BVI Economic Substance 2020

On 19th December, 2018, the British Virgin Islands passed the Economic Substance (Companies and Limited Partnership) Act, 2018, which came into force on 1st January 2019.

The most important details of the new legislation are:

1. According to the Act, a legal entity which carries on a relevant activity during any financial period must comply with the economic substance requirements in relation to the following activities:

a) banking business;
b) insurance business;
c) fund management business;
d) finance and leasing business;
e) headquarters business;
f) shipping business;
g) holding business;
h) intellectual property business;
i) distribution and service centre business

2. Subject to these new legal provisions, a legal entity complies with the economic substance requirements if:

(a) the relevant activity is directed and managed in the British Virgin Islands;
(b) having regard to the nature and scale of the relevant activity:

- there are an adequate number of suitably qualified employees in relation to that activity who are physically present in the Virgin Islands (whether or not employed by the relevant legal entity or by another entity and whether on temporary or longterm contracts);
- there is adequate expenditure incurred in the Virgin Islands;
- there are physical offices or premises as may be appropriate for the core income-generating activities; and
- where the relevant activity is intellectual property business and requires the use of specific equipment, that equipment is located in the Virgin Islands;

(c) the legal entity conducts core income-generating activity; which is described in the law as follows:

- banking business

means the business of accepting deposits of money which may be withdrawn or repaid on demand or after a fixed period or after notice, by cheque or otherwise and the employment of such deposits, either in whole or in part,

(a) in making or giving loans, advances, overdrafts, guarantees or similar facilities, or


(b) the making of investments,

for the account and at the risk of the person accepting such deposits.

- insurance business

means the business of undertaking liabilityunder a contract of insurance to indemnify or compensate a person in respect of loss or damage, including the liability to pay damages or compensation contingent upon the happening of a specified event, and includes life insurance business and reinsurance business.

- fund management business

means the conduct of an activity that requires the legal entity to hold an investment business license pursuant to section 4 and category 3 of Schedule 3 of the Securities and Investment Business Act, 2010, which includes the following sub-categories:

Investment Management
Sub-category A: managing Segregated Portfolios (Excluding Mutual Funds);
Sub-category B: Managing Mutual Funds;
Sub-category C: Managing Pension Schemes;
Sub-category D: Managing Insurance Products; and
Sub-category E: Managing Other Types of Investment

- finance or leasing business

means the business of providing credit facilities of any kind for consideration. Consideration may include consideration by way of interest. The provision of credit may be by way of instalments for which a separate charge is made and disclosed tothe customer in connection with:

(i) the supply of goods by hire purchase
(ii) leasing other than any lease granting an exclusive right to occupy land
(iii) conditional sale or credit sale

Where an advance or credit repayable by a customer to a person is assigned to another person, that other person is deemed to be providing the credit facility for these purposes. Any activity falling within the scope of “banking business”, “fund management business” or “insurance business” is excluded from this definition.

- headquarters business

means the business of providing any of the following services to an entity in the same group:

(a) the provision of senior management;
(b) the assumption or control of material risk for activities carried out by any of those entities in thesame group; or
(c) the provision of substantive advice in connection with the assumption or control of risk referred to in paragraph (b) but does not include “banking business”, “finance and leasing business”, “fund management business”, “intellectual property business”, “holding business” or “insurance business”.

- shipping business

means any of the following activities involving the operation of a ship anywhere in the world other than solely within British Virgin Islands waters (as defined in section 2(2)(a) of the Merchant Shipping Act, 2001):

(a) the business of transporting, by sea, persons, animals, goods or mail;
(b) the renting or chartering of ships for the purpose described in paragraph (a);
(c) the sale of travel tickets or equivalent, and ancillary services connected with the operation of a ship;
(d) the use, maintenance or rental of containers, including trailers and other vehicles or equipment for
the transport of containers, used for the transport of anything by sea;
(e) the management of the crew of a ship.

The definition of “ship” for these purposes does not include a “fishing vessel”, “pleasure vessel”, or a “small ship” (under 24m) as defined in the Merchant Shipping Act, 2001.

- holding business

means the business of being a “pure equity holding entity”, meaning a legal entity that only holds equity participations in other entities and only earns dividends and capital gains.
An entity which holds assets which are not equity participations is not a pure equity holding entity. An entity which holds a mixed asset portfolio (shares and real estate for example), or non-equity assets such as bonds or government securities, falls outside the definition of a pure equity holding entity.

- intellectual property business

means the business of holding “intellectual property assets”, meaning any intellectual property right in intangible assets, including but not limited to copyright, patents, trademarks, brand, and technical know how, from which identifiable income accrues to the business (such income being separately identifiable from any income generated from any tangible asset in which the right subsists).

“Income” in respect of an intellectual property asset incudes:

(a) royalties;
(b) capital gains and other income from the sale of an intellectual property asset;
(c) income from a franchise agreement; and
(d) income from licensing the intangible asset.

