Sep 2024
The British Virgin Islands (the BVI), along with most other major offshore jurisdictions, has introduced “economic substance” requirements for entities carrying on certain specified activities. This economic substance regime requires all companies and limited partnerships incorporated or registered in the BVI to make annual filings with the BVI International Tax Authority (the ITA) via their registered agent, and for entities carrying out certain specified “relevant activities” to establish and maintain substance physically in the BVI. We discuss below 10 key things you need to know about the BVI economic substance requirements.
1. Background and Relevant Legislation
The relevant legislation is the Economic Substance (Companies and Limited Partnerships) Act, 2018 (as amended) (the BVI Economic Substance Act), together with the Rules on Economic Substance in the Virgin Islands which were published by the ITA on 9 October 2019, as updated on 10 February 2020 and 24 February 2023, which provide additional guidance as to the interpretation and application of the BVI Economic Substance Act.
The BVI Economic Substance Act was brought into force in the BVI as of 1 January 2019 and was enacted in response to:
- a scoping paper issued by the European Union’s Code of Conduct Group (Business Taxation) in June 2018. The EU scoping paper expressed concerns regarding so-called harmful tax competition and the potential “misuse” of offshore entities in low tax jurisdictions for profit-shifting. The paper also set out requirements that certain jurisdictions outside the EU must adopt with regard to the economic substance of entities domiciled in those jurisdictions in order for the jurisdiction to avoid being blacklisted by the EU; and
- global OECD Base Erosion and Profit Shifting 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.
Broadly equivalent legislation has been enacted in other major offshore jurisdictions including Bermuda, the Cayman Islands and the Channel Islands.
2. Legal Entities
The BVI Economic Substance Act applies to all “legal entities” which are defined as a company or a limited partnership (and includes foreign companies and foreign limited partnerships registered under the BVI Business Companies Act or BVI Limited Partnership Act). Entities which are resident for tax purposes in a jurisdiction outside of the BVI that is not itself blacklisted by the EU are however excluded from the definition of legal entities.
3. Tax Residency
Where an entity is tax resident in a jurisdiction outside of the BVI which is not included in Annex 1 to the EU list of non-co-operative jurisdictions, it will be exempt from the BVI economic substance requirements if it provides evidence of such tax residency in its annual economic substance filing (please see paragraph 9 below for the relevant filing deadlines). An entity cannot however be regarded as resident for tax purposes in a jurisdiction that does not have a corporate income tax system.
Evidence of relevant tax residency which the ITA will accept includes:
- Certificates or letters issued by the competent tax authority of the relevant jurisdiction;
- Tax assessments, demands or evidence of payment issued by the competent tax authority of the relevant jurisdiction;
- Tax returns submitted to the competent tax authority of the relevant jurisdiction; or
- Rulings issued by the competent tax authority of the relevant jurisdiction.
For any evidence that is not in English, a certified English translation must be provided.
Such evidence must cover the entirety of the relevant financial period and therefore, for example, if certificates of tax residency are issued on the basis of a calendar year and the entity’s financial period for BVI economic substance purposes is 30 June – 29 June, it will be necessary to include certificates for both relevant calendar years.
Where an entity is unable to provide the necessary evidence of tax residency by the relevant filing deadline, an application for provisional treatment may be made before the end of the applicable reporting period specifying a reasonable period within which the necessary evidence will be submitted. During the provisional extension period the entity will be treated for the purposes of the BVI Economic Substance Act as if it were resident for tax purposes in a jurisdiction outside of the BVI.
