BVI passed the Economic Substance Act, due to the lack of tax transparency in the territory, in order to avoid BVI to be included in the EU list of the non-cooperative jurisdictions for tax purposes.
Similar legislation were passed in various jurisdictions which are listed as tax heaven jurisdictions.
Since 1st of January 2019, the new Act is requiring BVI legal entities to demonstrate adequate economic substance tax-wise. The Law introduces economic substance requirements for all companies and limited partnerships which are complied with the requirements as described below.
According to this Act, a legal entity which carries on a "relevant activity" during any financial period must comply with their economic substance requirements.
A "relevant activity" is defined as:
- Banking business such as raising funds, managing risk including credit, currency and interest risk, taking hedging positions, providing loans, credit or other financial services to customers, managing regulatory capital and preparing regulatory reports and returns;
- Insurance business such as predicting and calculating risk, insuring or re-insuring against risk and providing insurance business services to clients;
- Fund management business such as taking decisions on the holding and selling of investments, calculating risks and reserves, taking decisions on currency or interest fluctuations and hedging positions and preparing relevant regulatory or other reports for government authorities and investors;
- Finance and leasing business such as agreeing funding terms, identifying and acquiring assets to be leased (in the case of leasing), setting the terms and duration of any financing or leasing, monitoring and revising any agreements and managing any risks;
- Headquarters business such as taking relevant management decisions, incurring expenditures on behalf of affiliates and coordinating group activities;
- Shipping business such as managing the crew (including hiring, paying and overseeing crew members), hauling and maintaining ships, overseeing and tracking deliveries, determining what goods to order and when to deliver them and organizing and overseeing voyages;
- Holding business such as business of being a pure equity holding entity;
- Intellectual property business such as where the business concerns intellectual property assets such as patents, research and development, where the business concerns non-trade intangible assets such as brand, trademark and customer data, marketing, branding and distribution;
- Distribution and service center business such as transporting and storing foods, managing stocks, taking orders and providing consulting or other administrative services.
The companies which are outside the scope of the Law are BVI legal entities which are not BVI tax residents and the ones which do not undertake on a "relevant activity" as described above.
Furthermore, according to the new law any legal entity will now require providing information about their tax residency status and activities, enabling therefore the International Tax Authority to monitor whether the relevant entity is carrying on relevant activities and, if so, whether is complying with the economic substance requirements.
Penalties are imposed both for failure to provide required information and for operating a legal entity in breach of the economic substance requirements, which may include fines, imprisonment and/or strike-off.
The new legislation applies to the newly formed companies incorporated on or after 1 January 2019 with immediate effect. The existing legal entities incorporated prior to 1 January 2019 must comply with the economic substance requirements by 30 June 2019.
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.