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.
Entities out of scope
Entities which are not legal entities or do not carry on a relevant activity will not be required to comply with economic substance requirements. They will however have certain filing obligations as discussed below.
Legal entities carrying on Holding Business
A legal entity that only holds equity participations in other entities and only earns dividends and capital gains is carrying on ‘holding business’. To the extent a legal entity is carrying on ‘holding business’, then the economic substance requirements of the Act are less onerous. Specifically, the legal entity will need to comply with existing statutory obligations and it will need to have ‘adequate employees and premises for holding equitable interests or shares’ and, where it manages those equitable interests or shares, it will need to have ‘adequate employees and premises for carrying out that management’. We expect further guidance from regulations, rules and guidance notes as to the meaning of the phrase ‘adequate employees and premises’.
Legal Entities Carrying on Other Relevant Activities
A legal entity which is carrying on a relevant activity (other than ‘holding business’) will need to establish economic substance in the BVI and carry out specified ‘core income generating activities’ in the BVI. We note that legal entities carrying on some
forms of ‘intellectual property business’ are subject to certain presumptions of non-compliance.
It is beyond the scope of this bulletin to advise as to the nature and level of economic substance for each of the relevant
activities. However, we can advise that the economic substance requirements for legal entities carrying on a relevant activity
(other than ‘holding business’) are significant. In short, management decisions, possibly including day-to-day management
decisions, must be physically taken in the BVI. Furthermore, the legal entity is required to have appropriate premises,
adequate expenditures and an adequate number of suitably qualified employees in the BVI. The requirements vary by
business. If you are concerned that your legal entity may be carrying on a relevant activity, we recommend that you speak to
your usual Conyers lawyer.
New Filing Requirements
The ES Act imposes new filing requirements on BVI entities, which depend upon each entity’s classification under the Act.
A Company or Partnership not carrying out a Relevant Activity
A BVI business company or limited partnership with legal personality which is not carrying on any relevant activity will need to
file an annual return stating that it does not carry on a relevant activity.
A Company or Partnership which is not a Legal Entity as it is a Foreign Tax Resident
A BVI business company or limited partnership with legal personality which does not satisfy the definition of ‘legal entity’
because it is resident for tax purposes in a jurisdiction outside the BVI (and not in a jurisdiction which is on the
European Union list of non-cooperative jurisdictions for tax purposes) will need to demonstrate to the BVI authorities
that it is resident for tax purposes outside of the BVI.
Legal Entity carrying on a Relevant Activity
A legal entity carrying on a relevant activity must file the following information:
total turnover generated by the relevant activity
the amount of expenditure incurred on the relevant activity within the BVI
the total number of employees engaged in the relevant activity
the number of employees engaged in the relevant activity within the BVI
January 2019 | BRITISH VIRGIN ISLANDS
the address of any premises within the BVI which is used in connection with the relevant activity
the nature of any equipment located within the BVI which is used in connection with the relevant activity
the names of the persons responsible for the direction and management of the relevant activity, together with their
relationship to the company and whether they are resident in the BVI
Monitoring and enforcement
The International Tax Authority will be responsible for implementing, monitoring and enforcing the economic substance regime.
A legal entity carrying on a relevant activity which fails to comply with the ES Act is subject to penalty, strike off or both. At first
instance the fines can be up to US$20,000 (or up to US$40,000 for a ‘high risk IP legal entity’) and up to US$200,000 (or up to
US$400,000 for a ‘high risk IP legal entity’) for a second determination of non-compliance.
How can we help?
We recognise that this legislation will in some cases require changes to existing business models. Conyers Dill & Pearman is
ready to assist clients in understanding their obligations under the legislation and in implementing any such changes that may
be required. For further information please contact one of our lawyers listed below or your usual Conyers lawyer.