In late 2018, the BVI Government introduced new legislation, the Economic Substance (Companies and Limited Partnerships) Act 2018 (“Economic Substance Law”), to take effect from 1 January 2019. The Economic Substance Law is responsive to global OECD Base Erosion and Profit Shifting ("BEPS") standards regarding geographically mobile activities. Requirements of this type are rapidly being implemented on a level playing field basis by all OECD-compliant 'no or only nominal tax' jurisdictions.
You can access the British Virgin Islands (“BVI”) Economic Substance Law at the following link: https://eservices.gov.vg/gazette/sites/eservices.gov.vg.gazette/files/newattachments/Act%20No%2012%20--%20Economic%20Substance%20%28Companies%20and%20Limited%20Partnerships%29%20Act%202018-%20Revised%2017%2012%202018%20%28clean%29%20%281%29_0.pdf
In order to avoid being included on the EU Blacklist, BVI, like many other no or only nominal tax jurisdictions including Belize, Seychelles, Mauritius, Cayman Islands, Bermuda, Jersey, Guernsey and the Isle of Man, introduced the new Act which requires all companies and limited partnerships which are registered and tax resident in the BVI to have a substantial economic presence in the BVI.
Global standards in this field continue to develop. Accordingly, it is to be expected that the Economic Substance Law and the body of related Guidance will also evolve. The Economic Substance Law envisages that further regulations can be issued from time to time to prescribe and amend certain matters in the Economic Substance Law. Certain important practical aspects of the economic substance requirements are likely to be further clarified by additional guidance in due course.
Those who establish in no or only nominal tax jurisdictions do not generally do so to engage in BEPS activity; they do so because the said jurisdictions are efficient, stable and trusted neutral hub with key expertise in handling complex transactions.
The Economic Substance Law introduces certain reporting and economic substance requirements for 'relevant entities' conducting 'relevant activities'.
Such entities will be required to report certain information on their relevant activities on an annual basis to the relevant authority, the first such annual report being due no later than 12 months after the last day of the relevant entity's financial year commencing on or after 1 January 2019.
'Relevant entities' that do not conduct a 'relevant activity' will have to make a simple notification to confirm whether or not they conduct a 'relevant activity' (this straightforward notification is expected to be made online, via a dedicated portal, the first notification being made around September 2020).
For a relevant entity formed on or after 1 January 2019 that will conduct a 'relevant activity', the economic substance requirements will apply from the date that the relevant entity commences the relevant activity.
For relevant entities conducting relevant activities that were in existence before 1 January 2019, the economic substance requirements will apply from 1 July 2019.
The definition of 'relevant entity' is set out in the Regulations. It expressly recognises that the following are not within the classification of a 'relevant entity':
a. an entity that is an 'investment fund';
b. an entity that is a 'domestic company; and
c. an entity that is 'tax resident' outside of the BVI.
An initial step will be to determine whether an entity may fall within the classification of a 'relevant entity' (and, if so, to then determine if it is conducting or if it intends to conduct a 'relevant activity').
The Economic Substance Law applies economic substance requirements to the following categories of geographically mobile relevant activities previously identified by the OECD (and adopted by the EU):
Fund management business
Finance and leasing business
Intellectual property business
Distribution and service centre business
* Section 2 of the Economic Substance Law defines the holding business as a pure equity holding entity.
The extent to which an entity is affected will depend upon a number of factors including the entity type, the type of business the particular entity is engaged in and the way in which it operates.
However, an initial step will be to determine whether an entity may fall within the classification of a 'relevant entity' and, if so, to determine if it is conducting or if it intends to conduct a 'relevant activity'.
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