11 Jun 2021

BVI – Economic Substance: Enforcement and penalties for non-compliance

The penalties imposed by the Economic Substance (Companies and Limited Partnership) Act, 2018 (“ESA”) are intended to be rigorous, effective, and dissuasive, ranging from financial penalties to striking off from the registry. The BVI International Tax Authority (“ITA”) is responsible for assessing and enforcing compliance with the requirements of the ESA.

Assessment

Following the assessment of information on the activities filed by the entity’s registered agent on BOSS, the ITA may determine that the entity has not complied with the economic substance requirements during a financial period and issue a notice of non-compliance to an entity’s registered agent. By way of background, compliance with the requirements set by ESA is assessed by reference to financial periods, typically on an annual basis. Some entities have already been issued with first non-compliance notices by the ITA in relation to the first financial period.

The ITA may make a determination of non-compliance up to 6 years after the end of a financial period to which the determination relates and the deadline can be extended in case of extenuating circumstances. For entities incorporated before 1 January 2019 (which have not chosen to shorten their first financial period) this means that such determination of non-compliance notices relating to the first financial period can be issued until at least 29 June 2026.

Penalties

At present the minimum fine for the first determination of non-compliance is USD 5,000 with a maximum of USD 20,000 in all instances except high-risk high intellectual property entities, where the maximum rises to USD 50,000.

Once the first determination has been made an entity must pay the fine and take the remedial action within the timeframe indicated in the notice.

Following an initial first notice of a determination of non-compliance, where an entity has either (a) failed in its appeal, or (b) not completed the required remedial action within the required timeframe, a second determination may be made by the ITA. The penalty for the second determination is not less than USD 10,000 and the maximum is USD 200,000, rising to USD 400,000 for high-risk IP entities.

It should be further noted that any non-compliant determination may lead to the exchange of information between the ITA and the relevant tax authorities for amongst others, the entity, its parent, or the ultimate beneficial owners.

Where a Company fails to take the necessary remedial action set out the second notice of non-compliance the ITA may also make a filing with the Financial Services Commission (“FSC”) to recommend or require that the entity should be struck off.  Where the ITA views that there is no realistic prospect of the entity carrying out the remedial action following the first notice of non-compliance they may bypass the second notice and proceed straight to the strike off notice.  It is expected that the strike off option will only be used in the most extreme cases of non-compliance.

Appeal

An entity upon whom a notice of non-compliance has been served by the ITA may appeal against the determination made by the ITA and also against the amount of any penalty imposed.

If the entity wishes to appeal the determination of non-compliance an appeal must be filed with the BVI High Court and served on the ITA in the prescribed form no later than 30 days after the date of the notice of non-compliance. Until this appeal has been finally determined or withdrawn the entity will not be required to pay the fine or carry out the requisite remedial action.

The grounds for appeal are as follows:

  • a deficiency in the non-compliance notice (based on the statutory requirements);
  • the ITA has made a factual error in finding that the entity was not in compliance with the economic substance requirements; and
  • the law has been incorrectly interpreted by the ITA in determining that the entity was not in compliance with its economic substance requirements.

It should be noted that grounds for appeal will not be sufficient in and of itself to overturn the initial determination. At this early stage there is no further guidance or judicial authority on what grounds are required for a successful appeal. The court may confirm, vary, or revoke the ITA’s initial determination.

Proposed Amendments

Amendments to the ESA have been proposed by the Economic Substance (Companies and Limited Partnerships) (Amendment) Bill 2021. Once the amendments come into force, the minimum fine for a first notice of non-compliance will be reduced to USD 500 (five hundred).  It is also proposed that the report to the FSC will now recommend or request that the entity be wound up rather than struck off. It will also bring limited partnerships without personality within scope of the of the economic substance legislation for the first time.

Should you have any questions on the BVI economic substance requirements, please reach out to your usual contacts at Hatstone.

Philipp Neumann – Group Partner

Mark Harbison – Counsel

11 Jun 2021

Hatstone appoints new corporate counsel for its BVI office.

Hatstone is pleased to announce that Mark Harbison has been appointed as corporate counsel.  Based in Hatstone’s BVI office, Mark will continue to specialise in banking, finance and corporate matters.  He has also previously advised on a variety of regulatory reviews and contributed to multiple client guides and BVI articles in the industry press, including Practical Law Company and Global Legal Insights.

