BVI Offshore Business: Grey Area

We have already discussed the dispute between a French groupe Danone SA and its Chinese joint venture partner, which resulted in Danone’s filing legal action against BVI-based Ever Maple Trading Ltd. Danone accused Hangzhou Wahaha Food that is indirectly controlled by the BVI company, of violating its joint venture agreements by illegal selling products indentical to those sold by the companies’ joint ventures. The French firm has alleged the Chinese drinks giants of setting up 20 independent companies that sold products identical to those sold by the joint ventures.

In its turn, this time Wahaha Group confirmed that it intends to sue its French partner Groupe Danone for up to 5 billion euros for conducting its business illegally. The Chinese company accused Danone of violating non-compete agreements when it purchased another Chinese drinks company in 2000, and also in failing to get proper approval from Chinese authorities for using of the Wahaha trademark. Chinese company’s representatives claimed that they have reliable evidence of Danone’s violations, however they did not say when or where they would sue their partner. Both BVI-controlled Hangzhou Wahaha and French Group Danone declined further comments on this matter.
So the companies are now in the middle of their quarrel, which actually started when Danone, which is the owner of 51% stake in 29 joint ventures with Wahaha, has demanded a 51% stake in the non-joint venture companies. This was rejected by Wahaha Group’s chairman Zong Qinghou. After that,  on May 9, the French food giant filed for arbitration in Sweden. Then Danone filed a lawsuit in the Los Angeles-based Superior Court against the above-named BVI company, as well as against another company - Hangzhou Hongsheng Beverage Co Ltd, - and personally against Zong’s wife and daughter who were running both companies.

Danone said the underhand dealings have cost it 100 million dollars, while Zong insists that neither him nor his company had violated any agreements.

It has already been discussed that in September 2006 the US passed a law to shut down online gambling. As a result, the shares of many online gambling companies, including many the British Virgin Islands-based companies fell significantly. However, there are signs that the US Congress may reconsider its 2006 online gambling ban, which European operators perceive as a hope to re-enter the US market.

After the signing of the a bill banning Internet gambling payments by President Bush, five European public online gambling companies, which were very successful and in 2005 took in about $1.4 billion from the US, had their share prices tank and profits collapsed.

One of the five above-mentioned companies, BVI-based Empire Online had to entirely give up its online gambling activities and found its way out in becoming an investment company.

As to others, 888 Holdings, Sportingbet.com and PartyGaming, which bought poker customers of Empire Online’s, turned their focus to Western European gamblers, however, their share prices have not recovered; while London-based BetOnSports.com had its shares suspended, its Chief Executive Officer was arrested and pleaded guilty to federal racketeering charges in the USA.

Currently, some analysts believe that the United States may rethink and change its standpoint regarding online gambling, which would allow European companies to do business again in the US market. On June 8, 2007, the House Financial Services Committee held a hearing aimed at considering a bill to allow banks and credit-card companies to legally process payments for online gambling sites. One of the striking arguments was as follows: the gambling ban forced publicly traded companies like Empire Online to leave the USA, however, the gap was quickly filled by private outfits offering unregulated online gaming services to Americans. Also, numerous offshore gambling services are still targeting US customers, and, since the ban came into force, the total spending on gambling online has decreased by only 20%.

Last week two senior figures of Labour Party raised the problem of a property tax dodge which helped the rich people to escape stamp duty and cost the Treasury of UK tens of millions of pounds a year. The tax gap was mainly used for homes costing more than £5mn, and became common at the top end of London’s overheated property market.

Usually purchasers paying more than £500,000 had to pay 4% top rate stamp duty, but by transferring ownership of a property to a trust or company in one of offshore tax havens they reduce the bill to the 0.5% corporate rate. If property costs  £5mn, setting an offshore company or trust cuts the tax rate from £200,000 to only £25,000. However, for most home purchasers high cost of setting up an offshore trust outweighs savings that could be gained by going offshore. The loophole is therefore used by super-rich, and ordinary people are forced to pay the top rate this year.
The latest figures presented by Land Registry show that a total of 827 London homes are sold for between £500,000 and £1mn in February 2007; 207 homes are sold for the sum between £1mn and £2m; 64 are sold for more than £2mn. Recent study by leading property agents shows that of the 300 London homes sold for more than £5mn in 2006, only 118 were registered with the Land Registry. That means that all the rest homes are owned by offshore companies or trusts. For example, in one of the most exclusive London’s addresses, almost 40% of the 83 houses are owned by offshore entities registered in the British Virgin Islands, Channel Islands or Liberia. The same situation is on Kensington Palace Gardens, which is probably the world’s most expensive residential street.

British Virgin Islands is a very popular jurisdiction for registering an offshore tax-avoidance vehicle and transferring property into it. The homes transferred into BVI or similar tax havens no longer have to be recorded at the Land Registry when they change their owner.

