Updates for BVI Economic Substance

On 10 February 2020, the BVI International Tax Authority (“ITA”) released a Second Revision of the Economic Substance Rules, following an initial version published on 9 October 2019. The amendments offer clarifications and further details of the law.

The main points are the following:

1. For entities relocating ‘relevant activity’ to the BVI: For any entity that wishes to relocate its ‘relevant activity’ to the BVI for the purpose of fulfilling Substance compliance, the maximum timeline for said entity to come into full compliance would not typically extend beyond two financial periods, including the financial period in which the entity notified the ITA of its intention to relocate the activity to the BVI (the first financial period) and the subsequent financial period (the second financial period).

2. Procedure for filing tax residency claims: Any justification of tax residency outside the BVI must be reported in the database under section 10(3)(g) of the BOSS Act.

Such evidence would include:

(a) a letter or certificate from, or issued by, the competent authority for the jurisdiction in question stating that the entity is considered to be resident for tax purposes in that jurisdiction, or

(b) an assessment to tax on the entity, a confirmation of self-assessment to tax, a tax demand, evidence of payment of tax, or any other document, issued by the competent authority for the jurisdiction in question.

3. Whereas the first version of the Rules states that “the interest of a general partner in a limited partnership will usually be of [the] quality” where “equity participation includes shares in a company and encompasses other forms of investment in an entity which give the investor the right to participate in the profits of the entity”, the Second Revision now states that it is the interests of a “limited partner in a limited partnership” that applies to this condition.

4. Examples of what constitutes an Intellectual Property business are provided.

5. Clarity on what does NOT count as Distribution and Service Centre business, as well as illustrative examples, are provided.

6. Strategic decision-making: On this element, what is required is that the relevant activity be directed and managed in the BVI, not the mere fact that legal entity carries on the said relevant activity.

7. Outsourcing: An entity conducting a regulated activity under license from the BVI Financial Services Commission must comply with any relevant restrictions on outsourcing imposed by that license, or by the relevant financial services law, in addition to the requirements set out above under the ESA (including any related rules or regulations).

8. Nature of entities subject to ESA requirements: There has been clarity offered regarding companies as entities subject to ESA, on the following terms:

a) a company incorporated or registered in the BVI;

b) a company incorporated or formed outside the BVI and which is lawfully carrying on business in the BVI, which includes any foreign company engaging in a relevant activity from within the BVI.

BVI removed from 'Grey List'

Following the EU’s Economic and Financial Affairs Council’s most recent review of “The EU’s List of Non-cooperative Jurisdictions for Tax Purposes”, the BVI has been removed from the ‘grey list’ with effect on 18 February 2020. The jurisdiction is now recognized as one that practices good corporate governance and aligns with international tax standards. With this news, clients should be more confident than ever in the BVI’s status as a suitable international finance center for conducting business.

What to do now?

If you have already classified your entity, you should know if your entity is in-scope of the legislation, and if so, whether there is a need for you to establish substance in the BVI.

Please note that the BVI Substance reporting process is likely to start in Q2 of this year, and the BOSS system should be ready for use by June 2020.

Should you have any questions about Economic Substance and how we can assist you in classifying your BVI entity and ensuring compliance with the Act, please contact us.