The British Virgin Islands’ International Tax Authority (ITA) has issued the final Rules on Economic Substance in British Virgin Islands (BVI) setting out the implementation of the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the “Economic Substance Act”). The Rules were released on 9th October 2019. The new legislation is a direct response to the requirements of the EU Code of Conduct Group (the Code of Conduct Group).
The Economic Substance Act came into force on 1 January 2019 and applies to all “resident” BVI companies and limited partnerships (excluding limited partnerships without legal personality). Companies and limited partnerships that are within the scope of the legislation are required to comply with the economic substance requirements. This specifically excludes British Virgin Islands’ registered companies or limited partnerships that are resident for tax purposes in a jurisdiction outside the British Virgin Islands.
The draft guidance notes on clarification of the legislation were issued in April 2019, but the changes have taken place as a result of ongoing discussions with the European Union and other factors.
The final Rules give more clarity regarding the interpretation of the legislation and require the companies to file additional information with the database of the registered agent. The Act imposes economic
substance requirements for British Virgin Islands companies and limited partnerships that are not tax “resident” in countries outside the British Virgin Islands and carry on “relevant activities”.
The publication containing the text of the Rules is available here.
In order to meet the new legislative requirements, the BVI companies and limited partnerships need to determine the following:
- The tax residency of the entity;
- Whether the entity is conducting one or more “relevant” activities;
- The level of economic substance requirements depending on the activities;
- What should be done by the entity in order to establish the relevant level of substance, if needed;
- What is the entity’s financial reporting period in accordance with the legislation;
- What are the reporting obligations of the entity and reporting period.
The Rules do introduce a number of minor amendments throughout, as well as the following notable additions/clarifications:
- Applications for provisional tax residence:The Rules clarify that where the ITA approves an application for an entity to be treated as provisionally tax resident in a jurisdiction outside the BVI, the period the ITA will provide for the entity to submit the required
evidence typically would not extend beyond two financial periods (inclusive of the financial period for which the entity has applied for provisional treatment).
- Definition of “expenditure”:The Rules confirm that the reference to “expenditure” in the ESA includes only expenditure incurred in the operation of the relevant activity.
- Requirements for entities in liquidation:The Rules confirm that entities in liquidation will be expected to comply with the economic substance requirements.
- Reportable information for nonresident entities:The Rules clarify that even where an entity is claiming to be a nonresident entity, it nevertheless will be required to submit information about whether it is carrying on a relevant activity.
- Documentary evidence: The Rules clarify that an entity is only required to submit documentary evidence as part of the annual reporting where such evidence is specifically asked for (for example, in support of a submission that the entity is nonresident or to rebut a presumption of noncompliance for intellectual property business). However, all entities should be prepared to provide evidence in support of the information submitted within the return if the ITA requests it.
The Rules are not intended to be static, and it is anticipated that they will be updated periodically. Regulations concerning the economic substance
filing and submission periods, as well as requirements relating to intellectual property, are also anticipated to be released in due course.
Potentially affected entities and groups should continue to assess the application of the ESA and, where appropriate, take steps to ensure compliance with the economic substance requirements as soon as possible.
If you have any questions or require a free initial consultation, please do not hesitate to contact the Law Firm of G. Vrikis & Associates LLC at [email protected], +357 22 261 777 or +357 25 261 888 or please visit our offices in either Nicosia or Limassol.