The existing stamp duty loophole for wealthy is actually part of earlier discussed problem with enormous sums of taxes hidden in offshore tax havens, including British Virgin Islands. This question was raised up by Revenue & Customs, after they received from the banks personal details of 400,000 customers with offshore accounts.

Leeds United, which a month ago was put on administration by its chairman Ken Bates, with KPMG appointed as administrators, hung in the balance when on June 4 the Leeds’ administrator ordered a recount of creditors’ votes on a club’s survival plan. A six hour long creditors meeting has failed to allow Ken Bates to take over the club.

Even if Mr Bates’ bid to rebuy the club from the administrator goes through, the vote would be contested, because some of the larger creditors are likely to challenge the decision in the court.

The Bates takeover required 75% creditor approval and in the first count he received 75.02%. Leeds United has net debts of £35m and HM Revenue & Customs alone owed a £5m. So, Richard Fleming, administrator at accountants KPMG, adjourned the creditors’ meeting until Monday morning when the votes accounting for debt of in excess of £35m will be counted again.

A BVI-registered company Astor Investment Holdings is major creditor, owed about £13m, while Swiss-based Forward Sport Fund is owed £2.4m. The three biggest creditors have informed that they would back Bates. The BVI company has the controlling hand because with more than 25% of the debt owed to it alone, Astor could block any agreement requiring more than 75% of creditors’ backing.

A number of questions was asked at the meeting of creditors concerning possible links between Astor and Mr. Bates. If a link was established it could have affected BVI company’s ability to vote because of a potential prejudicial interest. However, the administrator had been unable to find any link despite intense investigation and accepted sworn statements from Mr. Bates and his co-director, Mark Taylor, plus a letter from Astor that they were unconnected.

However, later on it was found out that Leeds United’s last company accounts were directly referenced to the BVI company, the club’s owners and the company Mr Bates represents, as of June 30 last year. The administrator had to admit the link had not been known before.

Revenue & Customs expects to receive back hundreds of millions of pounds from Britain’s wealthy, after banks handed over personal details of 400,000 customers with offshore accounts. By the information received by Revenue & Customs, there are uncovered City bonuses, inheritance windfalls and foreign holiday homes hidden in offshore tax havens such as Jersey, the Isle of Man and the British Virgin Islands. The Revenue’s director-general Dave Hartnett expressed his concern about the way in which offshore schemes in these jurisdictions had been sold by high street banks.

In an interview he gave to the British newspaper The Sunday Times Dave Hartnett said that in most cases the offshore schemes may have been used illegally to avoid tax. In some cases tax evasion continued for many years, and the result was hundreds of millions of unpaid tax. It should be said that the level of offshore tax avoidance among British citizens has never been estimated before, and the number of offshore accounts discovered has surprised even tax professionals.

In April 2007 the Revenue & Customs announced a two-month “amnesty” for people to declare money placed in offshore jurisdictions including British Virgin Islands.  The deadline  to make a declaration is June 22. By words of Harntett, the Revenue had so far been approached by 34,000 people, and 4,000 have confirmed they would be disclosing hidden assets and paying all the taxes.

In the last few months, the high street banks have been forced to hand the Revenue details of their customers’ accounts in offshore jurisdictions.  The investigation may also spark a Financial Services Authority (FSA) probe into the high street banks’ activities. Mike Warburton, a senior tax partner at Grant Thornton, has said that some people applied to him who had been sold offshore tax schemes by banks but claimed to be unaware of the tax situation. Most of the high street banks have set up separate offshore operations with branches in tax havens around the world.

A dispute between French dairy and water company Groupe Danone SA and its Chinese joint venture partner, which actually started several months ago, last week was escalated when Danone filed a lawsuit in Los Angeles over alleged illegal sales in China.

Danone filed a complaint in the Superior Court of Los Angeles County against BVI-based Ever Maple Trading Ltd., as well as against Hangzhou Hongsheng Beverage Co Ltd., and two individuals related to these companies. One of the two persons named in the lawsuit is Kelly Fuli Zong, said to be the legal representative of Ever Maple. The name of the second person was not given by the company, but probably he is also related to Zong.

Danone said in its legal notice that BVI-registered Ever Maple has the controlling stock of Hangzhou Hongsheng Beverage, the parent company of Danone’s joint venture partner, Hangzhou Wahaha Food and Beverage Sales Co. Danone has accused Hangzhou Wahaha, which is one of China’s biggest domestic beverage makers, of violating its joint venture agreements by illegal selling products identical to those sold by the companies’ joint ventures.

The French-based company has claimed that its objective in filing the claim is to stop the illegal production and sales of products. Danone is not likely to disclose the amount of compensation it is seeking for “loss and damages”.

The conflict between Danone and Hangzhou Wahaha was initiated when the latter rejected the Danone’s plan to buy out some of company’s assets, accusing the French company of attempting a hostile takeover. Earlier Danone filed for arbitration in Stockholm to help resolve the dispute.

Both companies began establishing their joint ventures in China in 1996, and their beverage operation has become one of China’s largest.