A. Background Information
The BVI Government introduced, with effect from 1 January 2019, a new legislation titled the Economic Substance (Companies and Limited Partnerships) Act 2018 (the Law), requiring certain legal entities to demonstrate adequate economic substance regarding taxation in the BVI. Any company registered in the BVI going forward must adhere to the new guidelines which have been implemented as a result of OECD guidance and concerns from the EU Code of Conduct Group (COCG).
Similar laws were introduced in other zero or low corporation tax jurisdictions such as Belize, Seychelles, Mauritius, Cayman Islands, Bermuda, Jersey, Guernsey and the Isle of Man.
In short, the Law introduces economic substance requirements for all companies and limited partnerships which are registered and tax resident in the BVI. The Law mandates that every Corporate Services Provider registering a company that falls under the scope of the Law will have to know where the entity is tax resident and must be ready to relay that information to the BVI’s competent authorities. The Law also requires that in the case that a company or limited partnership is tax resident in the BVI, it must demonstrate economic substance.
Further key details, in the form of Regulations are expected to be published during the course of 1Q19.
B. Main Provisions of the Law
Entities in scope
The entities which are in scope of the Law and are required to have economic substance in BVI are those carrying on a “relevant activity” defined as:
- Banking business
- Insurance business
- Shipping business
- Fund management business
- Finance and leasing business
- Headquarters business
- Holding business
- Intellectual property business (IP legal entities will be facing more onerous requirements and are encouraged to seek legal advice).
- Distribution and service centre business
The entities which are outside the scope of the Law are the non-tax resident BVI entities as well as BVI entities which do not carry on a relevant activity.
First Reporting Period
Entities in scope which are formed as of 1 January 2019 onwards will have to comply for any reporting period ending on or after 31 December 2019.
Entities in scope and in existence on 1 January 2019 will have to comply for each reporting period starting no later than 30 June 2019.
Action required by Entities in scope
- Carry out an analysis of your activities: All BVI entities will need to carry out an analysis to assess whether they are in scope, i.e. whether they are conducting a relevant activity. Entities in scope will then need to consider their position and take appropriate action.
- Establish substance in BVI: Entities in scope (other than pure equity holding entities, as described below) must manage and direct the relevant activity in the BVI and conduct core income-generating activity. They must also, taking into account the nature and scale of the relevant activity, show that they have an adequate level of employees and expenditure in the BVI and appropriate physical offices or premises for the core income generating activity. It should be noted that outsourcing of the income generating activity is permitted in certain circumstances.
- Holding entities: Holding entities are required to meet reduced substance requirements. Specifically, for pure equity holding entities, only earning dividends and capital gains, the relevant entity will be deemed to have adequate substance if it complies with its statutory obligations under the BVI laws and has adequate employees and premises for holding and, where relevant, managing those equity interests.
Reporting obligations and access to reported information
All BVI entities must disclose adequate information to enable the International Tax Authority in the BVI (ITA) to monitor whether the relevant entity is carrying on relevant activities and, if so, whether it is complying with the economic substance requirements. The information will be integrated into the BVI’s existing Beneficial Ownership Secure Search (BOSS) system which obliges registered agents in the BVI to keep up to date information on beneficial ownership and allows competent authorities to search the database. The new regime requires legal entities to submit information on an annual basis which can be analysed by competent authorities and used as a basis for a risk-based investigation and enforcement of economic substance requirements.
Automatic notification will be made to the “relevant overseas competent authority” in respect of a relevant legal entity which:
- is found to be in breach of the economic substance requirements;
- carries on “IP relevant activity” in certain circumstances; or
- claims to be tax resident in a jurisdiction outside the BVI.
Substantial fines and up to 5 years’ imprisonment can be imposed for non-compliance and the relevant entity may be struck off the register.
C. The Way Forward
The Rules and Regulations relating to the new Law providing further details and clearer picture, are still being drafted by the BVI Authorities. It is our view though that clients who are looking to setup new holding and IP entities (or entities carrying on any relevant activities) from now on, should consider, following a relevant economic feasibility, tax and legal review, alternative mid-shore or on-shore jurisdictions such as Cyprus and Hong Kong depending on the activities and the nature of the assets to be held.
Regarding your existing BVI entities we suggest that even though you should proceed to review their activities to assess whether they are in scope and have a restructuring plan in place (and we remain available to assist you in this respect), you should not proceed with a final decision or implementation until the Rules and Regulations are issued and the various substance packages and costs are available. Options include building local substance, declaring substance elsewhere, discontinuing and setting up new or redomicile to an unaffected jurisdiction such as Cyprus or Hong Kong.
International developments focusing on transparency and tax compliance such as the above BVI Substance Law, continue to alter dramatically the playing field and are shaking the world of wealth planning and financial management to its core. Although meeting these developments is demanding and requires constant revisiting of the structures in use, alternative tax compliant structuring options do exist.
Fiduserve can assist in putting in place structures which give due consideration to international tax provisions and conditions, and personal as well as family circumstances, and provide the necessary support and resources to successfully maintain it.
Disclaimer: This memo should be used as a source of general information only. It is not intended to give a definitive statement of the law and it should not be construed as legal or other advice. Furthermore, it is based on information and legislation currently available to us which may be subject to further changes by the regulators.
Further information and advice on specific matters can be provided upon request.