners Association and Others v. Orange Grove Partners and others (No.2) (1997/98) 1 OFLR3)
12 Re Stephan Jay Lawrence, Debtor, Case no 97-14687, BKC-AJC-Chapter 7, 2ITELR283
13 Federal Trade Commission v Affordable Media LLC, Denyse Anderson and Michael Anderson, Case no 98-16378, US Ct of Appeals 9th Circuit, 2 ITELR 73
14 A bailment is a relationship created when there is no intention on the part of the baillor (equivalent to the settlor) to lose control. (cf. handing a coat into a hotel cloakroom for safe keeping.) See Clough Mill Ltd v. Martin - Court of Appeal [1948] 3 All E.R. 982
15 There is no Reciprocal Enforcement of Judgement Agreement between the Isle of Man and the USA. In the Isle of Man, the Judgements (Reciprocal Enforcement) (Isle of Man) Act 1968 provides for reciprocal agreements, but there has never been such an agreement with the USA.
16 The LLC has filed Form 8832 and elected to be taxed as a partnership. As a consequence, the income and gains of the LLC is attributed directly to the Members. If a Members’ interest is taken over by a successor, so also is the tax liability, irrespective of whether actual distributions are being made by the LLC.
17 Trustee in bankruptcy.
18 Published by Butterworths, London UK. In the USA available from Lexis Law Publishing, Charlottesville, Virginia ISSN 1464-7125.
19 Re Corin Bankruptcy, Kermode Trustee of Corin’s bankruptcy v Craig (1908), see Asset Protection Trusts – Grundy, Briggs & Field, 3rd Edition, at p.12 (ISBN 1 870070 80 1)
Wednesday, May 19, 2004
Finally, the BVI legislature has approved and released the much awaited provisions dealing with the immobilization of Bearer Shares and the definition of a Custodian that is incidental to the restrictive use of bearer shares. As expected, the Bearer Shares changes came as an amendment to the BVI International Business Company Law. The Custodian legislation came as a modification to the Financial Services Commission Act.
Although some of these provisions are yet to formally be made public in the BVI Gazette, such publication is expected in the coming weeks. Below is a summary of the most relevant aspects, for your reference:
1. INTERNATIONAL BUSINESS COMPANIES (AMENDMENT) ACT, 2004.
Amendments to the International Business Companies (IBCs) will ultimately require that all bearer shares in BVI IBCs be held by a custodian and thus immobilized. Companies formed after 1 January 2005 must comply with these requirements from their date of formation. Alternatively, BVI IBCs may be issued with registered shares.
However, Section 2 of the International Business Companies Act is amended to move back the deadline for the immobilization of bearer shares that are in existence prior to 1 January 2005, from the initially proposed date of 31 December 2004, to 31 December 2010. Thus, you will not need to be concerned about the restrictions on bearer shares for those companies formed previously, and up to 31 December 2004, at least until the year 2010.
2. FINANCIAL SECOMMISSIONMMISSON (AMENDMENT) ACT, 2004:
a. Authorized Custodian of Bearer Shares
This amendment act introduces a new section 50A to the BVI Financial Services Act that provides for the approval of authorized custodians by the BVI Financial Services Commission (FSC).
An Authorized custodian will be either (i) the holder of a license under any financial services legislation; or (ii) a body corporate formed outside the BVI that is not resident in, and does not have a place of business in the BVI. In both cases, an applicant for approval must satisfy the FSC that it is a fit and proper person to act as an authorized custodian, and that it has the necessary security and compliance systems and procedures in place.
In determining whether a body corporate incorporated and operating outside the BVI is fit and proper to act as an authorized custodian, the FSC will also consider the prudential regulation exercised over, and anti-money laundering obligations imposed on such corporate body outside the BVI.
The amendment act provides in its new section 50C that the FSC may establish conditions for the approval of an authorized custodian and to vary or revoke said conditions. Also, under section 50D, the FSC is enabled to issue Guidance Notes specifying the practices and procedures it expects authorized custodians to follow.
