In response to the requirements of the EU Code of Conduct Group, the government of the British Virgin Islands (BVI) has brought into force The Economic Substance (Companies and Limited Partnerships) Acts, 2018 (the Act) which sets out an economic substance test for tax-resident entities carrying on specified activities. The Act came into force on 1 January 2019.
The Act applies to all “legal entities” carrying on “relevant activities”, other than non-resident companies, non-resident limited partnerships and limited partnerships which have elected not to have legal personality.
Legal entities are defined as being BVI companies and limited partnerships, and foreign companies and foreign limited partnerships registered in the BVI under the BVI Business Companies Act, 2004 or the Limited Partnerships Act, 2017.
A non-resident company or non-resident limited partnership is a company or limited partnership which is resident for tax purposes in a jurisdiction outside the BVI (except for jurisdictions which have been included on the EU list of non-cooperative jurisdictions).
Relevant activities are defined by the Act as:
- banking business
- insurance business
- fund management business
- finance and leasing business
- headquarters business
- shipping business
- holding business
- intellectual property business
- distribution and service center business.
The Economic Substance Test
Each entity falling within the scope of the Act must in relation to any relevant activity, carry out defined core income-generating activities in the BVI and demonstrate economic substance by reference to the following criteria, having regard to the nature and scale of the relevant activity:
- The relevant activity it carries out is directed and managed in the BVI;
- It has an 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);
- It incurs adequate expenditure in the BVI;
- It has 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.
Obligation to disclose Information
Legal entities are required on an annual basis to provide information in order to enable the International Tax Authority in the BVI to monitor whether the entity is carrying on relevant activity and, if so, whether the entity meets the economic substance tests within the meaning of the Act.
The information will be integrated into the Beneficial Ownership Secure Search System Act, 2017 and registered agents in the BVI are obliged to keep up to date the information on beneficial ownership. The International Tax Authority in the BVI can search the database and will be responsible for monitoring and investigating compliance.
Penalties for non-compliance
Penalties will be imposed both for failure to provide required information as well as for operating a legal entity in breach of the economic substance requirements. The Act provides for both criminal and financial sanctions in the case of non-compliance.
Further rules and guidance
We expect that further guidance will be provided with respect to the obligations imposed by the Act in order to further clarify the substance requirements prescribed by the Act and for assisting with the proper interpretation of its terms.
How can we help you?
If you require further information or would like to discuss how the Act may impact your business, you can get in touch with us and we will assist you to determine what measures you should take in order to achieve compliance. A possible solution may be for your company to obtain a tax residence in a jurisdiction outside the BVI and Cyprus may be one of your preferred solutions.