Prior to joining Hatstone, Mark worked in the banking and finance and corporate departments of two offshore law firms in the BVI. Prior to relocating to the BVI, Mark trained with Mayer Brown in London before going on to work with Gide in Ho Chi Minh City and Cadwalader, Wickersham and Taft in London.  He has also gained experience inhouse with Wells Fargo and Lloyds Bank.  Mark works for a globally diverse group of clients across a wide array of industries including global financial institutions, leading law firms, large corporate entities, mining firms and private equity investors.

Mark commented:

“I am delighted to be joining Hatstone. I am very pleased to have joined an entrepreneurial group that is going from strength to strength and which will enable me to focus on delivering first class services to my clients.”

BVI based Group Partner Philipp Neumann commented:

“Mark is a highly accomplished lawyer with a great reputation in the BVI legal market. His extensive experience in complex cross-border corporate and finance matters makes him the perfect choice to further strengthen Hatstone’s BVI offering.”

19 Apr 2021

Hatstone establishes European hub in Dublin

Progressive international legal and corporate services firm Hatstone has today announced the establishment of its European hub in Ireland, welcoming the partners and staff of Tully Rinckey (Ireland) LLP into the group.

Specialising in finance, corporate and commercial law and dispute resolution across offices in Jersey, the BVI, London, Panama, South Africa and now Ireland, the opening of the firm’s Dublin office is a vital part of Hatstone’s European growth strategy.

Commenting on the announcement, Hatstone Group Partner, Bella Ward, said “we are thrilled to be opening an office  in Dublin.  We pride ourselves on and are committed to recognising and responding to our clients’ needs.  The decision to establish a presence in Ireland was driven by requests made by a number of clients post-Brexit, who want to invest in or through Ireland with the support of the personalised and partner-led service that Hatstone is renowned for.

Managing Partner of Hatstone Ireland, Grainne Loughnane ,said, “our team in Dublin has always strived to give our clients a first-class, personalised service from senior professionals. Becoming part of the Hatstone Group will allow us to offer this across a global international network .”

27 Jan 2021

Hatstone’s BVI team advises the Bank of London and The Middle East plc

Hatstone’s BVI team has advised the Bank of London and The Middle East plc (BLME), led by Paul DeCroos, Head of Real Estate Finance, on the BVI law aspects of its successful Sharia’a compliant financing of a valuable commercial property in Swindon.

The team, led by Group Partner Philipp Neumann alongside Group Partner, Bella Ward, focused on the financing and corporate aspects of the transaction, working closely with the Islamic Finance team at Druces LLP, comprising Claire Rigby, Suzanne Middleton Lindsley and Rebecca Pinder, throughout.

Philipp Neumann said:

“We are delighted to have advised BLME in relation to this transaction, which provided a great platform on which to showcase the advantages of using BVI property holding structures in these types of financing arrangements. As always, it was a pleasure to work with and assist Druces.”

Druces LLP’ Partner and Head of Islamic Finance, Christopher Axford, said:

“Working with BLME and Hatstone on this transaction has been a pleasure. Appetite for Sharia’a compliant financing continues to grow and transactions such as this highlight the confidence in this area. Our team is ideally suited to assist clients, such as BLME, providing bespoke Islamic finance advice for investments and funding.”

11 Jan 2021

Hatstone shortlisted as the Jersey Law Firm of the Year in the Citywealth International Financial Centre Awards

Hatstone is pleased to announce that it has been shortlisted as the Jersey Law Firm of the Year in the Citywealth International Financial Centre Awards. Now in their tenth year, the Awards were established to highlight the excellence of those working in the private wealth sector in the major international financial centres.

Speaking on the announcement, Group Partner, Simon Vivian, said “We are very proud to have been shortlisted for this prestigious award, which is testament to the dedication and commitment of our team. To be shortlisted is to have been recognised by an international panel of judges that is comprised of highly respected private wealth practitioners”.

11 Jan 2021

Implementation of new online public Digital Registry in Jersey

Following the introduction of the Financial Services (Disclosure of Provision of Information) (Jersey) Law 2020, which came into force on 6 January 2021, regulated entities are required to appoint a nominated person and give the JFSC more information on their significant persons.

The new law provides a definition of the significant persons for each of the different entities (including Companies, Foundations, ILPs, LLCs, LLPs, SLPs, LPs and any other prescribed bodies or persons).

