Legal Regime:

• The Economic Substance (Companies and Limited Partnerships) Act 2018 was enacted on 1 January 2019 in the British Virgin Islands, hereinafter referred to as “the BVI”;

• This Law was subsequently amended by the Economic Substance (Companies and Limited Partnerships) (Amendment) Act 2019, hereinafter referred to as “the Act”.

• In addition, the International Tax Authority subsequently issued the “Rules on Economic Substance in the British Virgin Islands” on 9 October 2019.

Economic Substance Scope:

• The entities and limited partnerships constituted and/or registered in the BVI, that carry out one or more “relevant activities”, in the BVI or abroad, must comply with the Act’s requirements and demonstrate adequate economic substance, whether they are tax resident  in the BVI or abroad.

• The entities and limited partnerships, hereinafter referred to jointly as “the entities”, must demonstrate that they have taken reasonable steps to comply with the Act and produce robust evidence of classification.

• The limited partnerships without separate legal personality are not subject to the Act. Relevant Activities:
• The Act provides that the entities are subject to economic substance requirements when performing any of the following “relevant activities”:

• Fund Management business;
• Insurance business;
• Banking business;
• Holding business (other than a pure equity holding entity which carries on no relevant activity other than holding equity participations in other entities, earning dividends and capital gains);
• Headquarters business;
• Finance and Leasing business;
• Distribution and service centre business;
• Intellectual property business;
• Shipping business;

The Economic Substance Test – Holding Business:

• The pure equity holding entities are required to meet a less stringent test for verifying economic substance requirements.

• The pure equity holding entity that carries on no relevant activity other than holding equity participations in other entities, earning dividends and capital gains, has adequate substance if:

• the entity complies with its statutory obligations under the BVI Business Companies Act, 2004 or the Limited Partnership Act, 2017 (whichever is relevant); and

• the entity has adequate employees and premises for holding equity participations and it has adequate employees and premises for carrying out that management in the BVI.

• The Act acknowledges that in most cases, holding equity participations can be considered as a passive activity in nature and thus the substance requirements for adequate and suitably qualified employees and appropriate premises may be met by the performance of the services provided by the entity’s registered agent in the BVI and the existing registered office.

Reporting Requirements:

• All entities are required to provide their registered agent with sufficient information to determine whether the entity is carrying on any relevant activity, and, if so, if the legal entity is complying with the legislation requirements.

• The registered agent shall record this information in the Beneficial Ownership Secure Search System (BOSS) and the company is required to submit information containing details on the relevant activities on an annual basis.

• The entities that are not tax residents in the BVI will have to provide evidence from the tax authorities in the jurisdiction where they are tax residents together with evidence of registration and tax payment on an annual basis.

• The entities constituted and/or registered in the BVI, as defined in the Act, that are not tax residents outside the BVI must carry out defined income generating activities in the BVI and demonstrate economic substance by reference to the following criteria:

• the relevant activity must be directed and managed in the BVI;

• adequate numbers of suitably qualified employees who are physically present in the BVI (whether or not employed by the relevant legal entity or by another entity and whether on temporary or long-term contracts);
• adequate expenditure incurred in the BVI;

• appropriate physical offices or premises in the BVI;
• where the relevant activity is intellectual property business and requires the use of specific equipment, the equipment is located in the BVI.

• We are currently preparing the list of entities we have the pleasure of managing for you as well as an automated classification solution that includes an interactive questionnaire providing tailored real-time legal advice by local lawyers in the BVI, with a cost-effective flat fee.

Timetable:

• The Act states that the entities must comply with the economic substance requirements as of the commencement of their first “financial period”.

• The financial period is not tied to the entities’ accounting period or fiscal year, and will be determined as follows:

• The first financial period of a legal entity incorporated or formed on or after 1 January 2019 will commence on the date of incorporation or formation and generally will be one year calculated as of that date.

• The first financial period of a legal entity incorporated or formed before 1 January 2019 will begin on 30 June 2019 and generally will be 12 months.

Penalties:

• Penalties are imposed both for failure to provide required information and for operating a legal entity in breach of the economic substance requirements.

• The ITA shall be able to impose monetary penalties ranging from US$20,000.00 to US$400,000.00 (depending on first and second determination of non-compliance) for failure of a legal entity to satisfy the economic substance requirements.

• The ITA may recommend the BVI Financial Services Commission that a legal entity be struck-off if it determines that it will not comply with the economic substance requirements.

• If a person intentionally or without reasonable excuse provides false information to the ITA, he or she is committing an offense punishable with a fine of US$40,000.00 and/or with imprisonment for a term of two years or on conviction on indictment with a fine of US$50,000.00 and/or with imprisonment for a term of five years.

• The failure to comply with the reporting obligations under the BOSS Act without reasonable excuse results in summary conviction with a fine of US$40,000.00 and/or with imprisonment for a term of six months or on conviction on indictment with a fine of US$250,000.00 and/or with imprisonment for a term of five years, including punishing the registered agent on summary conviction with a fine of USS$20,000.00 or on conviction on indictment with a fine of US$40,000.00.