BVI Economic Substance Update August 2019

OECD approves BVI’s Economic Substance legislation

Following the British Virgin Islands’ (BVI) enactment of the Economic Substance (Companies and Limited Partnerships) Act of 2018, the OECD’s Forum on Harmful Tax Practices (FHTP) has acknowledged that the BVI’s domestic legal framework meets the OECD’s Substantial Activities Standards (see BVI Finance press release).  The FHTP will continue their on-going review process.  While expected, this is a very positive outcome. 

How does BVI’s Economic Substance legislation apply to you and your entities?

This legislation captures all BVI companies, BVI limited partnerships and any foreign entities with a branch or tax residence in the BVI (collectively “entities”).  We are still awaiting the final Guidance Notes for clarity on certain procedural detail and interpretations, but we can distill the following important issues:

The legislation requires that you determine (a) the tax residence and (b) the activity of your entities.  Typically, your entities’ tax residence will be decided by the location of their management and the nexus of their activity.  There are many components to and consequences of tax residence, and we would urge that you seek suitable advice on this if you have not already done so.

Your entities will need to disclose their tax residence to the BVI Tax Authorities through your BVI Registered Agent.  If your entities are not tax resident in the BVI (nor in a jurisdiction listed as non-co-operative by the Economic Union), this determination will need to be validated, as outlined in our July circular.  This is an exercise that will have to be repeated annually, in each reporting period, but no further action is currently required for entities that are not tax resident in the BVI beyond this limited reporting and validation.

For those entities claiming BVI tax residence, they must classify their activities to determine (a) what relevant activity they are conducting that should be reported to the BVI tax authorities and (b) the level of substance and activity that must be conducted in the BVI to support its tax residence.  There are several tools available to help determine whether the activity of the company is a relevant activity and reportable for this purpose, also addressed in our July circular.  We would be delighted to discuss substance services with you further.

Entities that do not meet substance and reporting requirements, or are otherwise in breach of the legislation, may face significant fines and other enforcement actions.

BVI’s Economic Substance Timetable

The date by which entities are required to comply is determined by the date on which the Economic Substance legislation applies to that entity – typically the incorporation date for entities established in BVI after 1 January 2019.  Thus, if a company is incorporated on 4 February 2019, its financial period will start then, ending 3 February 2020, over which period its economic substance requirements must be met.   

For those entities established before 1 January 2019, the first financial period is one year from 30 June 2019, with an annual reporting thereafter.  All entities that are tax resident in the BVI should already have conducted their determination of relevant activity and should be well advanced in demonstrating the necessary substance for tax residence.  We can assist with both elements.

A call to action

While this process may appear complicated, we believe that it will be reasonably simple in practice, provided the necessary preparatory work has been properly concluded.  Our concern is that, for a variety of reasons, clients may continue to delay their engagement and determination of their entities’ tax residence and relevant activity, which may give rise to unnecessary, avoidable and potentially expensive enforcement actions.  We would urge you to conduct your initial assessments and report your findings to your Registered Agent as soon as possible, if you have not done so already.  Chorus would be delighted to assist you with these determinations.

We would be very happy to discuss these matters with you further. Get in touch.