BVI Economic Substance Update July 2019

As you may already be aware, the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the “Act”) came into force on 1 January 2019 with a requirement to determine and demonstrate economic substance for each reporting period starting no later than 30 June 2019. The effective date for compliance reporting has been pushed back from 30 June to 1 October 2019.  This is an administrative deferment and, we understand, changes little in practical terms.  In addition, the British Virgin Islands International Tax Authority (ITA) published a draft Economic Substance Code (the “Code”) on 23 April 2019. The Code is supplemental to the Act and contains rules on how the economic substance requirements may be met and guidance on the interpretation of the legislation and the manner in which the ITA will carry out its obligations. We understand that the reading and approval of the Code by the BVI’s Lawmakers was scheduled for 16 July 2019 but that this has been delayed pending a new date – we assume next week.

Helpful updates

Law firm Harneys have released a useful circular which includes  an interesting “interview” play-back, following a recent meeting of the ITA.  Harneys’ Guide on Economic substance in the BVI: a guide for directors and operators of BVI companies and limited partnerships, provides a good summary of what is involved and the related timelines (although pre-dates the deferment mentioned above).

Self-certification, relevant activities and validation

While the Act requires self-certification by each active company and limited partnership (“Legal entity”), it also requires that the Legal entity, through its Registered Agent (“Agent”), evidence the validity of the certification.  Several law firms have established on-line tools to assist in the determination of whether a Legal entity is engaged in a relevant activity and whether it has compliance reporting obligations based on tax residence.   Appleby and Carey Olsen, do not currently charge for usage, whereas Harneys will make a small charge for the use of their tool.

Once you have determined whether your Legal entity is engaged in a relevant activity and its tax residence, that information should be recorded on a central database by the Legal entity’s Agent in the BVI.  The tool’s analysis should be saved for review and filing by ChorusGlobal, as your Agent.  The determination should also be formalised and explained by either a legal opinion, or in a resolution of the directors. We will shortly be able to provide a sample resolution for this purpose, drafted by our legal partners.  We would suggest that all BVI users commence the determination process now (to meet the deadline), if they have not already done so.  In some cases it may be necessary to seek legal assistance.  ChorusGlobal is working closely with is legal partners and we would be delighted to support you in properly concluding this task.  There are significant penalties for misrepresenting a Legal entity’s circumstances or missing the deadlines.

Substance and tax residence

This leads to the most questioned issue:  What activities need to be conducted in the BVI to meet the requirement for tax residence?  As mentioned above, there is no formal guidance currently available.  However, we can ascertain a number of themes and have various options and fiscal building blocks to demonstrate local substance, such as BVI resident directors and officers, meetings held in the BVI, office space, staffing, and supporting BVI expenditure, which are all contributory factors, needing to fit the commercial activity.  Some activities, by necessity, will require a greater nexus in the BVI than others to demonstrate local tax residence.

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