BVI Passes Economic Substance Legislation
In an effort to address the EU’s Code of Conduct Group concerns and recent OECD guidance regarding economic substance, the BVI Government passed legislation effective 1 January 2019 establishing economic substance tests for tax resident entities. The passage of the Act ushers in a “somewhat” new era of dynamic economic substance requirements conceded to by a group of jurisdictions to alleviate the EU’s concerns as it relates to tax transparency, fair taxation and base erosion.
The Economic Substance (Companies and Limited Partnerships) Act, 2018 (the Act) applies to all companies and Limited Partnerships (LPs) with legal personality that are registered in the BVI and generate income from carrying on relevant activities. The Act also captures foreign companies and Limited Partnerships that are engaged in relevant activities in the BVI. The Act applies to existing entities and new entities incorporated or established on or after 1 January 2019.
Relevant activities are defined as:
- Banking business
- Holding business
- Headquarters business
- Insurance business
- Fund management business
- Finance and leasing business
- Shipping business
- Intellectual property business
- Distribution and service centre business
Economic Substance Tests
A company or LP carrying on a relevant activity would meet the economic substance requirements if they generally:
- are directed and managed in the BVI
- undertake core income generating activities in the BVI in relation to that activity
- make adequate expenditure in the BVI in relation to the relevant activity
- maintain adequate premises and suitable employees in the BVI
Implementation Time Period
Companies and LPs in existence as at 1 January 2019 must meet the economic substance requirements by 30 June 2019. The timeline to meet the reporting obligations under this category is 30 June 2020.
For new companies and limited partnerships established on or after 1 January 2019, immediate compliance regarding economic substance is expected. The timeline to meet the reporting obligations under this category will be within one year after formation.
Compliance and Consequences
The BVI International Tax Authority will have monitoring and enforcement powers over the implementation of the Act. Failure to meet substance and reporting requirements may result in sanctions and removal from the Registry.
What can we do?
As the legislation unfolds and guidelines are issued, we will have a clearer picture of what is required to achieve full compliance. We will continue to provide updates as we receive them. In the interim, please do not hesitate to contact us with questions or concerns.