BVI Tax Alert-Legislation on economic substance passed

BVI Tax Alert-Legislation on economic substance passed

The legislation is being introduced in response to concerns expressed by the Council of the European Union (EU) about the absence of clear general legal substance requirements for entities doing business in and through the BVI.

The legislation reinforces BVI’s commitment to meet the requirements imposed by the EU Code of Conduct Group on jurisdictions that currently appear on the EU’s “grey list” as a result of these concerns.

Economic substance requirements

The measures in the Act apply as from 1 January 2019 (with a six-month transitional period for existing legal entities). The requirements apply to all BVI companies and limited partnerships with legal personality (LPs), unless they are considered non-resident for the purposes of the Act, 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.

The legislation imposes economic substance requirements on any legal entity which carries on one or more of the following relevant activities:

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

Legal entities other than a pure equity holding entity
A legal entity (other than a pure equity holding entity) that engages in one or more relevant activities will be deemed to comply with the economic substance requirements if:

  • The relevant activity is directed and managed in the BVI;
  • Having regard to the nature and scale of the relevant activity carried on in the BVI:
    – There are an adequate number of suitably qualified employees in relation to that activity physically present in the BVI (whether employed by the relevant legal entity or by another entity and whether on temporary or long-term contracts);

   – Adequate expenditure is incurred in the BVI,

   – There are appropriate physical offices or premises for the core income-generating activities; and

   – Where the relevant activity is IP business and requires the use of specific equipment, that equipment is located in the BVI;

  • The legal entity conducts “core income-generating activity”; and
  • In the case of income-generating activity carried out for the relevant company or limited partnership by another entity:

    – No core income-generating activity is carried on outside the BVI;

    – 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

    – The relevant legal entity is able to monitor and control the carrying out of that activity by the other entity.

Pure equity holding entity
A pure equity holding entity, defined as a legal entity that holds only equity participations in other entities and earns only dividends and capital gains, is subject to reduced requirements and is deemed to have adequate substance if the entity:

  • Complies with its statutory obligations under the BVI Business 
    Companies Act 2004 or the Limited Partnership Act 2017, as
    appropriate; and
  • Has adequate employees and premises for holding equitable 
    interests or shares and, where it manages those equitable interests or shares, has adequate employees and premises for carrying out that management.

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