In addressing the concerns of the EU Code of Conduct Group for Business Taxation and OECD guidance around the economic substance of entities in low or no tax jurisdictions, a number of offshore jurisdictions, including the British Virgin Islands, Cayman Islands, Bermuda, Bahamas, Seychelles, Mauritius, Guernsey, Jersey and Isle of Man, enacted legislation requiring local entities carrying on specified activities in these countries to have adequate economic substance. It is expected that other low-tax jurisdictions will also follow. In this newsletter, we provide as an example the substance requirements enacted by the BVI government.
Enterprises and individuals that have offshore entities in the above jurisdictions within their existing investment and/or operating structures should take action to understand the substance requirements as applicable, and to determine what steps may need to be taken to comply with these measures. The changes are likely to render it unfavorable or even make it impossible to hold assets in these jurisdictions through companies without adequate business activities
It goes without saying that in light of these recent developments it might be worth considering re-domiciling some or all of such business activities in Cyprus.
On 19 December 2018, the BVI government passed the “Economic Substance (Companies and Limited Partnership) Act 2018” (the Act) that introduces increased substance requirements for certain BVI-resident legal entities. The measures in the Act apply as from 1 January 2019 (with a six-month transitional period for existing legal entities).
In general, the Act applies to all BVI companies and limited partnerships with legal personality (LPs), unless they are considered non-resident for the purposes of the Act (see below), and to all foreign companies and LPs doing business in the BVI that are engaged in “relevant activities”.
A non-resident company or LP is a company or LP that is resident for tax purposes in a jurisdiction outside of the BVI (provided the jurisdiction of tax residence is not on Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes). The in-scope companies and LPs are referred to collectively as “legal entities” in the Act.
A BVI tax resident legal entity is subject to the economic substance requirements if it conducts any of the following relevant 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 center business
The Act differentiates between a legal entity other than a pure equity holding entity, and a legal entity that is a pure equity holding entity. The latter is generally defined as an entity that only holds equity participations in other entities and only earns dividend and capital gains and such entity is subject to a reduced test.
Entities which are in existence on 1 January 2019 will need to demonstrate economic substance requirements no later than 30 June 2019 and meet reporting obligations within one year of that date.
New entities which are incorporated after 1 January 2019 must comply with the economic substance requirements immediately and meet the reporting obligations within one year of the date of incorporation.
Entities which are subject to the economic substance requirements (other than pure equity holding entities) must conduct core-income generating activity in the BVI by reference to the following criteria:
a) the relevant activity is directed and managed in the BVI;
b) there are an adequate number of suitably qualified employees in relation to the activity physically present in the BVI (whether or not employed by the relevant entity or by another entity and whether on temporary or long-term contracts);
c) there is adequate expenditure incurred in the BVI;
d) there are physical offices or premises as may be appropriate for the core income-generating activities;
e) where the relevant activity is intellectual property business and requires the use of specific equipment, that equipment is located in the BVI; and
f) The legal entity conducts “core income-generating activity”. In the case of income-generating activity carried out for the relevant company or limited partnership by another entity:
i) No core income-generating activity is carried on outside the BVI;
ii) Only that part of the activities of that other entity that are attributable to generating income for the relevant legal entity will be taken into account when considering if the relevant legal entity meets the economic substance requirements; and
iii) The relevant legal entity is able to monitor and control the carrying out of that activity by the other entity.
A pure equity holding entity has adequate substance if it:
a) complies with its statutory obligations under the BVI companies laws; and
b) has adequate employees and premises for holding and, where relevant, managing those equitable interests or shares.
All entities will be required to provide information to enable 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.
The information will be uploaded by the entity’s registered agent and integrated into the BVI’s existing Beneficial Ownership Secure Search (BOSS) system.
The new regime requires legal entities which carry on a relevant activity and are not considered nonresident to provide the following information in relation to each such relevant activity, on an annual basis:
- Total turnover generated;
- Expenditure incurred within the BVI;
- Total number of employees engaged in the activity;
- Number of employees engaged in the activity within the BVI;
- Address of any premises within the BVI used in connection with the activity;
- Nature of any equipment located within the BVI used in connection with the activity; and
- Names of the persons responsible for the direction and management of the activity, together with their relationship to the company and whether they are resident in the BVI.
Entities carrying on an intellectual property (IP) business must provide additional information, whereas non-resident companies and LPs only are required to specify the jurisdiction in which they are tax resident and provide evidence to support that tax resident status.
Entities which are not tax resident in the BVI will have to notify details of the jurisdiction where they are tax resident.
The Act outlines a notice process with graduated penalties to be applied for failure to meet economic substance requirements following each subsequent notice. The maximum penalty is USD 400,000 for a high-risk IP legal entity and USD 200,000 for all other legal entities.
The BVI International Tax Authority ultimately may recommend that the Financial Services Commission strike the legal entity off the Register of Companies or the Register of Limited Partnerships where either the economic substance requirements are not met after the second notice or it decides there is no realistic possibility of the legal entity meeting the economic substance requirements.
The above does not constitute a tax or legal advice / recommendation for taking any specific actions or decisions. Professional tax and legal advice should be sought.