To assist potential applicants for custodian status, the FSC has issued a new Aide Memoire, entitled Criteria for Approval of Authorized Custodians of Bearer Shares of BVI Incorporated Companies. In addition to providing an outline of the criteria that will be used by the FSC when approving custodians, the Aide Memoire addresses, inter alia, the duty of custodians and the grounds on which the FSC may revoke approvals. Based on the stringent requirements and compliance obligations, it is unlikely that many non-BVI companies, offices, trusts or firms, will be willing to apply for a custodian license.
Further, section 50E of the amendment act allows for the automatic revocation of an authorized custodianÂ’s license by the FSC if such person is no longer fit and proper to act as an authorized custodian, breaches any conditions to which its approval is subject, breaches any Guidance Notes issued by the FSC, or being a non-resident corporate body operating outside the BVI a person becomes resident or establishes a place of business in the BVI.
b. Recognized Custodian of Bearer Shares
Under a new section 50B, the FSC is also empowered to acknowledge as a recognized custodian of bearer shares, an investment exchange or a clearing organization operating securities clearance or settlement systems in a jurisdiction that is a member of the Financial Action Task Force (FATF).
c. Other Provisions
The principal Financial Services Act is amended such as to clarify that only courts of competent jurisdiction in the BVI are empowered to make an order for the disclosure of privileged information held by the FSC.
Additionally, the amendment extends immunity from being sued to persons who disclose information pursuant to a request from the FSC under the Financial Services Act.
Although some of these provisions are yet to formally be made public in the BVI Gazette, such publication is expected in the coming weeks. Below is a summary of the most relevant aspects, for your reference:
1. INTERNATIONAL BUSINESS COMPANIES (AMENDMENT) ACT, 2004.
Amendments to the International Business Companies (IBCs) will ultimately require that all bearer shares in BVI IBCs be held by a custodian and thus immobilized. Companies formed after 1 January 2005 must comply with these requirements from their date of formation. Alternatively, BVI IBCs may be issued with registered shares.
However, Section 2 of the International Business Companies Act is amended to move back the deadline for the immobilization of bearer shares that are in existence prior to 1 January 2005, from the initially proposed date of 31 December 2004, to 31 December 2010. Thus, you will not need to be concerned about the restrictions on bearer shares for those companies formed previously, and up to 31 December 2004, at least until the year 2010.
2. FINANCIAL SECOMMISSIONMMISSON (AMENDMENT) ACT, 2004:
a. Authorized Custodian of Bearer Shares
This amendment act introduces a new section 50A to the BVI Financial Services Act that provides for the approval of authorized custodians by the BVI Financial Services Commission (FSC).
An Authorized custodian will be either (i) the holder of a license under any financial services legislation; or (ii) a body corporate formed outside the BVI that is not resident in, and does not have a place of business in the BVI. In both cases, an applicant for approval must satisfy the FSC that it is a fit and proper person to act as an authorized custodian, and that it has the necessary security and compliance systems and procedures in place.
In determining whether a body corporate incorporated and operating outside the BVI is fit and proper to act as an authorized custodian, the FSC will also consider the prudential regulation exercised over, and anti-money laundering obligations imposed on such corporate body outside the BVI.
The amendment act provides in its new section 50C that the FSC may establish conditions for the approval of an authorized custodian and to vary or revoke said conditions. Also, under section 50D, the FSC is enabled to issue Guidance Notes specifying the practices and procedures it expects authorized custodians to follow.
To assist potential applicants for custodian status, the FSC has issued a new Aide Memoire, entitled Criteria for Approval of Authorized Custodians of Bearer Shares of BVI Incorporated Companies. In addition to providing an outline of the criteria that will be used by the FSC when approving custodians, the Aide Memoire addresses, inter alia, the duty of custodians and the grounds on which the FSC may revoke approvals. Based on the stringent requirements and compliance obligations, it is unlikely that many non-BVI companies, offices, trusts or firms, will be willing to apply for a custodian license.