4. Financial Periods
The BVI economic substance regime is applied by reference to “financial periods” which do not necessarily align with an entity’s accounting financial year-end. The following default financial periods apply unless the entity has elected to change its financial period by written notice to the ITA:
| Type of Entity | Default Economic Substance Financial Period |
| Company or limited partnership with legal personality incorporated or formed before 1 January 2019 | 30 June – 29 June |
| Company or limited partnership with legal personality incorporated or formed on or after 1 January 2019 | 12 month period commencing on the date of incorporation or formation |
| Limited partnership without legal personality formed before 1 July 2021 | 1 January – 31 December |
| Limited partnership without legal personality formed on or after 1 July 2021 | 12 month period commencing on the date of formation |
5. Relevant Activities
Legal entities must determine whether they carried on any of the following “relevant activities” during each financial period:
- banking business
- distribution and service center business
- financing and leasing business
- fund management business
- headquarters business
- holding business
- insurance business
- intellectual property business
- shipping business
The most common relevant activity is “holding business” where a legal entity only holds shares or other equity participations in other entities and only earns dividends and/or capital gains. The ownership of any other asset (such as a loan receivable, bond or other debt instrument) will take the legal entity outside this definition.
Each of these activities is defined in the BVI Economic Substance Act and the specific activities being carried on by the BVI entity must be carefully considered in order to determine whether a legal entity carrying out a “relevant activity”. Conyers BVI Economic Substance Calculator Tool provides interactive guidance to classify the activities of your legal entity or please contact Conyers who can assist you in carrying out this analysis.
6. Substance Requirements applicable to Legal Entities
The applicable substance requirements will depend on the specific activities being carried on by the legal entity:
- For legal entities carrying out holding business, a lighter substance regime applies and the entity is only required to: (i) comply with its existing statutory obligations under the BVI Business Companies Act or BVI Limited Partnership Act; and (ii) have, in the BVI, “adequate employees and premises for holding equity participations” and, where it actively manages those equity participations, it will need to have “adequate employees and premises for carrying out that management”. Where the holding business is passive in nature (please see paragraph 7 below in this regard) having a registered office, registered agent and corporate secretary located in the BVI will be sufficient for substance purposes.
- For other relevant activities the substance requirements are more onerous, with the need for the legal entity to have BVI resident directors, premises in the BVI and for the direction and management of the entity to take place from within the BVI. In addition certain “core income generating activities” need to be carried out in the BVI.
7. Passive and Active Holding Business
For legal entities carrying on “holding business”, it is important to determine whether the legal entity is passively or actively managing its equity holdings. What constitutes “actively managing” equity participations is a fact-sensitive question which is dependent on the nature of the activity being carried on. Where however the legal entity simply holds equity participations and does nothing else during a given financial period, the holding business will be entirely passive in nature.
8. Legal Entities Not Carrying on a “Relevant Activity”
If a legal entity is not carrying on one of the nine specified relevant activities under the BVI Economic Substance Act set out at paragraph 5 above then the only requirement is for the entity to make an annual filing via its registered agent confirming that it did not carry on a relevant activity during the relevant financial period.
9. Annual Filing Obligations and Relevant Deadlines
All companies and limited partnerships incorporated or registered in the BVI are required to make an annual filing confirming which relevant activities (if any) they conducted during the previous financial period along with certain other required information and evidence of their tax residency outside of the BVI if applicable, with the deadline for such filings being six months after the end of the relevant financial period. For example:
| Economic Substance Financial Period | Filing Deadline |
| 30 June – 29 June | 29 December |
| 1 January – 31 December | 30 June |
10. Penalties
The ITA is responsible for implementing, monitoring and enforcing the BVI economic substance regime. A entity which fails to comply with the requirements of the BVI Economic Substance Act is subject to penalty, strike off or both.
- Failure by an entity to make its annual filings or failure to provide information to the ITA on request without reasonable excuse may result in a fine of up to US$75,000 or imprisonment for a period of up to five years;
- On a determination by the ITA for non-compliance with the substance requirements under the BVI Economic Substance Act, at first instance the relevant fines can be up to US$20,000 (or US$50,000 in the case of high-risk IP entities) and up to US$200,000 (or US$400,000 in the case of high-risk IP entities) for a second determination of non-compliance. An entity can also be struck-off and dissolved for non-compliance.
If you have any queries regarding the BVI economic substance regime please contact Conyers BVI who will be pleased to discuss these requirements with you and their applicability to your individual circumstances.