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Discover how appointing a BVI resident director can help your entity meet economic substance requirements, avoid penalties and maintain compliance under BVI regulations.
All legal entities in the British Virgin Islands ("BVI") need to submit annual economic substance ("ES") returns via their registered agent. Applicable deadlines depend on the financial period being used for ES requirements. Failure to meet requirements can result in severe penalties.
Major offshore financial jurisdictions have ES regulations in place to gauge whether a legal entity undertakes its core income-generating activities ("CIGA") with respect to the level of income derived from a legal entity's "relevant activities" in the tax jurisdiction in question. The goal is to promote equitable global taxation, specifically regarding the base erosion and profit-shifting ("BEPS") global standards imposed upon member jurisdictions by the Organisation for Economic Cooperation and Development ("OECD") and the EU listing process. The Economic Substance (Companies and Limited Partnerships) Act (As Revised) is a sign of the BVI's commitment to participating in these global standards.
Who is required to comply with the ES test and what constitutes a "relevant activity"?
Any legal entity in the BVI – defined as BVI companies, registered foreign companies, BVI limited partnerships and registered foreign limited partnerships — that carries out a "relevant activity" and is categorised as a "tax resident" is required to demonstrate substance in the BVI. The reporting period to be used – noted as a "financial period" in the BVI – can vary from entity to entity.
How the OECD defines "relevant activity" for these purposes is quite broad. It may include:
- Fund management
- Banking
- Holding companies
- Intellectual property
- Distribution and service centres
- Shipping
- Finance and leasing
- Insurance
- Headquartering
It should also be noted that any entities that are undergoing the process of solvent or insolvent liquidation in the BVI still fall under the BVI economic substance regime and need to file ES reports each year.
Common scenarios where a BVI company must show substance in the BVI and ways to comply with regulatory obligations
Pure Equity Holding Business
A Pure Equity Holding Entity ("PEHE") can avail of lessened ES requirements. The BVI resident director assists clients in satisfying the minimum statutory requirements and providing oversight of equity participation.
|
ES Requirement |
What Directors Provide | Regulatory Solution |
|---|---|---|
|
Directed & Managed |
Convening and documenting local BVI board meetings to approve statutory filings (e.g., Annual Returns, ES declarations), director appointments, and dividend declarations. |
Shows that there is an appointed director local to the BVI. |
|
CIGA (Passive Holding) |
Satisfies BVI Business Companies Act ("BCA") requirements. |
Meets PEHE requirements, including local offices and employees and compliance with BVI regulations. |
| Local Resources | Serving as local representative for equity participation. |
Demonstrates presence and representation in BVI. |
Finance and Leasing Business
When it comes to credit facilities, ES requirements requires demonstration of active credit portfolio management.
|
ES Requirement |
What Directors Provide | Regulatory Solution |
|---|---|---|
|
Directed and Managed |
The lion's share of board meetings and related decision-making take place in the BVI. |
Evidences BVI-based portfolio management. |
|
CIGA (Finance and Leasing) |
Directs Core CIGA |
Demonstrates business direction is conducted by someone local to the BVI. |
|
Adequacy Test |
Oversees qualified employees and third-party service providers based in the BVI. |
Amount of work and staff based in BVI matches level of finance activity in the jurisdiction. |
Intellectual Property ("IP") Business
Manages CIGA for IP assets (as copyrights, patents and trademarks).
|
ES Requirement |
What Directors Provide | Regulatory Solution |
|---|---|---|
|
Directed and Managed |
Board support for key meetings on IP strategy. |
Demonstrates that IP decisions take place in the BVI. |
|
CIGA (IP Business) |
Manages IP-related CIGA. | CIGA activities pertaining to IP take place in the BVI. |
| Substance Demonstration | Managing and / or outsourcing IP-related CIGA and showing physical presence in the BVI. |
Proves local management of income-generating IP income. |
How can a resident director enhance compliance with BVI ES requirements?
Appointing a BVI resident director can be a strategic move to help your BVI entity meet and demonstrate compliance with ES regulations. Here are some key reasons why to appoint a BVI resident director:
- Show that the entity is directed and managed in the BVI: The BVI ES legislation requires that the relevant activity be "directed and managed" in the BVI. Having a BVI resident director helps to ensure that board meetings are held locally and that the strategic decisions are held within the territory. This is a core component of the ES test.
- It establishes tangible presence and substance: Resident directors reinforce the overall physical presence and substance of the BVI entity. They can provide an anchor for local operations, however minimal, for entities that are not subject to the most stringent level of requirements.
- It helps to facilitate local execution of activities: For entities required to demonstrate CIGA in the BVI, a resident director is well-positioned to oversee and execute (or ensure the execution of) these activities within BVI territory.
- It eases compliance and reporting: A resident director is well placed to manage and coordinate the local documentation, recordkeeping and reporting required for ES filings with the ITA. They understand the local context and requirements.
- It mitigates the risk of non-compliance: Non-compliance with ES requirements can result in significant penalties, including fines, enforcement notices – and striking off the entity. A resident director serves as a local compliance expert, working to satisfy any statutory obligations.
- A local director can ensure the longevity and good standing of your BVI entity: Appointing an experienced and qualified resident director both addresses regulatory requirements but also by having this professional working on your team, reinforces your BVI entity's reputation and good standing.
How does the Maples Group assist with BVI Economic Substance filings?
Leveraging our legal and specialised fiduciary and fund services teams, the Maples Group serves clients with a team comprised of dedicated individuals with extensive experience with providing the necessary services for companies based in the BVI, including the provision of directorship services and other ancillary services (such as authorised person, secretary and accounting services) to assist with the preparation and filings of ES returns and monitoring any updates and changes in regulations. Our registered agent and legal services teams work in concert with our Fiduciary team based in the BVI to meet all compliance requirements in the jurisdiction.
The Maples Group has a dedicated on-the-ground team in the BVI to serve as a trusted fiduciary expert on an array of BVI entities, including private companies, limited partnerships, funds and trusts, to ensure they will be handled in accordance with local regulations and guidelines.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