Further, section 50E of the amendment act allows for the automatic revocation of an authorized custodianÂ’s license by the FSC if such person is no longer fit and proper to act as an authorized custodian, breaches any conditions to which its approval is subject, breaches any Guidance Notes issued by the FSC, or being a non-resident corporate body operating outside the BVI a person becomes resident or establishes a place of business in the BVI.
b. Recognized Custodian of Bearer Shares
Under a new section 50B, the FSC is also empowered to acknowledge as a recognized custodian of bearer shares, an investment exchange or a clearing organization operating securities clearance or settlement systems in a jurisdiction that is a member of the Financial Action Task Force (FATF).
c. Other Provisions
The principal Financial Services Act is amended such as to clarify that only courts of competent jurisdiction in the BVI are empowered to make an order for the disclosure of privileged information held by the FSC.
Additionally, the amendment extends immunity from being sued to persons who disclose information pursuant to a request from the FSC under the Financial Services Act.
Finally, the BVI legislature has approved and released the much awaited provisions dealing with the immobilization of Bearer Shares and the definition of “Custodian” that is incidental to the restrictive use of bearer shares. As expected, the Bearer Shares changes came as an amendment to the BVI International Business Company Law. The “Custodian” legislation came as a modification to the Financial Services Commission Act.
Although some of these provisions are yet to formally be made public in the BVI Gazette, such publication is expected in the coming weeks. Below is a summary of the most relevant aspects, for your reference:
1. INTERNATIONAL BUSINESS COMPANIES (AMENDMENT) ACT, 2004.
Amendments to the International Business Companies (IBC’s) will ultimately require that all bearer shares in BVI IBC’s be held by a custodian and thus immobilized. Companies formed after 1 January 2005 must comply with these requirements from their date of formation. Alternatively, BVI IBC’s may be issued with registered shares.
However, Section 2 of the International Business Companies Act is amended to move back the deadline for the immobilization of bearer shares that are in existence prior to 1 January 2005, from the initially proposed date of 31 December 2004, to 31 December 2010. Thus, you will not need to be concerned about the restrictions on bearer shares for those companies formed previously, and up to 31 December 2004, at least until the year 2010.
2. FINANCIAL SERVICES COMMISSON (AMENDMENT) ACT, 2004:
a. Authorized Custodian of Bearer Shares
This amendment act introduces a new section 50A to the BVI Financial Services Act that provides for the approval of authorized custodians by the BVI Financial Services Commission (“FSC”).
An Authorized custodian will be either (i) the holder of a license under any financial services legislation; or (ii) a body corporate formed outside the BVI that is not resident in, and does not have a place of business in the BVI. In both cases, an applicant for approval must satisfy the FSC that it is a fit and proper person to act as an authorized custodian, and that it has the necessary security and compliance systems and procedures in place.
In determining whether a body corporate incorporated and operating outside the BVI is fit and proper to act as an authorized custodian, the FSC will also consider the prudential regulation exercised over, and anti-money laundering obligations imposed on such corporate body outside the BVI.
The amendment act provides in its new section 50C that the FSC may establish conditions for the approval of an authorized custodian and to vary or revoke said conditions. Also, under section 50D, the FSC is enabled to issue Guidance Notes specifying the practices and procedures it expects authorized custodians to follow.
To assist potential applicants for custodian status, the FSC has issued a new Aide Memoire, entitled Criteria for Approval of Authorized Custodians of Bearer Shares of BVI Incorporated Companies. In addition to providing an outline of the criteria that will be used by the FSC when approving custodians, the Aide Memoire addresses, inter alia, the duty of custodians and the grounds on which the FSC may revoke approvals. Based on the stringent requirements and compliance obligations, it is unlikely that many non-BVI companies, offices, trusts or firms, will be willing to apply for a custodian license.
