A BVI company for a crypto business: when VASP registration applies, and the Indian side

The British Virgin Islands are often considered by Indian founders who want an offshore company for a token project, a trading desk or a crypto platform. Until 2023 the BVI had no dedicated regime for crypto service businesses. That changed when the Virtual Assets Service Providers Act, 2022 (the VASP Act) came into force on 1 February 2023. Today the first question is not how to form the company, but whether what it will do is a regulated virtual asset service. The second is whether the Indian side — FEMA, tax and FIU-IND — has been planned with it.

1. When a BVI company is a VASP

Section 2 of the VASP Act defines a virtual assets service as the business of carrying on, for or on behalf of another person, any of these activities:

Three points decide most cases:

• Location does not help. Section 5(4) treats a BVI business company that carries on a virtual assets service outside the BVI as carrying it on from within the BVI. A BVI company serving only users in India or the Gulf still needs to register.
• Exchanges and custodians need more. An exchange or a custody service needs approval for that category in addition to basic registration, under Part IV of the Act.
• The penalty is serious. Carrying on a virtual assets service without registration is an offence. The Act provides for a fine of up to US$100,000 for a company (US$75,000 for an individual) and imprisonment of up to five years.

A company that only invests or trades its own assets is not acting on behalf of another person, so it is generally outside the VASP Act. The position changes once it manages money for others, offers a yield product or holds client assets. A company issuing its own token should also check whether the token is a security or fund-like interest, because BVI securities and investment business law may then apply. The boundary is fact-specific, and a BVI legal opinion is the usual way to settle it before launch.

2. What FSC registration involves

Applications go to the BVI Financial Services Commission (FSC) through an authorised representative. Under the Act and the FSC's application guidance, the main requirements are:

• At least two individual directors. Corporate directors are not permitted, and the FSC may require one director to be resident in the BVI. Directors, senior officers and significant owners must pass the fit-and-proper test.
• A physical address in the BVI and an approved authorised representative.
• An approved auditor with experience of virtual asset businesses.
• AML/CFT systems and controls, including the Travel Rule for virtual asset transfers. In practice the FSC also looks for a named compliance officer and money laundering reporting officer.
• A business plan with the initial capital and three-year projections, a cybersecurity framework, a business continuity plan, a risk assessment and compliance manuals.
• Capital proportionate to the business. The Act sets no fixed minimum. The FSC treats custody and exchange businesses as higher risk, so it expects more capital from them and may ask for professional indemnity insurance or a regulatory deposit.

The application fee is US$5,000 for a VASP that is neither a custodian nor an exchange, and US$10,000 each for custody and exchange. The FSC aims to give initial comments within six weeks of a complete application and to conclude within six months of submission. In practice, the timetable depends mainly on how complete the AML, technology and governance documents are on day one.

3. BVI tax and substance

BVI companies are generally exempt from income tax, and the BVI levies no withholding tax on dividends, interest or royalties. Payroll tax applies if the company has employees in the BVI. Separately, the Economic Substance (Companies and Limited Partnerships) Act, 2018 requires a BVI entity that carries on a "relevant activity" — such as holding, financing and leasing, fund management, headquarters, or distribution and service centre business — to meet substance requirements and file annual information. Whether a particular crypto business falls within one of these categories needs to be checked against the definitions.

A 0% BVI rate does not decide the overall tax. For an Indian founder, the larger questions are Indian.

4. The Indian side: FEMA

An Indian resident's shares in a BVI company are an overseas investment under the Foreign Exchange Management (Overseas Investment) Rules, 2022:

• Resident individuals may make overseas direct investment (ODI) only in an operating foreign entity not engaged in financial services activity, and one with no subsidiary or step-down subsidiary where the individual has control. The investment is within the Liberalised Remittance Scheme limit of US$250,000 a year.
• Indian companies may invest in a foreign entity engaged in financial services, other than banking or insurance, only if they have posted a net profit in the preceding three financial years, and subject to any regulatory approvals required.
• A foreign entity is engaged in financial services activity if its activity would need registration with, or be regulated by, a financial sector regulator if carried on in India.

