Since 1 January 2019 Economic Substance Act (2018) has been in force in the British Virgin Islands (BVI). Companies and partnerships that are tax residents of the BVI and are engaged in certain relevant activities are subject to this law.
The law in question was approved on 19 December 2018 by the Legislative Assembly of the BVI. Just over a year ago, the EU published its “blacklist of jurisdictions not cooperating in tax issues”. When entering one or another jurisdiction into the list, the level of its financial transparency was taken into consideration, as well as its readiness to implement the regulations of the BEPS project into its legislation and join the information exchange mechanism.
As a result, the countries that most abuse their beneficial position in the sphere of corporate and tax preferences were defined. The British Virgin Islands were acknowledged as a “cooperating jurisdiction”, therefore did not enter the “blacklist”. But at the same time the inspectors paid attention to the attractive tax regime for “shell companies” in the BVI that is considered unacceptable by the present EU standards. Against this background the BVI authorities promised to correct this “defect” until 31 December 2018. Having passed the above-mentioned law, the government of the islands kept its promise.
What are the new requirements and whom do they apply to?
The new requirements apply to legal entities registered in the BVI (limited companies and partnerships) that are residents of the BVI and conduct one of the following relevant activities:
- asset management;
- finance and leasing;
- holding activity;
- trucking activity;
- intellectual property management;
- distribution and rendering of services.
Brief description of every relevant activity listed above is in the law itself. Detailed instructions for determining characteristics of conduct of one or another activity are to be published as a separate document in the near future.
Every entity subject to the new law must implement Economic Substance Requirements, namely:
- the activities of the legal entity must be conducted from the territory of the British Virgin Islands (i.e., board meetings of the company must be held on the territory of the BVI and all the documents must also be kept in the BVI);
- the legal entity must have an “adequate number” of qualified employees physically present on the territory of the BVI;
- it must have expenses on the BVI adequate to the business scale;
- it must have an office or other business premises on the territory of the BVI.
In certain cases the law provides for additional requirements. For instance, a company or a partnership, which conducts activities connected with intellectual property ownership or management, is obliged to place the equipment necessary for carrying out this activity on the territory of the BVI.
Legal entities already existing in the BVI are obliged to meet their Economic Substance engagements no later than 30 June 2019. If a company carries out one of the enumerated relevant activities, it is obliged to report this to its registered agent and provide him with information on implementation of the Economic Substance Requirements. The information is to be presented for the first time until 30 June 2020, and afterwards it must be updated on an annual basis. At the moment, specific requirements about this information have not yet been approved, thus it is still unknown how detailed the companies will need to describe their implementation of the Economic Substance Requirements.
The registered agent will be uploading the received data into the Beneficial Ownership Secure Search system (BOSSs). Access to this data will be entirely owned by the tax authority of the BVI (International Tax Authority, ITA) which will control the completeness and relevance of the received data and send additional enquiries to companies.
New companies in the BVI can now be registered only if all the requirements listed above are met.
Legal entities that do not accomplish the new requirements will be struck off the Register of Companies or Register of Limited Partnerships. Moreover, for the violation of this law a fine will be imposed, minimum amount of which is 5 thousand American dollars. In case of failure to pay this fine a cascade system of increase of the fine amount will begin to act. Some violations may lead to criminal liability in the form of imprisonment for up to five years. ITA requirements and fines may be appealed to the courts.
It is also worth mentioning, that the law does not establish unified criteria for all the relevant activities — it takes into account the peculiarities of each of them. For instance, a pure equity holding company (a company owning shares in other companies and receiving dividends from them) and headquarter business (a company that provides services of other company’s strategic management, assumes functions and risks of other companies of the group) are distinguished in the law. Thus, more loyal Economic Substance Requirements are made to the first category of holding companies — availability of the office and employees are mainly demanded.
Stricter requirements are made to the companies conducting vigorous activity such as distribution, financing, logistics, insurance, etc. In addition to the availability of business premises, they are also required to prove that their activities are carried out namely from the islands.
In addition, “adequate” number of employees and premises is stated in the law that also complicates its realization.
The law indicates that additional regulations, which will define the requirements, may be approved, and ITA reserved the right to issue clarifications to them.
The maintenance of a company in the BVI has become much more expensive, because now it is necessary to spend money on office lease, salaries of employees, etc. But it is still expected that companies and partnerships actually conducting activities on the BVI will continue to be used by the international groups for asset ownership or realization of other functions.
Please contact one of our consultants if you have any questions.