Further, section 50E of the amendment act allows for the automatic revocation of an authorized custodian’s license by the FSC if such person is no longer fit and proper to act as an authorized custodian, breaches any conditions to which its approval is subject, breaches any Guidance Notes issued by the FSC, or being a non-resident corporate body operating outside the BVI a person becomes resident or establishes a place of business in the BVI.
b. Recognized Custodian of Bearer Shares
Under a new section 50B, the FSC is also empowered to acknowledge as a recognized custodian of bearer shares, an investment exchange or a clearing organization operating securities clearance or settlement systems in a jurisdiction that is a member of the Financial Action Task Force (“FATF”).
c. Other Provisions
The principal Financial Services Act is amended such as to clarify that only courts of competent jurisdiction in the BVI are empowered to make an order for the disclosure of privileged information held by the FSC.
Additionally, the amendment extends immunity from being sued to persons who disclose information pursuant to a request from the FSC under the Financial Services Act.
Although some of these provisions are yet to formally be made public in the BVI Gazette, such publication is expected in the coming weeks. Below is a summary of the most relevant aspects, for your reference:
1. INTERNATIONAL BUSINESS COMPANIES (AMENDMENT) ACT, 2004.
Amendments to the International Business Companies (IBC’s) will ultimately require that all bearer shares in BVI IBC’s be held by a custodian and thus immobilized. Companies formed after 1 January 2005 must comply with these requirements from their date of formation. Alternatively, BVI IBC’s may be issued with registered shares.
However, Section 2 of the International Business Companies Act is amended to move back the deadline for the immobilization of bearer shares that are in existence prior to 1 January 2005, from the initially proposed date of 31 December 2004, to 31 December 2010. Thus, you will not need to be concerned about the restrictions on bearer shares for those companies formed previously, and up to 31 December 2004, at least until the year 2010.
2. FINANCIAL SERVICES COMMISSON (AMENDMENT) ACT, 2004:
a. Authorized Custodian of Bearer Shares
This amendment act introduces a new section 50A to the BVI Financial Services Act that provides for the approval of authorized custodians by the BVI Financial Services Commission (“FSC”).
An Authorized custodian will be either (i) the holder of a license under any financial services legislation; or (ii) a body corporate formed outside the BVI that is not resident in, and does not have a place of business in the BVI. In both cases, an applicant for approval must satisfy the FSC that it is a fit and proper person to act as an authorized custodian, and that it has the necessary security and compliance systems and procedures in place.
In determining whether a body corporate incorporated and operating outside the BVI is fit and proper to act as an authorized custodian, the FSC will also consider the prudential regulation exercised over, and anti-money laundering obligations imposed on such corporate body outside the BVI.
The amendment act provides in its new section 50C that the FSC may establish conditions for the approval of an authorized custodian and to vary or revoke said conditions. Also, under section 50D, the FSC is enabled to issue Guidance Notes specifying the practices and procedures it expects authorized custodians to follow.
To assist potential applicants for custodian status, the FSC has issued a new Aide Memoire, entitled Criteria for Approval of Authorized Custodians of Bearer Shares of BVI Incorporated Companies. In addition to providing an outline of the criteria that will be used by the FSC when approving custodians, the Aide Memoire addresses, inter alia, the duty of custodians and the grounds on which the FSC may revoke approvals. Based on the stringent requirements and compliance obligations, it is unlikely that many non-BVI companies, offices, trusts or firms, will be willing to apply for a custodian license.
Further, section 50E of the amendment act allows for the automatic revocation of an authorized custodian’s license by the FSC if such person is no longer fit and proper to act as an authorized custodian, breaches any conditions to which its approval is subject, breaches any Guidance Notes issued by the FSC, or being a non-resident corporate body operating outside the BVI a person becomes resident or establishes a place of business in the BVI.
b. Recognized Custodian of Bearer Shares
Under a new section 50B, the FSC is also empowered to acknowledge as a recognized custodian of bearer shares, an investment exchange or a clearing organization operating securities clearance or settlement systems in a jurisdiction that is a member of the Financial Action Task Force (“FATF”).
c. Other Provisions
The principal Financial Services Act is amended such as to clarify that only courts of competent jurisdiction in the BVI are empowered to make an order for the disclosure of privileged information held by the FSC.