Whether a crypto exchange or custodian counts as financial services activity for this purpose is not settled. Authorised dealer banks also review crypto-related remittances closely. A founder should expect the bank to ask what the company will do, and should have the structure and a written analysis ready before the first remittance. Every ODI is reported through the bank — Form FC, a unique identification number and an annual performance report — and the shares are reported in Schedule FA of the founder's return every year. Failing to report a foreign asset in Schedule FA can attract a penalty of ₹10 lakh under the Black Money Act.

5. The Indian side: tax

India has no tax treaty with the BVI — only a tax information exchange agreement, in force since 22 August 2011 — so none of the treaty protections that apply to UAE or Singapore companies are available. Four rules matter:

• Place of effective management. Under section 6(10) (6(3) of the 1961 Act), a foreign company whose key management and commercial decisions are in substance taken in India is resident in India and taxed on its worldwide income. Under Circular 8 of 2017, the POEM guidelines do not apply to companies with turnover or gross receipts of ₹50 crore or less in the year. A smaller company is still exposed to the next two rules.
• Business connection and permanent establishment. A BVI company whose founders run trading, development or operations from Mumbai can have a business connection in India. The income attributable to the Indian activity is then taxable in India.
• Significant economic presence. A non-resident's business connection also includes payments from India above ₹2 crore in a year, or systematic interaction with 3 lakh or more users in India. That is a realistic threshold for a platform with Indian customers, and without a treaty there is nothing to override it.
• The founder's own income. Dividends, salary or director's fees from the BVI company are taxable in India for a resident founder at the applicable rates, with no BVI tax to credit. The founder's own crypto gains remain taxable at 30% under section 194 (115BBH of the 1961 Act).

6. Serving Indian users: FIU-IND

By notification S.O. 1072(E) of 7 March 2023, the same five activities, when carried on for others in the course of business, make the provider a reporting entity under the Prevention of Money-laundering Act. FIU-IND's guidelines apply them to offshore platforms serving Indian users. In December 2023 FIU-IND issued show-cause notices to offshore exchanges that had not registered and asked for their websites to be blocked.

A BVI VASP that onboards Indian residents should plan for FIU-IND registration, KYC and reporting under Indian rules, and the 1% TDS under section 393 (194S of the 1961 Act) on transfers by its Indian users — in addition to its BVI obligations, not instead of them.

BVI or UAE?

For a founder who will actually run the business from abroad, a UAE structure — VARA in Dubai, ADGM or DIFC for an institutional model, or a free zone for an unregulated development business — can offer what the BVI does not: residence for the founder, banking, a treaty with India, and a regulator that Indian banks and counterparties recognise. The BVI remains useful as a holding or token-issuing entity alongside a properly substanced operating company, provided the VASP Act boundary has been checked. Our note on moving a Web3 company to Dubai covers the UAE route.

Questions we are asked

Does every BVI crypto company need a VASP registration? No. Registration is tied to providing one of the listed services as a business for other people. A development studio, a company trading its own treasury, or a merchant accepting crypto is generally outside the Act — but the facts need to be checked, because many business models mix activities.

Can an Indian resident individual own a BVI crypto company? Only within the ODI rules. Individuals may invest only in an operating entity not engaged in financial services activity, with no controlled step-down subsidiaries, and within the LRS limit. Whether a given crypto business qualifies needs analysis before any money is remitted.

Is a BVI company tax-free for an Indian founder? Not necessarily. The company pays no BVI income tax, but it can be taxed in India through POEM, a business connection or significant economic presence. The founder pays Indian tax on what the company pays out.

How long does BVI VASP registration take? The FSC aims to comment within six weeks of a complete application and to conclude within six months of submission. Incomplete AML and technology documents are the usual cause of delay.

If my BVI platform serves Indian users, do I need anything in India? Yes. Plan for FIU-IND registration as a reporting entity and for TDS under section 393 (194S), in addition to the BVI registration.

Ibrahim Khan · I. H. Khan and Associates
Tax, GST and business setup advisors — Mumbai and Thane. Contact us to discuss your situation.

Related articles

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• Moving your Web3 company to Dubai: VARA, DMCC, residency and the Indian exit
• Overseas direct investment from India: Form FC, UIN, APR and the mistakes that lead to RBI compounding
• Is your Dubai company taxable in India? The place of effective management test explained

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