British Virgin Islands Implements Economic Substance Requirements
In December 2018, the government of the British Virgin Islands passed the Economic Substance (Companies and Limited Partnership) Act 2018 (the “Act”).
The provisions of the Act concern legal entities, which term includes companies and limited partnerships registered in the BVI as well as foreign companies and foreign limited partnerships that carry out activities in the BVI.
The relevant legal entities are required to create adequate and relevant economic substance in the BVI, in case they conduct relevant activities as defined in the Act, unless they can demonstrate that they are tax resident in another jurisdiction which is not included in the EU list of non-cooperative jurisdictions.
A number of issues need to be clarified with regards to the provisions of the Act and to this end further regulations and guidelines are expected to be issued in the near future by the BVI authorities.
Until the above-mentioned clarifications are finalised and issued by the BVI authorities, the reality of the matter remains that a new era has started in the BVI and the economic substance requirement in the cases laid down by the Act, is a fact.
In essence, the relevant legal entities that carry out one or more relevant activity must carry out, for each relevant activity, defined core income-generating activities in the BVI and establish economic substance in the BVI, as per the provisions of the Act.
A relevant activity is defined in the Act to include the following:
Fund management business;
Finance and leasing business;
Intellectual property business;
Distribution and service centre business.
Economic substance can be demonstrated by reference to the following criteria, having regard to the nature and scale of the relevant activity:
The relevant activity being directed and managed in the BVI and has its core income generating activities in the BVI;
Adequate number of suitably qualified employees who are physically present in the BVI (whether or not employed by the relevant legal entity or by another entity and whether on temporary or long-term contracts);
Adequate expenditure incurred in the BVI;
Appropriate physical offices or premises in the BVI; and
Where the relevant activity is intellectual property business and requires the use of specific equipment, the equipment is located in the BVI.
It is noted that, under certain circumstances, the Act allows for the outsourcing of core income generating activities.
In the case of pure equity holding entities, which carry out no relevant activity other than holding equity participations in other entities and earning dividends and capital gains, the Act provides for a reduced test for economic substance, so that they have adequate substance if they:
Comply with their statutory obligations under the BVI Business Companies Act 2004 or the Limited Partnership Act 2017 (whichever is relevant);
Have adequate employees and premises for holding equitable interests or shares and, where they manage those equitable interests or shares, have adequate employees and premises for carrying out that management.
As per the draft for discussion paper of the International Tax Authority of BVI, it is the intention that the employees and premises for holding companies to be situated in BVI and not abroad. It remains to see the final version which will be implemented as relevant Law and is expected to be finalised soon.
The provisions of the Act are applicable as of 1st January 2019 and a 6-month transitional period exists for existing legal entities.
Further to the above, the Act has also introduced amendments to the Beneficial Ownership Secure Search System Act 2017 (“BOSS”) whereby it is required that the legal entities, in addition to their existing requirements to disclose information about their beneficial owners, disclose information about their tax residency status and activities.
In case of non-compliance with the provisions of the Act penalties will be imposed and there is the risk of strike-off of the legal entity from the Registry.
This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case. No responsibility can be accepted by the authors or the publishers for any loss.
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