Introduction of Substance Requirements for Certain British Virgin Islands Legal Entities
The British Virgin Islands Government has passed legislation requiring certain legal entities incorporated or registered in the British Virgin Islands to maintain ‘economic substance’ in the jurisdiction. We set out below a summary of the legal entities affected by this new legislation and steps that will be required for compliance.
The Economic Substance (Companies and Limited Partnerships) Act, 2018 (the “ES Act”) was enacted in response to a scoping paper issued by the European Union’s Code of Conduct Group (Business Taxation) in June 2018. The paper set out requirements that certain jurisdictions outside the EU must adopt with regard to the economic substance of entities based in those jurisdictions, in order to avoid being black-listed by the EU. Broadly equivalent legislation has been enacted in other major offshore jurisdictions, including Bermuda, the Cayman Islands and the Channel Islands.
Under the ES Act, ‘legal entities‘ carrying on a ‘relevant activity‘ will need to establish economic substance in the BVI. A legal entity is a business company or limited partnership with legal personality, and includes foreign companies and foreign limited partnerships that are registered in the British Virgin Islands. Excluded from the definition of legal entities are (a) entities which are resident for tax purposes outside of the British Virgin Islands and (b) limited partnerships that do not have legal personality.
Legal entities which carry on any one or more of the following ‘relevant activities’ will be in scope and must comply with economic substance requirements:
- Banking business
- Distribution and service centre business
- Financing and leasing business
- Fund management business
- Headquarters business
- Holding business
- Insurance business
- Intellectual property business
- Shipping business
These terms are defined in the ES Act and are included in Annex 1 to this bulletin. It is anticipated that regulations, rules and guidance notes will be issued by the British Virgin Islands authorities in due course to provide greater insight into the meaning of these terms.