KEY CHANGES:

  • Each entity must appoint at least one eligible person as a nominated person by 6 April 2021.
  • The most notable change is the requirement to update the JFSC’s public central register with details of significant persons. You must also notify the JFSC with information changes within 21 days.
  • Details of beneficial ownership to be provided to the JFSC.
  • The Easy Company Registry will be replaced with myRegistry. Paper filing will not be accepted.
  • Annual confirmation statements replace the annual return process.
  • Each entity must submit an annual confirmation statement that confirms that the information provided is accurate.
  • The first annual confirmation statement is due by 30 April 2021.
11 Jan 2021

COVID-19 – Update on Business Restrictions – The Law Society of Jersey excerpt

On Friday 18 December 2020, the Chief Minister announced that unless critical to the running of their business, islanders must work from home until further notice.

Firms were asked revert to home working, on the same basis as the essential employees scheme implemented in March 2020, albeit without the authorisation regime previously adopted.

Non essential businesses were subsequently required to close.

The Government’s timetable for potential relaxation of current measures to manage COVID-19:

  • Monday 18 January 2021 – STAC is due to meet to review the next stages. This may include the re-opening of non-essential businesses.
  • Wednesday 20 January 2021 – STAC will present its recommendations to Ministers.
  • Thursday 21 January 2021 – a further announcement will be made by Government.
  • Monday 25 January 2021 – there may be a potential re-opening of non-essential businesses.

It is not yet clear whether the ‘working from home’ requirement will be lifted in line with the re-opening of non-essential businesses.

Guidance in this regard will be issued by the Law Society to firms as soon as the position has been confirmed by Government.

14 Dec 2020

The curious case of Webb v Webb

If you want to have your cake and eat it, take a slice or two, not the whole cake.

There has been lot of noise generated by the Supreme Court decision in Webb v Webb* regarding the settlor reserved powers aspect of the case, little of which is worth the airtime. Many practitioners have been warning for years about taking liberties with reserved powers and the danger of stretching the concept too far. Like an elastic band, stretch it far enough, and it will snap.

In this case, reserving a personal (as opposed to fiduciary) power for Mr Webb to declare at any time that he was the only beneficiary of the Trust, made it an easy decision that he had failed to make an effective disposition of property, as the rights he enjoyed in respect of the trust assets, were indistinguishable from personal ownership. Had he not had this power, then it would have been interesting, based on the extensive other powers he had reserved, to see whether he had created a valid trust or not.

Prudent practitioners have always had reservations about taking things to extremes, whether it be about trying to oust the responsibilities for which a professional trustee is paid (as in Zhang v DBS – can you really have a trustee with no obligation whatsoever for oversight?), or about creating trusts with so many reserved powers that you scratch your head and wonder whether it is a trust, or any form of disposition, at all. It is good to see the courts across the world putting the brakes on. If you want to have your cake and eat it, take a slice or two, not the whole cake.

The more interesting aspect of the case was the tax point, which was considered in the context of whether a New Zealand tax debt should be taken into account in determining the value of matrimonial property situated in the Cook Islands. The debt was found to be unenforceable in the Cook Islands.

The conclusion (by 2-1 Lord Wilson dissenting) confirmed that you cannot enforce one country’s tax judgment abroad. This is an entirely conventional principle but interesting in this case because of the legislative and constitutional relationship between the Cook Islands and New Zealand, more particularly section 655 of the Cook Islands Act 1915, which states that: “Bankruptcy in New Zealand shall have the same effect in respect to property situated in the Cook Islands as if that property was situated in New Zealand”.

Mr Webb had been declared bankrupt with the main judgment debtor being the Commissioner of the Inland Revenue. It is highly arguable that the Commissioner should have been in the same position as any other judgement debtor in bankruptcy looking to enforce their rights under section 655.

* Webb v Webb (Cook Islands) 2020 UKPC 22

13 Dec 2020

No Reasonable Trustee

Introduction

The absolute discretion of trustees is often emphasised when discussing competing interests of beneficiaries. This is particularly so as, although the court has jurisdiction under Jersey law to intervene in the exercise of the trustee’s discretion, it will not do so lightly.

The trustee of a Jersey trust was recently faced with the decision of whether it should add the settlor’s spouse as a beneficiary to the settlement in her own right. In the interesting judgement of B v Erinvale PTC [2020] JRC 213, the court found that the decision made by the trustee not to add the settlor’s spouse as a beneficiary in her own right, was a decision that no reasonable trustee would have made.