Additionally, the amendment extends immunity from being sued to persons who disclose information pursuant to a request from the FSC under the Financial Services Act.
Thursday, March 04, 2004
JP MORGAN FORECAST ON DOMINICAN REPUBLIC PAYMENT.
DR SURE WILL DEFAULT PAYMENTS
The umbrella of the grace period is a bad signal.
The present is a free summary of the information released by Dominican newspaper Diario Libre.
The Dominican authorities requested an extension to start accommodations with the Club of Paris regarding the payment of the external debt of the Dominican Republic. The meeting for renegotiation of bilateral debt repayment was scheduled for march, and now it will take place on April. The experts of JP Morgan said that is a fact that the payment of the US$11-million due on 28 February for the PDI Brady Bond will not be made on time. They stress nevertheless that the Dominican Republic is entitled to a 15 days grace period.
According to Morgan, DR still has a considerable limitation on resources, giving rise to the theory that the Paris Club was putting a lot of Pressure over the Country to display its equal treatment with private investors. Morgan confirmed that the IMF recommended to DR to keep up to date in payments until it reaches an agreement with the Paris Club.
The postponement of accommodations until April, “further complicates the things”, because there is another payment in the amount of US$23.74 millions on the 06 bonds due on March 27 (with a 30 days grace period). Finally according to JP Morgan the late payments on 06 bonds would be used to negotiate with Paris Club. The goal is to postpone payments to private creditors, and odds are that private creditors will no receive more payments on 2004.
DR SURE WILL DEFAULT PAYMENTS
The umbrella of the grace period is a bad signal.
The present is a free summary of the information released by Dominican newspaper Diario Libre.
The Dominican authorities requested an extension to start accommodations with the Club of Paris regarding the payment of the external debt of the Dominican Republic. The meeting for renegotiation of bilateral debt repayment was scheduled for march, and now it will take place on April. The experts of JP Morgan said that is a fact that the payment of the US$11-million due on 28 February for the PDI Brady Bond will not be made on time. They stress nevertheless that the Dominican Republic is entitled to a 15 days grace period.
According to Morgan, DR still has a considerable limitation on resources, giving rise to the theory that the Paris Club was putting a lot of Pressure over the Country to display its equal treatment with private investors. Morgan confirmed that the IMF recommended to DR to keep up to date in payments until it reaches an agreement with the Paris Club.
The postponement of accommodations until April, “further complicates the things”, because there is another payment in the amount of US$23.74 millions on the 06 bonds due on March 27 (with a 30 days grace period). Finally according to JP Morgan the late payments on 06 bonds would be used to negotiate with Paris Club. The goal is to postpone payments to private creditors, and odds are that private creditors will no receive more payments on 2004.
COSTASUR DOMINICANA TO WITHHELD LUXURY TAX IVSS
In January, specifically the 27th, Direccion General de Impuestos Insternos, similar to Internal Revenue
Service enacted an special resolution converting Costasur Domnicana, S.A. in a sort of Agency in charge of collecting
the property tax or IVSS from owners. Therefore IVSS (property tax) is changing its form to a withholding tax. It is still a levy or contribution over the property but from this year Casa de Campo would be responsible for the collection of the levy. Consequently Costasur may charge the luxury tax (IVSS) directly to those clients with balances outstanding with Internal Revenue Office (even if they don’t want to pay the IVSS) because Costasur is liable to pay the property tax on its expenses. In other words Costasur is liable (jointly and severally liable) for owner’s obligations. The purpose of the resolution then, is to enable enforcement of legislation 18-88 relative to property tax or IVSS.
We may say: “then I am not going to pay the property tax through them I am going to do it by myself”, because I don’t consider appropriate to live my property on their free will. Or perhaps because you may think that they may retain the funds (I don’t think they can) and then do not report it to Internal Revenue Office. The answer is that yes you can pay the property tax directly to Internal Revenue Office. However in my opinion from now on it is almost impossible to default property tax payment; provided that Costasur is bound by the resolution above mentioned, in a short period of time if they are required to make a payment on behalf of an owner that went into default, they may cut out the services to this client, such as telephone, electricity, if said owner does not fulfill his obligations with respect to the property tax.
