Industry Alert: Draft BVI guidance on economic substance requirements expected late April 2019
Earlier this year, the government of the British Virgin Islands (BVI) enacted the Economic Substance (Companies and Limited Partnerships) Act of 2018 that came into effect on 1 January 2019. In a nutshell, the Act aims to eliminate the use of shelf companies and dummy directors by making sure a BVI legal entity can demonstrate to the BVI International Tax Authority it has satisfactory economic substance in the BVI.
Since the Act was published, interested parties have been waiting for the BVI Government’s guidance to understand which entities are affected. There is also a need for clarity around whether affected entities meet the applicable economic substance requirements.
We are happy to announce BVI Finance has confirmed that, with the assistance of external draftsmen, the government’s guidance is in progress. It will be known as the Economic Substance Code and we expect it to be published late April 2019. This will be followed by an educational campaign in the BVI and Hong Kong. The final Code will be publicised subsequent to these educational campaigns.
Next steps for impacted entities
The Act applies to all BVI legal entities that are carrying on one or more of the following relevant activities:
• Banking business.
• Insurance business.
• Fund management business.
• Finance and leasing business.
• Headquarters business.
• Shipping business.
• Holding business.
• Intellectual property business.
• Distribution and service centre business.
This does not affect non-resident companies, non-resident limited partnerships and limited partnerships which have elected not to have legal personality.
Companies and partnerships incorporated after 1 January 2019 will need to comply with the Act. Companies and partnerships in existence on 1 January 2019 will have to comply for each reporting period starting no later than 30 June 2019.
Any high-risk entity will have a rebuttable presumption of non-compliance. This applies to companies that conduct intellectual property business but do not carry out research and development or marketing branding or distribution activities in the BVI. This would have to be appropriate to the type of intellectual property involved.
Obviously, any entity carrying on a relevant activity needs to consider their position and take appropriate action. For pure holding companies, the relevant entity will be deemed as having adequate substance if it complies with its statutory obligations and has adequate employees and premises for holding and managing those equity interests. Reporting changes have been made to the Beneficial Ownership Secure Search system. Certain information will accordingly have to be provided to the registered agent to upload onto this system. This information could be provided under any ITA agreements where an entity claims to be resident in the BVI or an entity claims to be tax resident in an EU member state.
Once the draft Code has been published, we will reach out to affected clients so we can provide further clarity and guidance. If you have any questions before then, feel free to contact us on firstname.lastname@example.org or +230 650 4030.