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.