The resolution is no doubt against the Dominican constitution for a lot of reasons, but only in the event of a judgment from the Supreme Court against the resolution owners are bound by said, and so far I don’t see a loophole to bypass it.
In January, specifically the 27th, Direccion General de Impuestos Insternos, similar to Internal Revenue
Service enacted an special resolution converting Costasur Domnicana, S.A. in a sort of Agency in charge of collecting
the property tax or IVSS from owners. Therefore IVSS (property tax) is changing its form to a withholding tax. It is still a levy or contribution over the property but from this year Casa de Campo would be responsible for the collection of the levy. Consequently Costasur may charge the luxury tax (IVSS) directly to those clients with balances outstanding with Internal Revenue Office (even if they don’t want to pay the IVSS) because Costasur is liable to pay the property tax on its expenses. In other words Costasur is liable (jointly and severally liable) for owner’s obligations. The purpose of the resolution then, is to enable enforcement of legislation 18-88 relative to property tax or IVSS.
We may say: “then I am not going to pay the property tax through them I am going to do it by myself”, because I don’t consider appropriate to live my property on their free will. Or perhaps because you may think that they may retain the funds (I don’t think they can) and then do not report it to Internal Revenue Office. The answer is that yes you can pay the property tax directly to Internal Revenue Office. However in my opinion from now on it is almost impossible to default property tax payment; provided that Costasur is bound by the resolution above mentioned, in a short period of time if they are required to make a payment on behalf of an owner that went into default, they may cut out the services to this client, such as telephone, electricity, if said owner does not fulfill his obligations with respect to the property tax.
The resolution is no doubt against the Dominican constitution for a lot of reasons, but only in the event of a judgment from the Supreme Court against the resolution owners are bound by said, and so far I don’t see a loophole to bypass it.
PUNTA CANA GETS THE MOST VISITORS
SANTO DOMINGO. Almost half the total number of tourists who came to this country arrived through the Punta Cana airport, according to the most recent report of the Central Bank on tourists flow. This past January, 46.8% of the foreigners and non-residents who arrived in this country came in through that terminal.
Puerto Plata ranked second, having received 25.6% of the visitors during the first month of the year, whereas Las Americas terminal recorded 15.9%.
La Romana Airport mobilized 10.0%, and the remaining 1.7% came in through the Cibao and the Herrera terminals, according to the official report.
The report states that, although it took second place for the number of tourists mobilized, Puerto Plata is the most dynamic, with a growth of 26.0%. In Punta Cana, the increase amounts to 7.8%, but Las Américas, La Romana, Cibao and Herrera, reported a decline of 4.5%, 5.6%, 9.6% and 38.3%, respectively.
SANTO DOMINGO. Almost half the total number of tourists who came to this country arrived through the Punta Cana airport, according to the most recent report of the Central Bank on tourists flow. This past January, 46.8% of the foreigners and non-residents who arrived in this country came in through that terminal.
Puerto Plata ranked second, having received 25.6% of the visitors during the first month of the year, whereas Las Americas terminal recorded 15.9%.
La Romana Airport mobilized 10.0%, and the remaining 1.7% came in through the Cibao and the Herrera terminals, according to the official report.
The report states that, although it took second place for the number of tourists mobilized, Puerto Plata is the most dynamic, with a growth of 26.0%. In Punta Cana, the increase amounts to 7.8%, but Las Américas, La Romana, Cibao and Herrera, reported a decline of 4.5%, 5.6%, 9.6% and 38.3%, respectively.
PUNTA CANA RECIBE LA MAYORIA DE VISITANTES
SANTO DOMINGO. El aeropuerto de Punta Cana recibió casi la mitad de los turistas que visitaran el país, según el informe más reciente del Banco Central sobre el flujo turístico. El pasado mes de enero, por la terminal entró el 46.8% de extranjeros no residentes que arribó al país.