The focus here is on entities receiving income from licensing or otherwise exploiting the intellectual property rights, rather than owning IP relating to its business activities.

- distribution and service centre business

means the business of either or both of the following:

(a) purchasing from foreign affiliates

(i) component parts or materials for goods; or
(ii) goods ready for sale; and

(b) providing services to foreign affiliates in connection with the business,

but does not include any activity included in any other relevant activity except “holding business”. Broadly, an entity is affiliated with another entity if it is in the same group of the other entity.

3. Additionally, the law specifies that 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, has adequate substance if it:

(a) complies with its statutory obligations under the BVI Business Companies Act, 2004 or the Limited Partnership Act, 2017 (whichever is relevant);
(b) has adequate employees and premises for holding equitable interests or shares and, where it manages those equitable interests or shares, has adequate employees and premises for carrying out that management.

4. In regards to legal entities which carry on intellectual property business, the law includes a presumption that the legal entity does not conduct core income-generating activity if:

(a) the activities being carried on from within the Virgin Islands do not include any of the activities identified as core-income generating; or
(b) the legal entity is a high risk IP legal entity.

VERY IMPORTANT!

The BVI ECONOMIC SUBSTANCE (COMPANIES AND LIMITED PARTNERSHIPS) ACT, 2018 does not apply to non-resident companies and partnerships. Please note, however, that "non-resident company” and “non-resident partnership” mean a company or partnership which is resident for tax purposes in a jurisdiction outside the British Virgin Islands and which is also NOT on Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes (American Samoa, Belize, Fiji, Guam, Oman, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu).

Amendments to the Beneficial Owner Secure System (BOSS) Act have also come into effect as of 1st January, 2019, which will now require legal entities (in addition to the information regarding Beneficial Owners) to provide information about their tax residency status and activities, enabling the International Tax Authority in the BVI to monitor whether the relevant entity is carrying on relevant activities and, if so, whether it is complying with the economic substance requirements.

Summary of the Act

Economic substance will be assessed during a period called “financial period”, and the new legislation will affect BVI entities which are deemed to be:

1) tax resident in the BVI, and

2) which carry on and earn income from the above mentioned relevant activities during any financial period.

If the entity’s activities are relevant activities, the directors will need to consider whether they have adequate substance in the BVI to prevent financial penalties and potential strike off. If there is insufficient substance based on the activities, then actions will need to be taken to improve substance before the end of the company’s 2019 financial period.  

In the cases of entities conducting pure equity holding activities there may be reduced substance requirements.  A legal entity that is a pure equity holding entity and is deemed a passive entity, i.e. it does not engage in buying and selling regularly, can meet the substance requirements by having a registered agent and registered office in the BVI. A company will also need to demonstrate that the relevant activity is directed and managed out of the BVI and it has an adequate number of suitably qualified employees.

A company can meet the requirements by outsourcing or by engaging local companies to provide needed services through temporary or long-term contracts.

Financial Period & Economic Substance Declaration

In accordance to the BVI Regulations, the Economic Substance Declaration for all BVI companies must be updated and submitted within each financial period of the companies as follows:
 
A) Companies incorporated before 1st January 2019:

- The financial period commences no later than June 30, 2019 and ends 12 months later, unless the company elects for a shorter period in order to align with its tax accounting period;
- December 29, 2020 will be the final date when complete information must be already entered in the BVI Registered Agent’ database.
 
B) Companies incorporated on or after 1st January 2019:

- The financial period of an entity incorporated, for example, on the 4th February 2019 ends on the 3rd February 2020 (12 months after incorporation), unless the company elects for a shorter period to align with its tax accounting period.
- August 03rd, 2020 will be the final date when complete information must be already entered in the BVI Registered Agent’ database (but no later than 6 months after end of financial period).
 
As a result of the above, every BVI company is now in its first “financial period” and needs to have its activities duly classified, since that would be initial step to determine if it is conducting or if it intends to conduct a relevant activity.

At this stage, the BOSS platform remains offline and all BVI Registered Agents are now receiving classification of the companies in order for the Agents to be able to upload information as soon as the BOSS system become available.

Penalties

Penalties for failing to provide required information without reasonable excuse may include fines up to US$75,000 and imprisonment for up to five years.  The penalty for failing to comply with BOSS requirements may be a fine of up to US$250,000 and imprisonment for up to five years.

The penalty for failing to comply with the requirements is subject to a minimum penalty of US$5,000 on a first determination of non-compliance and US$10,000 on a second determination.  The maximum penalty is US$20,000 on a first determination of non-compliance (US$50,000 if it relates to a high risk intellectual property legal entity) and US$200,000 on a second determination (US$400,000 if it relates to a high risk intellectual property legal entity).

A company can be struck for failure to comply with the legislation after a three step regime for determining non-compliance and providing the company with the opportunity to remedy the non-compliance.  In exceptional cases the International Tax Authority may immediately proceed to strike off a company.

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