On 22 August 2011 the Tax Information Exchange Agreement ("TIEA") between the British Virgin Islands ("BVI") and India came into force. TIEAs facilitate the exchange of tax information between two jurisdictions and are utilised to help prevent tax evasion (where no tax treaty already exists), money laundering and harmful tax practices.
The BVI continues to be the number one offshore centre for incorporations with approximately 456,000 active companies and 500 partnerships. With the TIEA now having come into effect, our expectation is that BVI companies or partnerships will be used increasingly by Indian companies in overseas acquisitions. A substantial proportion of investments by Indian companies in overseas markets is currently undertaken through a special purpose vehicle ("SPV") set up in jurisdictions such as the BVI. BVI entities benefit from both a modern f lexible corporate law regime and tax neutrality (the BVI corporate tax rate is zero), which is conducive to their use in joint ventures and as listing vehicles. It is our understanding that Indian companies seeking to make an acquisition abroad must gain regulatory approval (from the Reserve Bank of India, the Indian Income Tax Department and certain other regulatory authorities), or fall within certain exceptions to such approval. The BVI's TIEA with India will accordingly now help facilitate regulatory approval for the use of a BVI entity as the acquisition vehicle.
There are a number of BVI regulated funds, predominantly professional funds, whose strategies focus on investments in India, albeit traditionally through the use of Mauritius SPV entities, because of the double tax treaty in place between India and Mauritius. According to a fact sheet on Foreign Direct Investment ("FDI") into India published by the Department of Industrial Policy & Promotion within India's Ministry of Commerce and Industry, the BVI (directly) was the 17th largest source of foreign direct investment inf lows into India, contributing approximately US$672.8 million worth of inbound investment over a ten year period ending August 2010. This does not take into account investments by BVI companies channeled through Mauritius (the largest contributor of approximately 42% of all FDI inf low into India, amounting to approximately US$50,164 million over a ten year period ending August 2010).
The implementation of a TIEA between the BVI and India, and the BVI's compliance with, and implementation of, IOSCO principles, will ease the path for BVI funds looking to register with the foreign institutional investor regime of the Securities and Exchange Board of India ("SEBI") and further facilitate direct investment into India.
The BVI has signed 22 TIEAs to date with the following countries: Australia, China, Czech Republic, Curacao, Denmark, Faroe Islands, France, Finland, Germany, Greenland, Iceland, India, Ireland, Netherlands, New Zealand, Norway, Portugal, St Maarten, Aruba, Sweden, UK, and USA.
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