Economic Substance Requirements in the British Virgin Islands (BVI)
The BVI is among the most popular jurisdictions for offshore structures.
But things are changing and for a number of reasons, it is losing its appeal -
Now it seems that the new rules around substance is hitting them pretty hard -
The BVI government has introduced a new Act with Economic Substance Requirements for certain legal entities
effectively applicable from 1 January 2019, with a six-month transitional period for existing legal entities.
The legislation is introduced based on the recommendations of the BEPS project developed by the OECD to combat
tax evasion by multinationals which are shifting profits from high tax jurisdictions to entities in low/zero tax jurisdictions
but which entities have no adequate economic substance locally.
Similar legislation is introduced in other low/zero
tax jurisdictions including Cayman Islands, Mauritius, Bahamas, Bermuda, Jersey, Guernsey, Isle of Man, Aruba and
Curacao, while other jurisdictions may follow.
The ES Law applies to certain BVI companies, BVI limited partnerships with legal personality, and foreign companies and foreign limited partnerships with legal personality registered in the BVI carrying on "relevant activities". The ES Law does not apply to limited partnerships that do not have legal personality.
Entities that are tax resident in a jurisdiction outside of the BVI (other than in a jurisdiction included on the EU non-cooperative jurisdictions list) do not need to comply with the economic substance requirements but will need to provide satisfactory evidence of their tax residency.
Legal Entities with Relevant Activity
The legislation imposes Economic Substance Requirements to BVI resident entities (companies and limited
partnerships with legal personality) carrying out one or more any of the following “relevant activities”:
- Banking business
- Insurance business
- Fund management business
- Headquarters business
- Shipping business
- Distribution and service centre business
- Finance and leasing business
- Intellectual property (IP) business
- Holding business
The mentioned relevant activities are defined in the Act. Entities that
do not carry out any of these relevant activities are out of the scope of the legislation and therefore will not be subject
to Economic Substance Requirements.
On the other hand, some distribution and service activities only become
relevant activity when purchases are made from foreign affiliated companies or when services are provided to foreign
affiliated companies. A legal entity which carries on more than one relevant activity shall comply with the Economic
Substance Requirements in respect of each activity. An investment fund is outside of scope of the Economic
Substance Requirements, unless it carries on relevant activities besides being an investment fund.
Any entity which carries out a relevant activity in the BVI but claims to fall outside the definitions of resident entity
must make a formal claim and provide evidence that the entity is resident for tax purposes outside the BVI and which
is not on the EU list of non-cooperative countries. In the case that such evidence is not made available the, entity will
be required to meet the Economic Substance Requirements.
Subject to below, in order to meet the ES Test a legal entity carrying on a relevant activity must:
- conduct core income generating activities ("CIGA") in the BVI;
- be directed and managed in the BVI; and
- taking into account the nature and scale of the relevant activity, have:
- an adequate number of suitably qualified employees physically present in the BVI;
- an adequate amount of expenditure incurred in the BVI; and
- appropriate physical offices for CIGA.
The Economic Substance Code does not seek to provide specific definitions of "adequate", "suitable" or "appropriate" for the ES Test, instead noting that such terms should be given their ordinary English meaning and that the size of the particular business should be taken into consideration.
It is possible to outsource some or all of the BVI CIGA provided the legal entity is able to demonstrate that it is able to monitor and control the outsourced activities and that those activities are undertaken in the BVI.
Note that if a company is a "pure equity holding entity" which carries on no relevant activity other than holding equity participations in other entities and earning dividends and capital gains, the ES Law provides that it satisfies the ES Test if it
(i) complies with its statutory obligations under the BVI Business Companies Act; and
(ii) has in the British Virgin Islands adequate employees and premises for holding equity participations and, where it manages those equity participations, has in the British Virgin Islands adequate employees and premises for carrying out that management. A pure equity holding entity for these purposes means a legal entity that only holds equity participations in other entities and only earns dividends and capital gains.
On the other hand, high risk intellectual property ("IP") businesses face more stringent requirements.
Enforcement and penalties
The ES Law contains penalties for failure to satisfy the ES Test, including:
- for the first determination of non-compliance, a minimum penalty of $5,000 and a maximum penalty of $20,000 ($50,000 for high risk IP entities) may be imposed by the ITA;
- for the second determination of non-compliance, a minimum penalty of $10,000 and a maximum penalty of $200,000 ($400,000 for high risk IP entities) may be imposed by the ITA;
- The ITA may also serve notice on the Financial Services Commission requiring that the legal entity be struck off the Register of Companies or Register of Limited Partnerships as applicable.
For the ES Act and Code on economic substance requirements please find following hyperlinks:
- Economic Substance Act 2018: https://eservices.gov.vg/gazette/content/recent-gazettes
- Economic Substance Code: https://bvifinance.vg/News-Resources/ArticleID/3017/Draft-Economic-Substance-Code