In an effort to comply with the Code of Conduct Group (COCG) taxation standards, the BVI Economic Substance Law, or the Economic Substance Act, was implemented by the BVI government. If you are planning to incorporate a company in the BVI, there are a few important aspects regarding the BVI Economic Substance Act that you will need to know, which can be seen below.
WHAT EXACTLY IS THE BVI ECONOMIC SUBSTANCE ACT?
- Economic substance is the focus of any offshore jurisdiction with “no or only nominal taxation,” including the British Virgin Islands (BVI)
- The Economic Substance Act mandates relevant legal entities to establish enough presence and/or perform economic activity if they are tax residents in the BVI.
- The ESA, like earlier substance legislation established in the Cayman Islands, is designed to guarantee that BVI companies (whether incorporated in the BVI or registered foreign organizations) that carry out specific activities have demonstrated economic substance in the BVI. That is, relevant organizations must demonstrate that they have sufficient economic activity in the country to justify their earnings.
- The law imposes economic substance requirements on British Virgin Islands companies and limited partnerships that are “resident” in the BVI and engage in “relevant activities.”
WHEN WAS THE ECONOMIC SUBSTANCE ACT IMPLEMENTED IN BVI?
- The Economic Substance (Companies and Limited Partnerships) Act 2018 was first enacted in the BVI on January 1, 2019.
- The Economic Substance (Companies and Limited Partnerships) (Amendment) Act 2021 went into effect on June 29, 2021. This took place after the Economic Substance (Companies and Limited Partnerships) Act of 2018 was amended.
WHAT ARE THE TYPES OF RELEVANT ACTIVITIES IN BVI?
According to the final regulation of this legislation, when a legal entity engages in a relevant activity, such entity must comply with the economic substance criteria and submit a report annually.
A list of the relevant activities is as follows:
- Banking
- Insurance
- Fund management
- Finance and leasing
- Headquarters
- Shipping
- Holding Company
- Intellectual property
- Distribution and service centers
Learn About BVI Annual Filing Requirements
WHAT ARE THE SUBSTANCE REQUIREMENTS FOR THE BVI ECONOMIC SUBSTANCE ACT?
According to the BVI Economic Substance Act, all BVI companies and limited partnerships, including BVI business companies with legal personality, that engage in one or more relevant activities must meet the compliance requirements (economic substance test) for each relevant activity.
For Legal entities
Legal entities can fulfil the economic substance test in the BVI if the following three requirements are met: –
Direction and management test
During the fiscal term, the entity must ensure that its relevant operations are directed and managed inside the territory of the BVI.
“Adequacy” test on expenditure, number of workers, buildings, and equipment situated in the British Virgin Islands
The entity must, in particular, guarantee:
- Having an appropriate number of competent staff to carry out the required activity in the British Virgin Islands.
- Expenses incurred in connection with the relevant activity in the BVI.
- Having an adequate physical presence to carry out its primary revenue-generating operation.
- If the company is engaged in an IP business that requires specialized equipment, the equipment must be located in the BVI.
CIGA Test
In the BVI, the entity must carry out specific Core Income-Generating Activities (CIGA). Section 7 of the Act defines core income-generating activities, which vary depending on the type of business. The list below depicts some representative CIGAs in connection to the relevant activities covered under the BVI ESA.
- Banking – Raising funds, managing credit or currency risks, making loans and credit available, maintaining regulatory capital, etc.
- Insurance – Predicting and assessing risk, insuring or re-insuring against risk, and offering insurance-related business services.
- Fund management – Making investment decisions, evaluating risks and reserves, making currency judgments, etc.
- Finance and leasing – Negotiating finance arrangements, locating and obtaining leased assets, modifying relevant agreements, etc.
- Headquarters – Making managerial decisions, spending fees on behalf of affiliates, and organizing group activities.
- Shipping – Recruiting and supervising crew members, transporting and repairing ships, planning journeys, etc.
- Intellectual property – In terms of intellectual property assets (patents, R&D), or non-trade intangible assets (brand, trademark and customer data, branding, and distribution).
- Distribution and service centers – Transporting and storing products, maintaining stockpiles, receiving orders, and giving advisory solutions.
For pure equity holding companies
In the BVI, a pure equity holding company is defined as an organization that “carries on no significant activity other than owning equity participations in other entities and reaping dividends and capital gains.”
It should be noted that if you form a pure equity holding entity that exclusively holds equity participation in other businesses from which you receive dividends and capital gains, your entity may be entitled to a simpler compliance responsibility to fulfil the economic substance requirements.
The pure equity holding company, in particular, will have economic substance if it meets the following criteria
- It conforms with the necessary rules that govern it, such as the BVI Business Companies Act 2004 or the Limited Partnership Act 2017.
