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SVG Hybrid Companies- The perfect solution

The St Vincent and the Grenadines Hybrid Company:- A wealth oftax planning opportunities.

Isaac N Legair, (Barrister) of Dennings (Trustees) Limited describes some uses of the St Vincent and the Grenadines (“SVG”) hybrid company in international tax planning and as a vehicle for owning real estate in SVG.

The International Business Companies (Amendment and Consolidation Act) 2007 (the “2007 IBC Act”) came into force in February 2008. This Act represents the first major overhaul of the law governing international business companies in SVG since this corporate vehicle was introduced into the jurisdiction in 1996. In this amended and consolidated version, the opportunity was taken to update and modernise the old law while simultaneously creating a piece of legislation which could be extremely useful to tax and estate planners worldwide.

The 2007 IBC Act makes explicit provision for the incorporation of the following types of company:

  1. Companies limited by shares;
  2. Companies limited by guarantee (so called ‘mutual’ companies);
  3. Companies limited by guarantee and having a share capital (so called ‘hybrid’ companies, and
  4. Unlimited companies, which may (or may not) issue shares.

By far the most interesting of these is (3). These form the basis of this article.

Definition and Structure

The term “hybrid company” describes a company that is limited by guarantee but which also has a share capital. Such a company is normally structured with at least two classes of members – shareholding members and guarantee/beneficiary members. Shareholding members may own ordinary voting shares, preference shares, or both.

The directors elect guarantee members into membership of the company on condition that each member undertakes to contribute to the debts of the company up to certain specified maximum amount (typically US$100) in the event of its liquidation. Thus a guarantee member holds a contingent liability (an obligation) in contrast to a shareholding member who holds a positive stake (shares) in the company.

The constitutional documents of the hybrid are normally written so that the shareholding members get voting control and a fixed predictable (if any) return. This is achieved by issuing non-participating ordinary shares and/or preference shares. Any residual income is distributed at the discretion of the directors. This they will do so on an ex gratia basis to the guarantee members.

The ordinary shares are issued to professional managers, who act rather like ‘quasi trustees’ with full legal ownership of the company and corresponding voting rights over the corporate assets. Ordinary shareholders receive no financial benefit from holding the shares. All of the net financial benefits (after payment to preference shareholders) flow to the guarantee members, placing them in a position rather like the beneficiaries of a typical discretionary trust. The interest of a guarantee member may be extinguished on death so as to prevent succession problems, remove any probate requirements and therefore eliminate any inheritance tax or estate duty implications.

Section 52(d) defines a guarantee member as a person ‘who may not participate in the income, profits, gains or assets of the company or receive any distribution or payment from the company other than on an ex gratia basis at the sole discretion of the directors, or on the basis of a contract existing between him and the company’.

In an attempt to further clearly define the status of guarantee members; section 54(1) (b) requires that their names be kept on a separate register from the names of shareholding members. This is quite unlike some other jurisdictions where both sets of names appear on the same register, thus giving the impression that guarantee members have a positive a positive stake in the company synonymous, comparable or equivalent to that held by shareholding members.

As guarantee members do not own shares, it is questionable whether and to what extent the punitive controlled foreign corporation (“CFC”) legislation of their countries of residence apply to them.

Use of SVG Hybrid in International Tax Planning

The hybrid is an efficient tax planning vehicle for international clients whose domestic tax regime imposes punitive rates of tax coupled with controlled foreign corporation (CFC) anti-avoidance provisions.

Hybrid companies are often used as quasi discretionary trusts. They are especially useful to persons resident in civil law countries that do not recognize trusts. As with trusts, hybrid structures may be useful for asset protection, tax planning (including estate tax planning), confidentiality and avoiding forced heirship rules.

When used as a quasi trust, the hybrid company is typically structured with a single ordinary share carrying one vote but having no right to dividends and no right to participate in the capital or income of the company in any way. The guarantee members have no voting right in the company but participate fully in its income and capital. By adopting this formulation, control of the company legally rests with the ordinary shareholders, but most of the economic benefits flow to the guarantee members.

The hybrid offers an ideal structure for long-term investors who accumulate their profits offshore tax-free. Beneficiary members can honestly declare to authorities in their own country that they do not own, directly or beneficially, assets overseas.

