BVI Economic Substance Code Published

The move to require substance of entities established in the BVI has now received some clarity with the publication on 23 April 2019 by the BVI International Tax Authority of the draft Economic Substance Code (the Code).

This complements the previously published Economic Substance (Companies and Limited Partnerships) Act, 2018 (the Act).  The Code now sets out quite detailed rules as to how the economic substance requirements must be dealt with and offer useful guidance on how it will be interpreted.

We have highlighted some of the more important points below and provided a link to the Code at the end of this article;

  • The starting point is that an entity must carry on relevant activity.  It will only be treated as carrying on a “relevant activity” in the BVI only if during any financial period it receives income from that activity.
  • The Code also provides guidance as to the meaning of “holding business” and “pure equity holding entity”.  Given the volume of this type of activity in the BVI, this will be of significant interest to business owners.  Of importance is that if the entity owns any investment other than equity participation it will no longer qualify as a “pure equity holding entity”.
  • The key date to look at is 1 January 2019.  All entities formed after that date are already in the initial financial period whilst for those formed prior to that date, the first period starts 12 months from 30 June 2019. It follows that the rules are immediate of relevance.
  • An important exception to the concept of a relevant activity is the exclusion of an “investment fund”.  Such a fund is excluded unless it carries on a relevant activity itself.  Further guidance with regards to funds is expected later in the year.
  • A further carve out is that the incidental provision of credit will not be treated as a “financing and leasing business”, nor will entities which hold debt instruments for purposes of investment.
  • The ITA has now initiated a short and sharp education campaign starting in the BVI and Hong Kong.  The final Code will then be issued probably in May together with any amendments that may be required.
  • This is one of the more significant changes ever to come into the BVI.  Given that the clear majority of BVI entities are likely to qualify as pure holding companies the impact on a lot of them will be quite limited.  However, we remain available to conduct an assessment of the impact on any of our clients and to assist with the requisite planning.  To that end, we have attached a copy of the Code (read here).