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.

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.

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.

Public Ownership Registers Delayed by UK

The UK Government has delayed the deadline for the establishment of public ownership registers by the British Overseas Territories.

The British Overseas Territories, including the British Virgin Islands, will not be directed to establish an operable public register for the ownership of companies and partnerships until 2023 at the earliest, deferred from the end of 2020 as originally demanded.

2023 Target Date to Adopt Global Standards

David Cameron, the former UK Prime Minister, chose 2023 as the target date for public registers to be a global standard.  While it is now broadly recognised that public registers are unlikely to be globally adopted by this date, the UK Government nonetheless directs British Overseas Territories to have operable registers in place by then.  The UK has offered the British Overseas Territories technical assistance and support with the establishment process and importantly has also acknowledged that the Territories have differing circumstances which should be reflected in the model they adopt.

The BVI has not (at this time) made a public statement on this extension.  The BVI’s Premier indicated in May 2018 that the jurisdiction has no intention of establishing a public register before the requirement has become a global standard, noting that the BVI continues to meet its obligations under information exchange and international co-operation treaties.  There is no reason to believe that the BVI’s position has changed in any way.

Attached is a more detailed article drafted by STEP.  Please let us know if you have any questions or concerns.

New Legislation Enacted

The British Virgin Islands has enacted legislation, effective 1 January 2019, that requires companies claiming tax residence in the territory to meet certain BVI substance requirements.   I have attached an excellent introductory memorandum drafted by lawyers Appleby, and a helpful flow chart (produced by BVI Finance) illustrating the determination process.

This BVI legislation is very similar to laws also introduced in the Crown Dependencies and other British Overseas Territories and seeks to better define what is required for a company or partnership to achieve local tax residence.  We are awaiting the publication of supporting regulations for more detail on how this will be determined in practice, but my understanding is that if the directors are already fulfilling their role properly, there should be limited impact. If a company is not claiming to be tax resident in BVI, we will have to disclose its tax residence on the BOSS system.

Our Involvement

Chorus International Services (BVI) Limited has now been approved by BVI’s Financial Services Commission and we are working through the final formalities to licensing.  We will be delighted to help with the provision of substance directors and governance proposals upon the formal issue of our license.

Technical Updates

We think it important that ChorusGlobal engage in an active programme of “knowledge-sharing” with its partners and we have a range of initiatives furthering this aim, including:

• the drafting and provision of guidance notes;
• drafting and circulating our own advisories and tutorials on hot-button topics; and
• distributing memoranda and circulars produced by third-party subject experts that we believe are relevant, adding our own comments where we think it may help.

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