One option for prospective entrepreneurs in the renewables sector is the use of a BVI vehicle.

Technology has altered our lives dramatically over the last couple of decades and it continues to change how we think. This is especially notable within frontier and emerging markets, where it enables ‘leapfrogging’ by providing solutions that allow us to solve challenges that more traditional methodologies could not.  There are myriad examples of this, particularly when the power of mobile technology is coupled with internet access.  

A striking advance has been in the delivery of innovative solar energy solutions for off grid rural communities. The International Finance Corporation in 2012 found that every year worldwide, poor households spend US$37 billion on kerosene for lighting, biomass for cooking, and other unsustainable and unhealthy fuels.  Hundreds of millions of people have no access to grid electricity and consequently are exposed to health risks from fuel based energy sources.

Investors are required to evaluate the risks and returns related to a project before committing to invest.  Projects in frontier and emerging markets, where investment is most sorely needed, usually have a higher risk profile than projects in more developed markets. 

The risk profile of such investments would commonly include political, geographic, currency, infrastructure, institutional, legislative, corporate and court risk. Risks that are important to consider, but often are not immediately apparent, include legislative, corporate and court.

Legislative risk refers to a jurisdiction’s laws; some jurisdictions have less modern and investment friendly laws that are obstructive to the ease of doing business.  Corporate risk relates to the nature and type of corporate entities and their ability to be aligned with the corporate governance and control expectations of investors. 

Court risk covers the ability to resolve disputes efficiently and fairly through access to reputable courts with a deep bench and strong precedent. 

Innovators are often entrepreneurs and to achieve success, like any startup, they need to attract investment funding, usually from multinational investors.  With a multinational investor base, choosing the appropriate capital raising vehicle and legal framework to attract and protect the investment can be difficult.

Most multinational investors will look to be treated equally, have a preference for the transaction documents being governed by common opposed to civil code law and have access to reputable courts with a deep bench and strong precedent.  The BVI is a jurisdiction that offers corporate solutions; while this does not reduce all of the risks faced by investors, such structures can and do mitigate legislative, corporate and court risk — this is known as the BVI Corporate Advantage.

There are two recent examples of firms in the off grid rural communities renewable energy space which demonstrate the BVI Corporate Advantage in practice. Kingo provides off-grid villages with decentralised solar energy services, while Hybrico powers cellular towers in rural areas with green and hybrid energy. 

These firms both chose to use a BVI company as their capital raising vehicle and BVI law to govern the transaction documents. However, they could have equally used New York law or English law as the flexibility of BVI law would have accommodated this too.

The unique flexibility of BVI corporate law enabled the constitutive documents of the BVI company to be shaped and designed to satisfy the corporate governance and control requirements of the investors (which included development finance institutions, family offices, private equity and venture capital), thereby helping to protect their investment and promote project success.  

 In these cases, due to the zero tax applicable to the BVI company, each investor also attained investor neutrality in that there were no pros and cons for the investors that would otherwise exist in relation to double tax treaty forum shopping. To clarify, the BVI company is tax neutral and simply a corporate conduit — the cable connecting the solar panel to the battery.

The investment flows through the BVI company from the multinational investors directly into the operating company in the frontier market. The operating company is a local company in that frontier jurisdiction and subject to taxation in that jurisdiction.  When returns are paid to investors on their investment, they again flow through the BVI company back to the investors who are accountable for applicable taxation on those returns in their own jurisdictions.

Subjecting the BVI company to a BVI tax would simply reduce the funds available for investment and/or the return on investment for the investors by adding a layer of unnecessary and irrelevant tax.

The BVI Corporate Advantage assists in maximising impact investment transactions for those vitally needed projects in emerging and frontier markets. This advantage adds to the impact of such transactions, in these examples, by providing safer energy and cell service to rural families and businesses around the world.

Greg Boyd is a Partner in the Transactional Group at Harneys in the BVI Office. He is expert in maximising BVI Corporate Advantage in impact investment transactions. Greg has extensive experience in BVI corporate and finance matters. His client base includes financial institutions, public and private businesses, private equity funds, family offices, high-net-worth individuals and start-ups.