- It has enough premises and staff in the BVI for passively holding or actively managing equity participation.
For Intellectual Property (IP) holding companies
This sort of entity is deemed not to engage in a core income-generating activity if its activities within the BVI do not include those listed in Section 7 of the Act.
To overcome the assumption, the entity must demonstrate that its operations in the BVI include:
- Strategic decisions and risk management relating to the development and exploitation of intangible assets.
- Strategic decisions and risk management relating to third-party acquisition and exploitation of intangible assets.
- Underlying commercial activity includes the exploitation of intangible assets and the generation of income from third parties.
WHAT ARE THE REPORTING OBLIGATIONS AS PER THE BVI ECONOMIC SUBSTANCE ACT?
Legal entities are expected to report on their activities on a yearly basis. It is critical to note that such reports must be submitted through their registered agent in the British Virgin Islands.
Furthermore, the documentation necessary for your report may differ depending on your company sector and tax resident status.
We have summarized the reporting information which can be seen below:
Legal entities that are BVI tax residents and engage in relevant activities must file the following reports within six months of the conclusion of their fiscal year (or 18 months from the commencement of the financial period from 30 June 2019)
a) Total income generated by the relevant activity in the BVI.
b) The total amount spent on and by the relevant activity in the BVI.
c) The total number of competent personnel engaged in related activity in the BVI.
d) Address of premises in the BVI in connection to the relevant activity.
e) Details of equipment in the BVI in respect to the relevant activity.
f) Details on the individuals in charge of the relevant activity’s direction and management, as well as their residency in the BVI.
g) Details on the outsourcing entity and the resources that have been deployed (if CIGAs are outsourced to another company).
IP Holding business
a) Whether they are high-risk intellectual-property transactions.
b) Whether they intend to challenge the Act’s rebuttable presumption (plus related documents).
Legal entities engaged in relevant activities that are not BVI tax residents.
Details and supporting documents proving your country of tax residence.
WHAT ABOUT THE BVI COMPLIANCE TIMELINE?
The Economic Substance Act mandated that a legal entity meet economic substance standards for every fiscal period in which it engaged in relevant operations.
The legal entity’s financial period can be established in the following circumstances:
- The financial term for businesses and limited partnerships (with legal personality) established on or after January 1, 2019, is within one year of the date of incorporation.
- For businesses and limited partnerships (with legal personality) formed before the date above, the fiscal period will be suspended for one year and will resume no later than 30 June 2019. In other words, such entities are exempt from substance regulation until June 30, 2019.
- Whether or whether they engage in relevant operations, all legal entities are required to file an annual economic substance report within 6 months after the end of their fiscal year.
The BVI limited partnerships without legal personality’s financial term have been amended as follows:
- The first “financial period” of BVI limited partnerships without legal personality created before 1 July 2021 must begin no later than 1 January 2023.
- The first “financial period” for BVI limited partnerships without legal personality created on or after 1 July 2021 will begin on the date of formation or registration.
- All BVI limited partnerships without legal personality are required to file an annual Economic Substance report within 18 months of the start of the fiscal term.
FAQs
How does the exchange of information take place?
The connection between the BVI and the appropriate tax authority in which your firm is a tax resident facilitates the exchange of information.
If your firm is found to be a non-tax resident in the BVI, the International Tax Authority (ITA) of the BVI will notify the overseas competent tax body based in the foreign jurisdiction.
In the event that your business has one beneficial owner who is an EU member state, the ITA will additionally notify the competent authority in that EU member state of your firm’s tax residency claim.
The ITA may exchange economic substance information with the foreign tax authority of one non-resident entity in the BVI if the entity meets the following criteria:
The entity has broken the BVI’s economic substance regulations.
The entity participates in IP commerce and is presumed to be not carrying out Captive Insurance Companies Association (CICA) within the BVI.
Despite the substance requirements, why is the BVI a popular jurisdiction for company incorporation?
A business in the BVI can be formed rapidly, with a flexible organizational structure and minimum financial reporting obligations. BVI companies are perfect for new businesses since they may be operated from anywhere in the globe and there are no geographical constraints on where a BVI company can conduct business.
What are the consequences of non-compliance with the Act?
In the event of non-compliance, the Act allows for both criminal and pecuniary penalties. Compliance will be monitored and investigated by the International Tax Authority of the BVI.
Can the International Tax Authority of the BVI disclose the economic substance information to other parties?
In the following circumstances, the ITA is obligated to and shall provide economic substance information recorded in the Registered Agent’s database in respect of any entity to the applicable foreign competent authority: –
- If the economic substance standards have been violated.
- The entity engages in the intellectual property business and is presumed not to engage in CIGA in the BVI.
