On January 1st, 2019 The Economic Substance (Companies and Limited Partnership) Act 2018 (“ES Act”) came into force in the British Virgin Islands (“BVI”) to address tax system concerns of the European Union and the OECD. The BVI International Tax Authority (“ITA”) has been task with enforcing the ES Act in the BVI.
All ES filings with the ITA are submitted by the Registered Agents only via the Beneficial Owner Secure Search System (“BOSSS)”, which is the existing portal used by the ITA for private filing of ultimate beneficial owners.*
The ES Act simply requires that Business Companies and Limited Partnerships (“Entities”) conducting specifically targeted relevant activities (as listed below) should show substance/presence in the British Virgin Islands unless they are tax resident in another jurisdiction. However, there is an exception to the rule with respect to two of the relevant activities, namely, intellectual property business and pure equity holding business in that once these types of entities do not earn any income during their financial period, they are not considered to be conducting a relevant activity.
Below are the targeted relevant activities, which are more broadly defined in the ES Act and Rules, (it is important to note that an entity can fall under more than one relevant activity at any given time, except for holding business, which will not apply as a relevant activity if the entity is conducting any other type of business activities besides holding business):
- Banking business
- Insurance business
- Fund management business
- Finance and leasing business (eg. earning interest from offering of credit)
- Headquarters business (which relates to groups)
- Shipping business (by sea only)
- Holding business, i.e. pure equity holding of shares in other entities and earning dividend or in receipt of capital gains. (Please take note that an entity holding shares and not earning any dividend or in receipt of capital gains during the financial period, do not qualify as pure equity holding business).
- Intellectual property business. (Please take note that if no income is earned from the intellectual property during the financial period, it does not qualify as intellectual property business).
- Distribution and service center business (which relates to groups)
The ES Act requires that all Entities incorporated in the BVI must inform the ITA of their Economic Substance status, within six months after the end of their financial period, by submitting a declaration for filing through their Registered Agent in the BOSSS.
The ITA’s filing system does not allow for partial or early filings, therefore all filings must be done at the end of the financial period and only takes into account the status of the Entities at the end of the financial period, (eg. if the entity was conducting a relevant activity in the first half of the financial period and the entity changes its activities in the last half of the financial period to something other than one of the relevant activities then the entity must file as out of scope at the end of that financial period).
Discontinued and liquidated entities are required to file their declaration for their last financial period after liquidation or discontinuation. If the financial period has not ended at the time of discontinuation or liquidation, the entities must lodge their declarations with the Registered Agent for submission at the end of the relevant financial period. If an entity was conducting a relevant activity prior to discontinuation or liquidation it will be required to show substance on last financial period declaration.
Entities that were struck off of the Registry of Corporate Affairs before January 1st, 2016 are not subject to the ES filings. All other struck off Entities are obligated to file their declaration with the ITA.
The ITA is currently having discussions with other local authorities to determine the best way forward for these struck off Entities. We will provide an update as the information becomes available.
The financial period for Entities incorporated from January 1st, 2019 is one year from the date of their incorporation. Reporting via BOSSS commences at the end of each financial period. Filings must be done within 6 months after the end of the financial period.
The financial period for entities incorporated prior to January 1st, 2019 is one year commencing no later than June 30th, 2019. Reporting via BOSSS commences at the end of each financial period. Filings should be done within 6 months after the end of each financial period.
There are also provisions available for changing the standard financial periods
mentioned above, please inquire if necessary.
The filing/reporting requirement is an annual requirement to assist the regulators with their monitoring obligations.
The ITA has recommended that Entities obtain independent (legal) assessment of their status to ensure that they adequately comply before the filing deadline, especially if they are required to show substance, which should ideally start at the beginning of the financial period. However, entities can opt to self-assess and proceed with filing without the legal assessment. It is important to note that Registered Agents are not required to make assessments. Such assessment should be done by the directors or partners of the entities or other persons within the entity that are aware of the internal affairs of the entity, eg company lawyer or accountant.
