The British Virgin Islands (“BVI”) has enacted new legislation requiring certain BVI entities carrying on relevant activities to demonstrate “adequate economic substance” in the BVI. The Economic Substance (Companies and Limited Partnerships) Act 2018 (the “BVI ES Act”) which came into force on 1 January 2019 was introduced as a result of OECD guidance on Base Erosion and Profit Shifting (BEPS) and concerns from the EU Code of Conduct Group for Business Taxation. Similar laws were enacted in Seychelles, Cayman Islands, Bermuda, Mauritius, Jersey, Belize, Guernsey and Isle of Man.

The BVI ES Act applies to all “legal entities” carrying on “relevant activities”, other than non-resident companies, non-resident limited partnerships and limited partnerships which have elected not to have legal personality (“Relevant Entities”).

So, what is this BVI ES Act about?

The BVI ES Act mandates that every BVI agent registering or maintaining an entity that falls under the scope of the ES Act to identify where the entity is tax resident and must be ready to pass on that information to the BVI’s competent authorities. In the case that an entity is BVI tax resident, it must demonstrate economic substance if it conducts any of the following “Relevant Activities”.

• Banking business
• Insurance business
• Shipping business
• Fund management business
• Finance and leasing business
• Headquarters business
• Holding business
• Intellectual property business
• Distribution and service centre business

The Economic Substance Test?

All Relevant Entities carrying on Relevant Activities (other than 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) must demonstrate that:

• 1.The relevant activity being directed and managed in the BVI;
• 2.Adequate numbers of suitably qualified employees who are physically present in the BVI;
• 3.Adequate expenditure incurred in the BVI;
• 4.Appropriate physical office or premises in the BVI; and
• 5.Where the relevant activity is intellectual property business and requires the use of specific equipment, the equipment is located in the BVI.

Outsourcing of core income generating activities is allowed under certain conditions.

Holding companies are required to meet a reduced test for economic substance, under which the relevant entity will be deemed to have adequate substance if it complies with its statutory obligations under the BVI companies/ limited partnership laws and has adequate employees and premises for holding and, where relevant, managing those equity interests.

How soon will the substance requirements apply?

Relevant Entities which are newly formed as of 1 January 2019 onwards must comply with the economic substance requirements immediately and meet the reporting obligations within one year of the date of incorporation or formation respectively.

Relevant Entities which are in existence on 1 January 2019 must comply with the economic substance requirements by 30 June 2019 and meet reporting obligations within one year of that date.

What are to be reported and who will have access to information?

The BVI ES Act made changes to the BVI Beneficial Ownership Secure Search (“BOSS”) System regime, as a result of which BVI and foreign registered companies and limited partnership will generally be required to report certain information to their BVI registered agent to be uploaded onto the BOSS system.

In addition to their existing obligations under the BOSS regime, BVI and foreign registered companies and limited partnerships which are subject to the BOSS reporting requirements will have to identify and provide their registered agent with certain information including income, expenditure, assets, premises, management, employees and details of domestic activities. This information will be provided to the BVI International Tax Authority (ITA) via the BOSS system. The ITA may use the information to discharge its duty to supervise and enforce the economic substance requirements. Information will be disclosed by the ITA to relevant overseas authorities in certain appropriate cases, including where:

• there is breach of the economic substance requirements
• carries on “IP relevant activity” in certain circumstances; or
• the entity claims to be tax resident in a jurisdiction outside the BVI.

What are the penalties?

Penalties are imposed both or 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.