On 22 April 2019, the British Virgin Islands International Tax Authority (ITA) published a draft Economic Substance Code (the Code). The Code is supplementary and provides guidance on the interpretation of the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the Act) and the manner in which the ITA will carry out its obligations under the legislation.
The Code provides clarification for entities which may be subject to economic substance requirements to assist with compliance under the Act.
Key points to note from the draft Code are as follows:
- A legal entity will be treated as carrying on a relevant activity in the Virgin Islands during any financial period in which it receives income from that activity.
- Pure equity holding entities are subject to a less rigorous substance regime than other forms of relevant activity. A legal entity will only fall within the definition of a “holding business” or “pure equity holding entity” if it holds nothing but equity participations, yielding dividends or capital gains. The ownership of any other form of investment will take the legal entity outside this definition.
- The business of being an investment fund is not a relevant activity as defined in the Act. It is outside the scope of the economic substance requirements in the same way as all other forms of business activity which are not specifically mentioned. Of course, if a legal entity carries on other activities besides being an investment fund, and those activities do constitute a relevant activity as this is defined in the Act, the economic substance requirements will have to be fulfilled in respect of those other activities.
- A framework for the initial financial periods for both new entities (formed since 1 January 2019) and existing entities (formed prior to 1 January 2019) is as follows:
- The first financial period of a legal entity which has been incorporated or formed on or after 1 January 2019 shall commence on the date of incorporation or formation and shall terminate on the expiry of one year from that date, unless the legal entity elects for a shorter financial period by giving relevant notice to the ITA.
- The first financial period of a legal entity which has been incorporated or formed before 1 January 2019 shall commence on 30 June 2019 unless the legal entity gives notice to the ITA that it wishes to elect for an earlier commencement date.
- An entity which provides credit as “an incidental part of a different sort of business” will not be treated as carrying on financing and leasing business (one of the relevant activities under the Code). Only where the provision of credit can be seen to be a business activity in its own right will the entity be treated as conducting financing and leasing business.
- Entities which hold debt or debt instruments for the purposes of investment will not be regarded as being in the business of providing credit facilities (and therefore outside of financing and leasing business).
- Section 7 of the Code defines Core Income Generating Activity (CIGA), however the definition is non-exclusive. What constitutes the CIGA of a particular activity is a fact sensitive issue which can vary from business to business. In some cases, it may be possible to carry on a relevant activity without also conducting all the related core income generating activities listed in the Act.
- Direction and Management in the BVI. It should be noted that what is required is that the relevant activity, as defined in the Act, is directed and managed in the BVI, not the legal entity which carries on the relevant activity. Where the legal entity’s only business is the relevant activity or activities in question, then that will mean that the entity itself must be directed and managed from the BVI. For the relevant activity to be directed and managed from the BVI there must be an adequate number of board meetings held in the BVI, having regard to the nature of the relevant activity, and its importance in the overall business of the legal entity. For a board meeting to be held in the BVI there must be a quorum of directors physically present in the BVI. The directors of the legal entity attending such meetings must include among their number adequate expertise to direct the relevant activity. Decisions of the Board regarding the relevant activity must be minuted, and minutes of those decisions must be kept in the BVI.
The Code provides BVI entities with helpful guidance on the Act and its implementation. The Code can provide reassurance in terms of identifying which entities are in or out of scope of the economic substance requirements and what measures should be taken to comply with those requirements.
A copy of the draft Code is available here.