Directors Duties and BVI Economic Substance

The tax residence of a company is a key issue that company users have to consider very carefully.  It is at the heart of corporate structuring and governance planning and can have lasting implications for the company, its officers and its owners.  The economic substance analysis that so many of us currently face puts even greater focus on tax residence planning and how it should be approached. 

What Determines a Company’s Tax Residency?

Typically, a company’s tax residency will be determined by the location of its management, commonly where its directors physically reside.  One must then consider whether there are other controlling parties, what commercial services the company utilises in its home jurisdiction and of course how this will interact with the company’s activities:  all of which should combine to demonstrate its “operational home” in its jurisdiction of tax residence.  Much of this is being distilled into economic substance tests across a range of jurisdictions, about which we have already written and which will be the subject of further communication once the BVI Regulations are issued.

We can commit time and energy to concentrating economic activity in a jurisdiction to support a company’s tax residence, but it is wasted if the company’s directors are not conducting themselves as substance directors – are only acting as nominee for another party, are not properly assuming their responsibilities or meeting their legal obligations – the tax residence of the company can still be called into doubt as control is not being properly exercised in that jurisdiction.  It would be prudent therefore to ensure that the company’s governance is good for purpose as part of any economic substance/ tax residency review.

Moreover, the importance of good corporate governance extends beyond a determinant of tax residency.  The validity of a company’s activities and its legal and statutory good standing depend on the directors properly discharging their duties.  It is essential that the directors fully understand their duties and obligations, risks and liabilities, and the options available to mitigate those risks, if the company is to meet the purposes for which it was established.  

George Weston of Harneys, BVI lawyers, has written an excellent paper on the duties of directors under BVI law.  I would recommend that all BVI company users and potential directors familiarise themselves with George’s comments — download PDF here. 

I would be very happy to discuss any issues or queries that you may have. I am also delighted to report that Chorus has now received its licence from the BVI Financial Services Commission, so is able to provide a full range of services, including the provision of substance directors. A more formal notification of this will follow!  Please let me know if Chorus may help in any way.