Puerto Plata quedó en un segundo lugar, al recibir el primer mes del año el 25.6% de los visitantes, mientras la terminal de Las Américas registró un 15.9%.
El aeropuerto de La Romana movilizó el 10.0% y el restante 1.7% le correspondió al Cibao y a la terminal de Herrera, consigna el reporte oficial.
A pesar de que ocupa el segundo lugar por cantidad de turistas movilizados, Puerto Plata muestra el mayor dinamismo, con un crecimiento de 26.0%, dice el informe. Rn Punta Cana el incremento suma un 7.8% pero Las Américas, La Romana, El Cibao y Herrera, registraron disminuciones de 4.5%, 5.6%, 9.6% y 38.3%, respectivamente.
SANTO DOMINGO. El aeropuerto de Punta Cana recibió casi la mitad de los turistas que visitaran el país, según el informe más reciente del Banco Central sobre el flujo turístico. El pasado mes de enero, por la terminal entró el 46.8% de extranjeros no residentes que arribó al país.
Puerto Plata quedó en un segundo lugar, al recibir el primer mes del año el 25.6% de los visitantes, mientras la terminal de Las Américas registró un 15.9%.
El aeropuerto de La Romana movilizó el 10.0% y el restante 1.7% le correspondió al Cibao y a la terminal de Herrera, consigna el reporte oficial.
A pesar de que ocupa el segundo lugar por cantidad de turistas movilizados, Puerto Plata muestra el mayor dinamismo, con un crecimiento de 26.0%, dice el informe. Rn Punta Cana el incremento suma un 7.8% pero Las Américas, La Romana, El Cibao y Herrera, registraron disminuciones de 4.5%, 5.6%, 9.6% y 38.3%, respectivamente.
Brazilian Company Buys 51% in PEPSI RD AND WILL ESTABLISH BREWERY
AmBevi is the number 1 brewery in that South American country and the fifth largest in the world.
SAO PAULO. AmBev, the largest beer company in Brazil, will expand its operations in Latin America after paying US$100 million for the control of the only distributor of Pepsico in the Dominican Republic, and for establishing a brewery.
AmBev will pay US$60 million for 51% of Pepsi shares in Embotelladora Dominicana CxA (Embodom), and it will eventually increase its participation to 66%, after establishing a brewery and contributing US$10 million more in cash. Embodom distributes Pepsi Cola, 7up, Mirinda, Red Rock and Mont Pellier water.
Scope
Juan Vergara, Ambev's International CEO considered that "the Dominican market is very promising." According to Ambev's estimations, the Dominican beer market is approximately 3.2 million hectoliters per year (35 liters per person, per year), and it generates over US$430 million.
Expansion
This agreement marks the beginning of AmBev's operations in the Caribbean. In the last three years, this company took over the major beer company in Argentina, Uruguay and Paraguay, introduced itself in Guatemala, and made investments in Ecuador and Peru.
AmBevi is the number 1 brewery in that South American country and the fifth largest in the world.
SAO PAULO. AmBev, the largest beer company in Brazil, will expand its operations in Latin America after paying US$100 million for the control of the only distributor of Pepsico in the Dominican Republic, and for establishing a brewery.
AmBev will pay US$60 million for 51% of Pepsi shares in Embotelladora Dominicana CxA (Embodom), and it will eventually increase its participation to 66%, after establishing a brewery and contributing US$10 million more in cash. Embodom distributes Pepsi Cola, 7up, Mirinda, Red Rock and Mont Pellier water.
Scope
Juan Vergara, Ambev's International CEO considered that "the Dominican market is very promising." According to Ambev's estimations, the Dominican beer market is approximately 3.2 million hectoliters per year (35 liters per person, per year), and it generates over US$430 million.
Expansion
This agreement marks the beginning of AmBev's operations in the Caribbean. In the last three years, this company took over the major beer company in Argentina, Uruguay and Paraguay, introduced itself in Guatemala, and made investments in Ecuador and Peru.
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