The considerations of the court shed some light on a very relevant and current issue – the trustee’s power and duties when considering the interests of the settlor’s spouse, particularly concerning a person who will cease to be the settlor’s spouse.

Background

The case arose against the background of matrimonial proceedings between the settlor, C, and the settlor’s spouse, B. They have been married for 23 years, and now have one adult child. Each of B and C have two children from previous marriages.

Fifteen years into their marriage, C created the A Settlement and settled the whole of his free estate into the settlement. The settlement is governed by Jersey law, and the beneficial class is described as the settlor, the settlor’s spouse, and the settlor’s children and remoter issue.

C’s letter of wishes expresses his wish for the trustees to provide for B, in particular by setting aside an amount of £4m for her, of which £1m was to be made available to her and the balance invested to provide B with a monthly income. The property in which B lived was to be made available to her during her lifetime (although another trust owned this property).

With all C’s free assets being within the settlement, B was concerned as to her status as a beneficiary as C’s spouse. An interim order for the divorce between B and C had been issued, and the parties agreed that the final order would not be issued until B’s ancillary application was finalised. If C were to die before the divorce order was made final (C was diagnosed with a brain disease in 2012), or if C were to die after the divorce order was made final, but before orders for ancillary relief (a maintenance claim to be paid by the settlement) were made, B would cease to be a beneficiary of the settlement before she could obtain relief under the matrimonial proceedings.

For this reason, B applied to the court to be appointed as a beneficiary in her own right.

Trustee’s decision

The trustee considered appointing B as a beneficiary in January 2020, resolving not to add her as a beneficiary at that time. As the court essentially reviews this decision, its details are crucial to the case.

The court summarised the trustee’s decision as follows:

From the perspective of the A Settlement, there are competing interests as between the beneficiaries which have to be balanced and [the trustee] submits that it has done that impartially and reached a reasonable conclusion for the reasons set out in the minute, but in particular:

  • B is currently a beneficiary;
  • She is currently receiving substantial financial support;
  • [The Trustee] had given the clear indication that she would be appointed a beneficiary in her own right should C die before the [divorce] decree was made absolute and this without fettering the future exercise of [the trustee’s] discretion as trustee. It was essentially a question of timing with [the trustee] not being prepared to appoint her “at this time”…”

The trustee could not confirm the settlor’s wishes in respect of this decision, due to his lack of capacity. Not surprisingly, C’s children and grandchildren were opposed to the addition of B as a beneficiary. The trustee also considered that B is likely to receive substantial relief under the matrimonial proceedings, and that, seeing as the settlement would abide by any order of the court in that sense, it would likely be inappropriate thereafter for B to remain a beneficiary in her own right on an ongoing basis, partly because any resolution under the matrimonial proceeding was likely to be on a ‘clean break’ basis.

Court’s considerations and finding

The court was asked to exercise its jurisdiction under Article 51 of the Trusts (Jersey) Law 1984 (the ‘Law’), under which the court may make an order concerning, amongst other things, the trustee’s exercise of any power or discretion.

The court remarked that, whilst its jurisdiction under Article 51 is wide, it must be exercised on a sensible and principled basis. Referring to the principle of non-intervention by the courts, and the judgment in S v Bedell Cristin [2005] JRC 109, the court concluded that it fell upon B to challenge the decision of the trustee not to add her as a beneficiary in her own right, by showing –

  1. That the decision was one which no reasonable trustee could have arrived at, or
  2. In taking the decision it failed to take into account a relevant consideration or took into account an irrelevant consideration.

It was noted by the court that, procedurally, it was seized only with the application under Article 51 and that it was sitting in its supervisory role in respect of trusts. As such, the court was not concerned with doing justice between C and B, but instead, it was only concerned with the interests of the settlement’s beneficiaries.

The court found that the considerations taken into account by the trustee were relevant, and that it had in fact considered the matters which B alleged it did not (namely that the Matrimonial Court would be disempowered upon C’s death and the effect on B if she were to lose rights under the settlement). However, the court found that the trustee had not truly taken B’s position and concerns into account or given them sufficient weight.

As to the reasonableness of the decision, the court noted that the key reason the trustees put forward for not appointing B as a beneficiary in her own right, was one of timing – it was prepared to appoint her, but not now. The court rightly pointed out that a trustee cannot fetter the future exercise of its discretion, resulting in the possibility that some external event may prevent B’s appointment in the future. If this were to happen, B would be an outsider to the trust and would face the prospect of having to fund an application as an outsider to be readmitted into the beneficial class, the financial implications of which, the court remarked, could not be more serious.

