New BVI Law tests real economic activity

The British Virgin Islands has been issuing reminders to incorporated entities domiciled locally about the new Economic Substance (Companies and Limited Partnerships) Act and their need to take action where necessary.

Road Town, British Virgin Islands (Photo: marinas.com)

The new Economic Substance (Companies and Limited Partnerships) Act, 2018 (ESA) was enacted in the British Virgin Islands on 31 December 2018 with the purpose of satisfying obligations under European Union expectations regarding tax havens. 

The law’s purpose is to fulfil the BVI’s commitment to new standards of tax governance. It will also ensure that the BVI is not included in Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes.

Bermuda, the Cayman Islands, Guernsey, Jersey, Isle of Man – key tax neutral jurisdictions – have also passed similar legislation.

Bermuda has also passed similar legislation. (Photo: bermuda-online.org)

As reported at forbes.com, the BVI tax regime is currently included in the State of Play as one that facilitates offshore structures which attract profits without real economic activity.   

The country, knowing the new targets for transparency, has made a commitment to address the EU’s concerns relating to economic substance in the area of collective investment funds by the end of 2019. 

 The new Economic Substance (Companies and Limited Partnerships) Act, 2018 (ESA) applies to companies and limited partnerships (with legal personality) incorporated in BVI or registered as foreign companies or limited partnerships in BVI which are tax resident in BVI and carrying on Relevant Activities.

The BVI has made a commitment to address the EU’s concerns. (Photo: shutterstock)

Under the Economic Substance Act (“ESA”), legal entities formed or registered in the BVI are required to have economic substance in the BVI.

The ESA also amends the BVI’s Beneficial Ownership Secure Search System Act, 2017 (“BOSS Act”) to add to the existing requirements such that a legal entity and its Registered Agent have obligations in respect of reporting prescribed information in relation to a legal entity’s economic substance.

Relevant activities under the law Banking Business; Fund management; Insurance;  Intellectual property Business ; Shipping; Finance and leasing Business ; Headquarters; Holding Business; Distribution and service center Business and others listed.

An entity which carries on more than one relevant activity must comply with the economic substance requirements and must satisfy the economic substance test.

It is noted that a  legal entity carrying on a relevant activity must conduct core income generating activities (“CIGA”)* in the BVI;  be directed and managed in the BVI; and taking into account the nature and scale of the relevant activity, have:  an adequate number of suitably qualified employees physically present in the BVI;  an adequate amount of expenditure incurred in the BVI; and appropriate physical offices for conducting core income generating activities (CIGA).

They must also produce a list of core income generating activities (CIGA).

Mondaq.com  says it is possible to outsource some or all of the BVI CIGA provided the legal entity is able to demonstrate that it is able to monitor and control the outsourced activities and that those activities are undertaken in the BVI.

The ESA contains penalties for failure to satisfy the Economic Substance Test, including for the first determination of non-compliance, a minimum penalty of $5,000 and a maximum penalty of $20,000 ($50,000 for high risk IP entities) may be imposed.