BVI Rules on Economic Substance

The BVI Economic Substance Code has now been finalized and renamed the Rules (and Explanatory Notes) on Economic Substance. The Economic Substance Code was originally published by the BVI International Tax Authority, alongside the Economic Substance Act, in order to adhere to standards set by the EU Business Taxation Code of Conduct Group and OECD Forum on Harmful Tax Practices.

 

The Forum on Harmful Tax Practices reviewed the legislation in July 2019 and confirmed that it meets OECD standards. The Economic Substance Act took effect on January 1st, 2019, and Key Guidance on compliance was released by the BVI International Tax Authority on April 23rd  2019 and confirmed on October 9th.  Companies and enterprises operating in the BVI should begin anticipating how they will be classified under the Act and Rules.

 

The Economic Substance Act requires any legal entity that undertakes relevant activity, during any financial period, to comply with economic substance requirements. The International Tax Authority states that an entity’s classification should be carried out with enough detail to efficiently evaluate compliance. Businesses should have all company information and documentation on hand in order to quickly respond to requests for information. The most likely practical scenario is representatives holding articles of incorporation and minutes from board meetings to hand over to the International Tax Authority upon request. Companies should consult with legal representatives and business advisory firms in most cases.

 

What does ‘Financial Period’ mean?

 

If the company was incorporated in 2019, the financial period starts from the date of incorporation. Compliance is required from the date that ‘relevant activity’ begins. Companies that were incorporated prior to January 1st, 2019 are considered to have begun their first financial period on June 30th, 2019.

 

What is a ‘Relevant Legal Entity’?

 

Any company or limited partnership registered in the BVI with corporate personhood, including foreign companies and joint ventures, are considered relevant legal entities.

 

How are ‘Relevant Activities’ Defined?

 

The Economic Substance Act (and Rules) specify nine relevant activities.

 

  • Finance and leasing
  • Shipping
  • Headquarters
  • Banking
  • Fund management
  • Pure equity holding
  • Intellectual property holding
  • Insurance
  • Distribution and Service Centers

 

Companies that are not resident in the BVI will not face requirements to comply with economic substance requirements, except during periods when they do maintain tax residence in the country. Documentary evidence of local BVI tax residence status should be kept on hand, in case of any government requests. The BVI authorities have not yet clarified if they will request overseas tax residence related documentation.

 

What differences are there between the recently released ‘Rules’ and previous ‘Code’?

 

The main changes to the October 2019 ‘Rules’, compared to the earlier ‘Code’ are as follows:

 

  • Clarification of “expenditure”: The Rules limit the scope of “expenditure” to overhead during the course of relevant activity.

 

  • Documentary evidence: Submitting documentary evidence with annual reports will only be necessary when requested. However, all relevant documentation should be prepared ahead of time.

 

  • Provisional Tax Residence Applications: If the International Tax Authority grants approval for provisional tax residence treatment in an overseas jurisdiction, the supporting evidence cannot cover more than two financial periods, including the period for which the application is submitted.

 

  • Liquidation: Companies and enterprises in the process of liquidation will be required to follow the same economic substance requirements as any other entity.

 

  • Nonresident entity reporting: Companies that claim not to be resident in the BVI will have to submit information demonstrating whether they conduct relevant activities in the jurisdiction.

 

 

Reduced Economic Substance Requirements for Equity Holding

 

Pure equity holding businesses that only earn dividends and capital gains satisfy the economic substance criteria. Passive holding businesses may be eligible for reduced substance requirements in some cases, only having to establish a registered office, engage  a registered agent and maintain a record of compliance with BVI tax laws. If the enterprise is involved in any other relevant activity, it has to carry out Core Income Generating Activity in the BVI, with an appropriate level of staffing and infrastructure, which can be outsourced. Criteria will vary depending on the nature of the business.

 

 

Reporting

 

From 2020 onwards, companies will have six months after the end of the financial period to submit reports. Reporting should be carried out by providing information to a registered legal representative for online submission. Information requirements differ according to the nature of the company and its activities. All BVI companies should ensure that their information is complete and accurate, because noncompliance is automatically shared with international authorities and other governments.

 

If you have any enquiries or require any guidance about classifying your enterprise and planning your reporting process in the BVI, our corporate services team can help you set up a cost effective and adaptive strategy. If your BVI Company is already managed by Harris, we shall contact you shortly for the relevant classification and reporting. If you are interested in setting up a company in another jurisdiction, we can help you make the right decision based on your circumstances.

As a new decade approaches, we aim to help our clients around the world plan ahead for every aspect of their business and wealth structuring.

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