BVI Economic Substance
The British Virgin Islands (“the BVI”), together with other major offshore jurisdictions, introduced economic substance laws. The BVI Economic Substance (Companies and Limited Partnerships) Act, 2018 (“the Act”) became effective from 1 January 2019. Companies incorporated on or after 1 January 2019 have to comply with the Act immediately, while a transition period to 30 June 2019 was provided for entities established before 1 January 2019. This is in response to the European Union (“EU”) and the Organisationfor Economic Cooperation and Developments’ (“OECD”) various efforts to enhance tax transparency.
In simple terms, a relevant BVI entity (including locally incorporated companies, foreign entities registered in the BVI and limited partnerships having legal personality (see Table 1 in Figure 1)) that engages in one or more of the Relevant Activities (see Table 2 in Figure 1) would be required to comply with the Act by maintaining an appropriate level of economic substance (see Table 3 in Figure 1) in the BVI, unless exceptions apply. Please refer to our previous Hong Kong Tax Alert Issue 4 for details.
Barbados, Bermuda, BVI, Cayman Islands, Guernsey, Isle of Man, Jersey, Marshall Islands, etc.
Locally incorporated companies
Foreign companies registered in the relevant jurisdictions
Limited partnerships with legal personality
Distribution and service center
Finance and leasing
Intellectual property (IP) holding
Managed and directed (Board)
Core income generating activities (CIGA) conducted locally
Figure 1. Conceptual illustration of Offshore Economic Substance Laws
BVI entities that are not conducting Relevant Activities are out of scope. Although the Relevant Activities are widely defined with the intention of encompassing most entities, there are still some business activities that are out of scope, e.g. the holding of immovable property. Investment fund is not a Relevant Activity, however, it is not entirely clear whether, similar to the Cayman Islands’ approach, any entity through which an investment fund directly or indirectly invests or operates is part of an investment fund. That said, fund management business is not excluded, and is one of the Relevant Activities requiring local economic substance.
BVI entities that do not receive income from the respective businesses (e.g. providing non-interest bearing loans) during the reporting period (typically a 12-month period) is not regarded as conducting Relevant Activities. This could also apply to intellectual property holding entities that do not charge a royalty or licencefee (e.g. the primary reason for holding such intellectual property through a BVI entity was due to various legal and commercial considerations). In fact, the Rules specifically mention that a BVI entity “can discontinue the activity, or modify it so it no longer falls within the scope of a relevant activity”. However, wider considerations including the counterparties’ transfer pricing and local tax implications should be taken into account.
BVI entities that are tax residents in another jurisdiction (which is not a black-listed jurisdiction 1) are out of scope, provided their income from relevant activities are subject to tax in a jurisdiction outside the BVI. The underlying rationale is that such entities should be properly taxed in such another jurisdiction. The Rules go on to explain that the tax residence of a transparent entity is demonstrated by reference to the tax residence of the participators or partners, and it is sufficient that an entity is accepted to be a taxable entity in a jurisdiction not imposing tax based on residence. By contrast, there are no such provisions in the Cayman Island rules.
Holding companies are subject to a less stringent economic substance requirements where only an appropriate level of employees (or outsourced resources) and business premises are required. The reduced requirements apply to “Pure Equity Holding Companies” which are defined as entities that only hold equity investment, and only receive dividend and capital gains. A strict application of this intentionally narrow definition is required. Importantly, Pure Equity Holding Companies are not required to be managed and directed in the BVI which helpfully suggests that maintaining sufficient qualified director(s), sufficient quorum of each board meetings physically present in the BVI, etc. are not necessary.
Interestingly, the Rules clarified that for a Pure Equity Holding Company that actively manages its equity participations, it should maintain adequate and suitably qualified employees and appropriate premises locally. While outsourcing is always permissible, the practical aspects of this operating model should be considered especially with regards to a BVI entity established to trade equity investments on a regular basis.
Filing / Reporting
The ES Act requires that all Business Companies and Limited Partnerships incorporated in the BVI must inform the International Tax Authority of their Economic Substance status, within six months after the end of their financial period.
The financial period for entities incorporated from January 1st, 2019 is one year from the date of their incorporation. Reporting via BOSSS commences at the end of each financial period. Filings must be done within 6 months after the end of the financial period.
The financial period for entities incorporated prior to January 1st, 2019 is one year commencing no later than June 30th, 2019. Reporting via BOSSS commences at the end of each financial period. Filings should be done within 6 months after the end of each financial period.
There are also provisions available for changing the standard financial periods mentioned above, please inquire if necessary.
The filing/reporting requirement is an annual requirement to assist the regulators with their monitoring obligations.
We will be assisting with legal assessments, application for change of financial periods, outsourcing services, setting up of independent office, recruitment of qualified staff, applications for licenses, and registration with Inland Revenue, Social Security and National Health Insurance. Our fee sheet is available for review.