The income tax statutes of many onshore countries, and in particular any related anti-avoidance provisions, often seek to tax undistributed or untaxed profits of low tax paying companies as if they had been received by the shareholders. The different legislations approach this goal in different ways but there is often a focus on the percentage of shares held.   Alternatively, the legislation may focus on thecontrol of the company, even if control is achieved otherwise than through the ownership of shares. However, in the organization of a typical hybrid company as set out above the guarantee members do not own shares nor have control.  Professional managers act as shareholders and have legal control of the company.  This may mean that the typical anti-avoidance legislation is ineffective in taxing profits rolled up within a hybrid structure. Additionally, such a structure may not bring about any reporting requirement for the guarantee member so, on a practical level, unwanted attention from onshore revenue authorities is avoided.

Impact of Caricom Tax Treaty

As international business companies, SVG hybrids are exempt from taxation in SVG and are given a 25 year tax exemption certificate by the registrar upon formation. In the minority of cases this total exemption from local taxation may not be beneficial to the company or it’s preference shareholders, (it is assumed that holders of ordinary shares do not get a dividend) who may be at a disadvantage if they are unable to prove to the tax authorities in their home country that the dividends they receive or the corporate profits from which such dividends were paid, have not been charged to SVG tax.

The 2007 IBC Act goes some way towards providing a solution. Section 180 gives companies an irrevocable option to either (a) remain totally exempt from taxes as at present, or (b) pay corporate income tax at the rate of 1% on their annual profits. Those companies that choose to pay the 1% tax must file annual tax returns and comply with the requisite provisions of income tax legislation.

Nevertheless, this option is an extremely good tax planning tool for companies based in the Caribbean Single Market or Caricom region, the Member States of which have ratified a multilateral Double Taxation Agreement amongst themselves. This “Treaty” provides that income arising in one Member State by a resident of another shall be taxed only in the source country, and taxed only once. It further exempts dividends payable by a company resident in one Member State from taxation not only in the country in which the income arises but also in the country in which the shareholder is resident.

The Treaty therefore provides significant tax planning opportunities for companies resident in one Member State but doing business in another through a subsidiary.

Many international companies are currently investing in the oil and gas industry in Trinidad and Tobago and in the real estate and hotel development projects across the Caricom region. Such investors could benefit greatly from using SVG companies and trusts as part of their group structure.

The 2007 Act gives international investors the perfect opportunity to minimise their tax liability and exposure. The tax advantages described above could not be obtained by using a BVI company as that country is not a Caricom Member State. SVG should be considered the jurisdiction of choice for those investors who wish to tap into the Trinidad and Tobago oil and gas boom and more generally into the major real estate developments taking place across the region.

Hybrid as owner of SVG Real Estate

The 2007 IBC Act (unlike its predecessor), gives companies the corporate capacity to own an interest in real estate situated in St Vincent and the Grenadines. However, this is subject to the proviso that if an Alien Land Holding Licence (“ALHL”) would otherwise be required, the requirement for such a licence could not be avoided merely by owning real estate through using a corporate vehicle.  In summary, an ALHL is required where the company is owned and/or controlled by persons who are not citizens of SVG, or where such persons derive the major share of dividend from the company.

The acquisition and disposal of SVG real estate currently attracts stamp duty at a rate of 5% payable byboth the purchaser and vendor.  A SVG hybrid company, creatively used, probably in conjunction with an international trust formed under the SVG International Trust Act of 1996, could (on first and subsequent disposal) help to minimise these otherwise punitive rates of taxes.

Distribution of Assets under hybrid structure

The company will not normally pay dividends, or reward the ordinary shareholders and directors in any way (except for the payment of annual fees). Holders of preference shares are invariably entitled to a variable yet predictable return according to the terms of issue of the shares and the constitution of the company. The assets (including residual profits) of the company are accumulated in the tax-free jurisdiction of incorporation.

During the life of the company, distributions are made by the directors to the guarantee members on a purely discretionary or ex-gratia basis. Beneficiary members have no positive right to request or demand that a distribution be made to them.

Upon liquidation, all remaining net assets go to the beneficiary members, again on an ex gratia basis. Where a company has a single beneficiary member, the company is automatically liquidated upon the death of that member, or earlier, according to its constitution.


As an entity which offers the flexibility of the discretionary trust and the familiarity of the traditional company, the SVG hybrid yields considerable tax planning opportunities for those professional advisers who wish to manage the affairs of their clients in a discreet yet watertight manner. Don’t leave home without it!

Isaac Legair may be contacted at: dennings@vincysurf.com