OFFSHORE UPDATE

REVISITING THE VIRGIN ISLANDS SPECIAL TRUSTS ACT, 2003 (VISTA)

Whilst the trust has always been regarded as one of the best succession vehicles, the use of the trust to cater for the succession of shares in companies has historically been impeded by a rule of English trust law which is designed to help preserve the value of trust investments. This rule, popularly known as the “prudent man of business rule”, has conventionally made the trust an unattractive vehicle to hold assets which settlors intend trustees to retain. Another aspect of this rule effectively requires trustees to monitor and intervene in the affairs of underlying companies which creates practical difficulties both from the settlor’s point of view and from that of the trustees.

The British Virgin Island’s (BVI’s) Virgin Islands Special Trusts Act, 2003 or VISTA enables creation of special new trusts, called VISTA trusts, to tide over these difficulties. The VISTA enables a shareholder to establish a trust of his company that relieves the trustee from the responsibility of managing the trust and permits the company and its business to be retained as long as the directors think fit. This is achieved in general terms by:

1. Authorizing the entire removal of the trustee’s monitoring and intervention obligations (except to the extent that the settlor otherwise requires);

2. Permitting the settlor to confer on the trustee a role more suited to a trustee’s abilities, namely a duty to intervene to resolve specific problems;

3. Allowing trust instruments to lay down rules for the appointment and removal of directors (so reducing the trustee’s ability to intervene in management by appointing directors of its own choice);

4. Giving both beneficiaries and directors the right to apply to the court if the trustee fails to comply with the requirements for non-intervention or the requirements for director appointment and removal; and

5. Giving to the trustee, if required, the power to sell the shares with the consent of the directors.

The enactment of VISTA, which is consistent with the historical development of the trust, demonstrates that the BVI is in the forefront of those jurisdictions which are able to introduce innovative measures which meet the legitimate needs of their international clients. It provides opportunities for many individuals who would otherwise wish to set up trusts to hold shares in their companies, but who have hitherto felt disinclined to do so as a result of the rigidity of the “prudent man of business” rule.

Taxation of trusts

• The income of the trust, in the hands of a trustee will be exempt from income tax;

• Any beneficiaries not resident in the BVI will be exempt from BVI income tax on payments received by them from the trustees of BVI trusts;

• No estate tax, inheritance tax, succession tax, gift tax, rate, duty, levy or other charge is payable by beneficiaries who are not resident in the BVI in respect of any distribution to them by the trustee of any trust; and

• Any trust that does not have beneficiaries resi-dent in the BVI will be exempt from stamp duty in respect of the trust instrument and all other deeds and instruments will be exempt from stamp duty.

Uses of VISTA Trusts

The VISTA is now around a five year old legislation and it is perhaps an interesting point to consider how the Act has been used and applied by the trust industry in the BVI. The VISTA was specifically designed to encourage owners of shares in BVI companies to make greater use of trusts established in the BVI, and to this end the Act contains the following key features:

• The trustees of a VISTA trust are prohibited from interfering in the running of the company the shares of which are held in trust;

• A VISTA trust may contain rules to determine who will be the directors of the company, and in what circumstances they may be removed;

• A VISTA trust may hold the shares of a company indefinitely.

The VISTA trust has over the years been used to fulfill quite different family needs and commercial requirements.

The Family Trading Company

Shares in family trading companies were not traditionally an asset that was placed in an offshore trust, and this was principally because most professional trustees would not accept the liability risks associated with overseeing a business of which they had no skill or knowledge, and also because most business owners would not accept the level of interference and oversight that a trustee had to undertake in order to comply with their legal obligations.

VISTA has had a transformative affect on this area. Shares in family trading companies are now routinely placed in VISTA trusts. For the business owner it is paramount that active control of the company is not lost to a third party trustee, and that the directors of the company are not under the control of the trustee(s). VISTA achieves this by prohibiting the trustee from being appointed a director of the company, and permits rules, termed “Office of Director Rules”, by which the business owner is given the power to decide who will be the directors of the company, when they should be removed and how much they should be paid.

For the trustee, VISTA provides a number of protections against liability in the event there is a decrease in the value of the shares, and taken with the prohibition against trustee involvement in the running of the business of the company.

The Single Asset Holding Company

It is thought that the majority of BVI companies hold a single asset, such as money held in an account opened in the name of the company.

Traditionally, such single asset holding companies were not held via trusts for the simple reason that the costs were not justified. It was difficult to convince an owner of a company that their shares were better held under a trust, particularly where the trust deed was a lengthy document, conferring on the trustee wide discretionary powers to manage the assets of the company.

VISTA made a significant impact in this area. Certain BVI trust companies now offer a short form VISTA trust deed, the sole purpose of which is to enable owners of BVI company shares to avoiding a public probate in the BVI in the event of their death.

Again, the main features of VISTA have been successfully utilised, in that the owner of the company is able to freely manage the assets of the company without trustee interference and the trustee is able to rely on statutory protections in the event there is a loss in the value of the shares, with the net result that costs of administration can be set and maintained at a modest level.

Private Trust Companies

The application of VISTA to the holding of shares in a BVI private trust company (PTC) is by far the most significant development in the use of VISTA trusts in the BVI. The BVI enacted private trust company legislation in the summer of 2007, by the Financial Services (Exemptions) Regulations, 2007 (“PTC Regulations”).

The PTC Regulations enable a company to be incorporated in the BVI, the sole purpose of which is to act as trustee or protector of a trust, without the need to obtain a trust licence under the Banks and Trust Companies Act, 1990.

Wealthy families are increasingly using private trust companies to consolidate ownership and to provide succession to their various worldwide assets. However, there was in the past one particular problem in the use of PTCs for which the Trust industry had no uniform answer, the problem centered on ownership and control of the PTC; whoever owned the shares of the company, would thereby indirectly have control and access to the entire family wealth.

In the past this problem was addressed in some cases by use of shareholder agreements, in others by use of a further trust (typically a purpose or charitable trust) to hold the shares of the PTC, with a letter of wishes providing non-binding guidance to the trustees as to the desired control of the PTC; However, the basic question of ownership and control of the PTC was not adequately addressed.

VISTA has significantly simplified this problem. VISTA trusts are now being used to hold the shares of family PTCs, with the trust deed typically prohibiting the trustee from selling or otherwise disposing of the shares in the company, and providing a number of options to address control of the PTC.

As mentioned above, VISTA permits rules, known as “Office of Director Rules”, to be included in the trust deed to govern circumstances in which directors may be appointed and removed. Use of Office of Director Rules has proved crucial in addressing the corporate governance issues that had previously been a problem in structuring ownership of PTCs.

Typically in a PTC scenario, the Office of Director Rules would provide that a named family member, would have fully discretion during his life to determine the directors of the PTC, and then on his death or earlier incapacity, automatic mandatory rules would apply, which may provide that only certain named family members may be appointed directors, and provide mandatory grounds to remove such directors, for example if they are convicted of a criminal offence.

Another common approach is to establish an Office of Director Rule committee, comprising members of each branch of the family, which is given the power to appoint and remove directors of the PTC; in this way a balance may be maintained between competing family interests.

In summary, VISTA has over the years proved extremely versatile in addressing the needs and commercial requirements of the modern BVI trust market, and can fairly be described as successful in meeting its primary objective to encourage use of trusts established in the BVI.

(This article is by our partner, Mr. Stany Pereira, and Mr. Chaitanya Kirtikar, Asst. Manager, Offshore Department.)