The court questioned why a trustee would allow the wife of the settler of 23 years, and the mother of one of his children, in her late sixties and with no other means of support, to be put in that position of uncertainty when it was the settlor’s clear intention as per his letters of wishes that she should be supported by the trust that holds all the family assets.

Court’s finding

The court could find no good reason for not appointing B immediately as a beneficiary in her own right, and found that the trustee had every good reason to do so, namely, to secure her position within the beneficial class of the settlement. The court further found that B’s need to be in the beneficial class in her own right, far outweighed the interests of the other beneficiaries in allowing the current uncertainty as to her status to continue.

The court considered that test for intervention is high, but even so, it concluded that the decision of the trustee not to appoint B as a beneficiary in her own right was a decision that no reasonable trustee would make. In the court’s view, the only reasonable decision would have been to appoint B as a beneficiary in her own right.

The trustee’s decision was set aside, and, although the court did order the trustee to add B as a beneficiary, it did make it clear that the trustee was expected to do so without delay or the need for the court’s further intervention.

Surrender of discretion

A substantial portion of the judgment deals with the court’s consideration of what decision it would have reached had the trustee surrendered its discretion to the court. The trustee had not surrendered its discretion, and the court noted that the test for intervention is not that it would have reached a different decision to that of the trustee.

Even so, the court considered at length the decision it would have made, and indicated that, had the trustee surrendered its discretion to the court, it would have appointed B as a beneficiary in her own right for the following reasons –

  1. The settlement controlled the means by which B and C were and are supported financially, C having settled all his free assets on the settlement 15 years into the marriage;
  2. B’s status as beneficiary is of vital interest to her as the marriage has broken down, and the settlement is her only means for support or by which any order of the Matrimonial Court against C can be met;
  3. The prospect of C dying before the final divorce order is made is very real in the court’s view, and it is unlikely that the trustee in such a case would cease to support B. The trustee would likely appoint B as a beneficiary in her own right in such a case.
  4. The trustee’s decision unnecessarily leaves B in a state of uncertainty, which, to the court’s mind, is not appropriate treatment of the wife of 23 years and the mother of one of the settlor’s children.
  5. There is no disadvantage to the other beneficiaries in B being appointed as beneficiary in her own right.
  6. The advantage to the other beneficiaries were B not to be appointed as a beneficiary in her own right cannot be properly balanced against B’s interest.
  7. From the other beneficiaries’ perspective, B is being supported by the settlement and will continue to be supported after she ceases to be the settlor’s wife (whether by divorce or death), and for this purpose, she needs to be a beneficiary in her own right. The court could see no good reason not to confirm that status now.

The considerations stated above seemed to have contributed to the court’s finding that no reasonable trustee would have made the decision which the trustee made in this instance.

Comments

It will be interesting to see whether this decision will go on appeal. The court seems to have considered the legal position correctly, referring to the judgment in S v Bedell Cristin (also reflected in Lewin on Trusts), stating that –

the mere fact that the court would not have acted as the trustees have done is no ground for interference’, and ‘the court cannot overturn a decision of a trustee which has not surrendered its discretion to the court, merely because the court would have reached a different decision. It may only intervene where the decision is one which no reasonable trustee could arrive at.’

Although the court starts by setting out this position, it veers off into considering what it would have decided had the trustee surrendered its discretion. One cannot help but wonder to what extent this consideration, which should ostensibly be irrelevant, impacted the court’s finding that no reasonable trustee would have made the decision the trustee had made.

The court also seems to have difficulty in removing the issue of justice between B and C from its mind, even though it expressly stated that it is not concerned therewith. One of the reasons the court seems to give for its decision is that B was the wife of the settlor for 23 years and the mother of one of his children, and therefore she should be treated better by the trustee. (The court did however in the same breath  emphasise that the settlor’s intention that B should be supported by the settlement, was clear.)

Be that as it may, this case does serve as a stark reminder to trustees on the importance of taking all relevant considerations into account when making decisions affecting the beneficiaries’ interests, and to carefully record these considerations as well as the reasons for making the decision it does. Furthermore, it highlights the importance of the settlor’s letter of wishes, and raises interesting questions around the trustee’s duty to consider the wishes of the settlor where those wishes might have changed.