For better understanding of the assessment process, we have created a (n internal) category system below. There are three assessment categories that an entity can fall within, as follows, (please pay close attention to the special instructions for pure equity holding Entities):
Category A: Entities that do not fall within the scope of the ES Act.
These Entities are only required to file their declaration with the ITA to confirm that they do not fall under the scope of the ES Act. A resolution of the directors or declaration of a related third party and any independent legal assessment or self assessment will be required for filing.
Category B: Entities that fall within the scope of the ES Act and are tax resident in the BVI
Entities that cannot prove that they are tax resident OUTSIDE of the BVI are automatically tax resident in the BVI and are required to show substance in the BVI as follows:
(a) the entity must be managed and directed from the BVI by;
(i) having a BVI qualified director or using an alternate qualified BVI director; or
(ii) the foreign director must travel to the BVI for meetings. It is important to note that the directors do not have to reside in the BVI but an adequate number of meetings of the directors must be held in the BVI. Therefore, it is necessary for a quorum of directors to be established in the BVI when having meetings, whether by BVI alternate director or by BVI director;
(b) the entity must have an adequate number of qualified employees (which can include the use of outsourcing);
(c) the entity must conduct the core income generating activities in the BVI (which can include the use of outsourcing);
(d) the entity must have adequate office facilities in the BVI (which can include the use of outsourcing); and
(e) the entity must have adequate expenditure in the BVI.
These entities will need to restructure to move the core income generating activities of their operations to the BVI in order to show adequate substance. It is important to note that an entity is not required to move the physical operations to the BVI, but to move functions of the operations that relates to the core income generating activities, (eg if a shipping company operates in India it is not required to move the shipping services to the BVI but it can move the billing aspect of the operations to the BVI.)
We recommend that Category B entities seek legal assistance on their restructuring plans, but it is not mandatory, the entity can decide on its own restructuring.
PURE EQUITY HOLDING BUSINESS – CATEGORY B
Pure equity holding Entities are given more relaxed substance requirements. They are only required to adhere to the BVI Business Companies Act and have adequate employees and premises for holding equity participation.
Entities conducting pure equity holding business that are receiving only dividend are considered passive in nature, therefore, having a registered agent in the BVI is considered enough substance.
Entities conducting pure equity holding business that are actively managing their participation such as re-investment of dividends, converting shares, selling shares, etc., the ITA will require evidence of more adequate substance to support such activities, such as qualified staff and office in the BVI. Pure equity holding business Entities are not required to have BVI directors but can do so if they so wish.
Outsourcing services can be used for all Category B Entities to establish substance or a trade license can be obtained to establish an independent office in the BVI. If an entity decides to establish an independent office, it will be required to obtain a (trade) license from the appropriate authorities and subsequently register with Inland Revenue, Social Security and National Health Insurance.
Filings for Entities under Category B with the ITA should be supported by a resolution of the directors or declaration of a related third party and any independent legal assessment or self assessment. The financial information of the entity will also be required to show that the entity has adequate expenditure in the BVI in comparison with its foreign expenditure.
Category C: Entities that fall within the scope of the ES Act but are tax resident in another jurisdiction.
These entities are required to submit evidence of their tax residency, e.g. a letter from the tax authority in an EU approved foreign jurisdiction, supported by a resolution of the directors and any independent legal assessment. Please take note that the ITA will be informing the tax authority in the foreign jurisdiction, that the entity has indicated that it is tax resident in that jurisdiction.
We will be assisting with legal assessments, application for change of financial periods, outsourcing services, setting up of independent office, recruitment of qualified staff, applications for licenses, and registration with Inland Revenue, Social Security and National Health Insurance. Our fee sheet is available for review.
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DISCLAIMER: OCI is a Company/Trust/LLC/LP/Foundation Formation Agency. We are not tax advisers or legal advisers. You are advised to seek local legal/tax/financial advice in regards to your local reporting/tax requirements before committing to set up or use an Offshore Company or other entity.
*Last amended March 3, 2022