If you are thinking about forming your start-up offshore, the company laws of the Cayman Islands and British Virgin Islands (BVI) likely offer many of the benefits you are looking for. However, as with any legal decision, incorporating in the Cayman Islands or BVI comes with certain drawbacks and counterpoints as well, and it is important to make an informed decision before simply moving forward with an overseas incorporation.
Why Incorporate in the Cayman Islands or British Virgin Islands?
The benefits of incorporating in the Cayman Islands and the British Virgin Islands fall into three primary categories. The first is tax liability. Both countries are considered tax havens for US-based companies because (i) they do not impose income taxes on corporations, and (ii) any income tax owed to the US Internal Revenue Service (IRS) – yes, foreign-organized corporations can still owe income tax to the IRS – can be deferred indefinitely with the right corporate structure and management.
The second primary benefit of incorporating in the Cayman Islands or BVI is asset protection. Neither the Cayman Islands nor BVI has a statutory law in place that provides for reciprocal enforcement of US judgments (although judgment creditors can seek common law remedies in the Cayman Islands). This means that corporate assets held in these jurisdictions can be much more difficult – if not impossible – for plaintiffs to come after in order to satisfy judgements entered in US courts. Note, however, that incorporating in the Cayman Islands or BVI does not, standing alone, establish this protection. It will be necessary for companies seeking these asset protection benefits to take additional steps to secure their assets offshore.
The third primary benefit of Cayman Islands or British Virgin Islands incorporation is privacy. No corporate tax means no corporate tax returns, and this means disclosing less information to the government. Both jurisdictions also have limited filing requirements for domestic corporations, so company owners’ identities and other information can be kept out of the public domain.
Incorporating in the Cayman Islands: What Founders Need to Know
Additional Benefits of Cayman Islands Incorporation
Along with the primary benefits discussed above forming a Cayman Islands corporation can offer a number of other benefits as well. These include:
- Cayman Islands corporations are not subject to any minimum capital requirements and formation of a Cayman Islands bank account is not required.
- Cayman Islands corporations can be formed with a single shareholder and director.
- There are no annual reporting requirements for maintaining a Cayman Islands corporation (though both resident and foreign corporations must pay annual company fees).
- Corporate formation documents can be prepared in English.
- Founders have significant flexibility with regard to structuring classes of shares.
- Forming a Cayman Islands corporation can be done quickly, in as little as a day, with no requirement for regulatory approval.
- Despite being considered a tax haven, the Cayman Islands remain in good standing with the Organization for Economic Co-operation and Development (OECD) and other international tax authorities.
- The Cayman political environment is generally considered to be stable, as is the local economy.
Limitations of Cayman Islands Incorporation
As we mentioned above, incorporation in the Cayman Islands and BVI have certain limitations as well. However, these limitations can be fairly minimal, and in many respects, they are on par with the limitations of forming domestic corporations in the United States. Some of the limitations of incorporating in the Cayman Islands include:
- All corporations must have a registered agent and registered office in the Cayman Islands (though these can be established using licensed third-party service providers).
- Due to the Cayman Islands’ recognition as a tax haven, corporations formed there can be viewed with some skepticism in certain circumstances.
- Filing fees in the Cayman Islands are comparatively higher than those in many other jurisdictions, and some experts expect these fees as well as import duties, work permit fees, and certain other costs of doing business to increase over time.
Incorporating in the British Virgin Islands: What Founders Need to Know
Additional Benefits of BVI Incorporation
Incorporating in the BVI offers a number of unique benefits as well. Significantly, a 2007 law change did away with the previous distinction between offshore and onshore legal entities. As a result, today, all BVI corporations are simply known as “business companies.” Some of the key benefits of forming a BVI business company (in addition to those listed above) include:
- Like the Cayman Islands, BVI is in good standing with the Organization for Economic Co-operation and Development (OECD) and other international tax authorities.
- BVI business companies can redomicile to other international jurisdictions (where also permitted by the laws of such jurisdiction).
- The initial and annual filing costs for BVI business companies are comparatively low, and initial filing fees are determined based upon the number of shares authorized.
- A minimum of one shareholder and one director is required.
- No annual meeting is required, and there are no accounting or audit requirements for BVI business companies.
- The US dollar is the official currency of the British Virgin Islands.
Limitations of BVI Incorporation
The limitations of BVI incorporation are similar to those of incorporating in the Cayman Islands (though, as noted above, the filing fees in the BVI are generally lower). Both a registered agent and registered office are required (though these can be provided by the same third-party provider), and BVI’s reputation as a tax haven can lead to certain assumptions in certain contexts. On the other hand, BVI business companies are well-known around the globe, and most major banking and financial institutions will be familiar with the BVI business company structure.
The British Virgin Islands Financial Services Commission provides some additional useful information on its website. To learn more about the requirements and steps involved in forming a BVI business company, you can read the Financial Services Commission’s FAQs.
Should You Incorporate in the Cayman Islands, BVI, or Somewhere Else?
So, where should you incorporate your startup? Is incorporating in the Cayman Islands the best option? It could be, if the unique benefits offered there outweigh the limitations and the benefits of incorporating in other jurisdictions. Are the British Virgin Islands a better option? Maybe, if keeping start-up costs down is a priority and you want to ensure that your privacy is protected as much as possible. Should you just incorporate in the US (or your other country of residence)? Perhaps, if the additional benefits of offshore incorporation are not worth the costs and (relatively minimal) administrative burdens involved.
Determining which option is best will require a careful assessment of your goals, both in the present and long-term. Despite the plethora of options and the endless list of “online service providers” that promise easy incorporation services worldwide, choosing how and where to form your startup is not a decision to be taken lightly. As a start-up founder, you inherently need to have a long-term outlook, and you want to make sure you form a legal entity that will protect your interests and provide the flexibility you need for years to come.
Speak with an International Business Lawyer in Confidence
For more information about the Cayman Islands and BVI incorporation, schedule a confidential consultation at Jiah Kim & Associates. You can put an appointment on our calendar online, or call (646) 389-5065 to discuss your start-up’s legal needs today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.