BVI Economic Substance (Companies and Partnerships) Act, 2018
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, which means the business of either or both of the following:
- purchasing from foreign affiliates component parts or materials for goods or goods ready for sale, and reselling such component parts, materials or goods;
- providing services to foreign affiliates.
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 Virgin Islands;
(b) having regard to the nature and scale of the relevant activity
(i) 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);
(ii) there is adequate expenditure incurred in the Virgin Islands;
(iii) there are physical offices or premises as may be appropriate for the core income-generating activities; and
(iv) 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:
- for banking business: raising funds, managing risk including credit, currency and interest risk | taking hedging positions | providing loans, credit or other financial services to customers | managing regulatory capital | preparing regulatory reports and returns;
- for distribution and service centre business: transporting and storing goods | managing stocks | taking orders | providing consulting or other administrative services;
- for insurance business: predicting and calculating risk | insuring or re-insuring against risk | providing insurance business services to clients;
- for fund management business: taking decisions on the holding and selling of investments | calculating risks and reserves | taking decisions on currency or interest fluctuations and hedging positions | preparing relevant regulatory or other reports for government authorities and investors;
- for finance or leasing business: agreeing funding terms | identifying and acquiring assets to be leased (in the case of leasing) | setting the terms and duration of any financing or leasing | monitoring and revising any agreements | managing any risks;
- for headquarters business: taking relevant management decisions | incurring expenditures on behalf of affiliates | co-ordinating group activities;
- for shipping business: managing the crew (including hiring, paying and overseeing crew members) | hauling and maintaining ships | overseeing and tracking deliveries | determining what goods to order and when to deliver them | organising and overseeing voyages;
- for intellectual property business: where the business concerns intellectual property assets such as patents, research and development | where the business concerns non-trade intangible assets such as brand, trademark and customer data, marketing, branding and distribution.
(d) and in the case of income-generating activity carried out for the relevant legal entity by another entity
(i) no core income generating activity is carried on outside the Virgin Islands;
(ii) only that part of the activities of that other entity which are solely attributable to generating income for the relevant legal entity and not for any other legal entity shall be taken into account when considering if the relevant legal entity meets the economic substance requirements;
(iii) the relevant legal entity is able to monitor and control the carrying out of that activity by 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.
5. Accordingly, amendments to the 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.
6. Penalties are imposed both for failure to provide required information, and for operating a legal entity in breach of the economic substance requirements, which may include fines, imprisonment and/or strike-off.
7. Already registered companies in the BVI have a short transition period to bring their affairs in line with the new Act. These requirements must be met before June 1, 2019.
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