The long-awaited Rules on Economic Substance in the Virgin Islands (the Rules) have now been made available to the public on 9 October 2019. The Rules serve as guidance and explanatory notes to the Virgin Islands Economic Substance (Companies and Limited Partnerships) Act, 2018 (the ESA).
The ESA and Rules require BVI legal entities (including BVI companies and limited partnerships) that are tax resident in the BVI and conduct one or more relevant activities during a specific financial period (in-scope entities) to demonstrate economic substance in the BVI.
Relevant activities are assessed during a specific financial period which is typically the entity’s fiscal year or a calendar year.
The relevant activities captured by the ESA are banking business, shipping business, insurance business, fund management business, finance or leasing business, headquarters business, holding business, intellectual property business, and distribution and service center business.
An entity that conducts a relevant activity but can prove tax residency in a jurisdiction outside the BVI should not be impacted by the ES legislation, provided that the jurisdiction of tax residency is not on the EU list of non-cooperative jurisdictions for tax purposes. However, robust evidence is necessary to substantiate tax residency, such as recent tax returns or a letter issued by the relevant tax authority.
A legal entity which does not conduct a relevant activity during a financial period will similarly fall outside the scope of the ESA. Due to the intricacies of the legislation, it is highly recommended that relevant activity determinations are substantiated by BVI Legal Counsel. Broadly speaking, the following entities should not be subject to the ESA:
Integral to the effective enforcement of the ES regime is the collection and submission of ES documentation. The Beneficial Ownership Secure Search System (BOSS) will be amended to house ES data which will then enable the ITA to determine an entity’s compliance under the ESA at any given time.
It is the responsibility of the Registered Agent to obtain and upload ES data. Although the BOSS updates are still pending, entities should have already undertaken the self-classification process to enable Registered Agents to determine the following for each entity:
The Rules have extended the ESA to apply to entities in liquidation. Specifically, entities that entered into liquidation after 1 January 2019 are required to prove substance up to their dissolution date. In addition, the Rules provide that entities struck off the BVI Corporate Register after 1 January 2019 are subject to the ES legislation.
Should you have questions or require a advice from BVI Legal Counsel please contact our ES Team Leader, Sherrie Niles at firstname.lastname@example.org.