Much has been said in recent months about the new international standards wanted by the OECD and relaunched by the European Union regarding the requirements of economic substance that companies and entities will have to comply with in order to be considered tax compliant.
In this respect, and in order to avoid the listing of non-cooperative countries, the British Virgin Islands and other jurisdictions with similar characteristics including Bermuda, the Cayman Islands, Jersey, Guernsey and the Isle of Man, have therefore decided to adhere to the new regulatory framework by committing themselves to its implementation.
In the following article, we will examine the case of the British Virgin Islands.
At the moment, as confirmed by the measures actually undertaken, the behavior of the BVI appears to be aimed at maintaining international consensus by avoiding its inclusion in the list. In detail, those measures are as follows:
- On 1 January 2019, the law known as ‘The Virgin Islands Economic Substance (Companies and Limited Liability Partnership) Act 2018’ (hereinafter referred to as ‘ESA’) entered into force;
- On April 23, 2019, the International Tax Authority of the BVI published the “Draft Economic Substance Code” (hereinafter “Draft Code”). It is a non-legally binding text which provides guidelines for the correct interpretation of ESA.
First of all, the types of activities considered relevant for its application are defined. These activities include:
- banking business
- insurance business
- fund management business
- finance and leasing business
- headquarters business
- shipping business
- holding business
- intellectual property business
- distribution and service center business
Companies and entities that carry out activities other than those indicated do not fall within the scope of application of the legislation. According to the interpretations provided, the mere holding of current accounts, the possession of real estate for personal use and the holding of equity investments are not restricted by the new economic substance requirements.
Three questions need to be asked in order to ensure proper application of the rules:
a) if the entity has a legal form that falls within the scope of the ESA;
b) if the entity performs one of the relevant activities referred to by the ESA;
c) if the entity is resident for tax purposes in another jurisdiction other than BVI, and that jurisdiction is not blacklisted for tax purposes.
If the answer to questions (a) and (b) is positive and (c) negative, the economic substance test will be used to assess whether the entity meets certain requirements, which vary depending on the following types of activities:
a) holding business;
b) intellectual property business;
c) another type of relevant activity
To pass the test, the entity must have an adequate number of employees and premises available for its operations. For the activities of categories (b) and (c) only, it is also required that the relevant activity be directed and managed from the BVI and that management costs be generated there that are appropriate to the activity carried out.
The substantive requirements will be verified during the so-called “financial period”, the terms of which should start no later than 30 June 2019 for companies existing as of 1 January 2019 and from the date of incorporation for all other companies.
Companies that do not meet the substance requirements will be subject to enforcement action that could go as far as the striking-off of the company.
We are closely following the implementation of the legislation and we remain available to customers and investors who wish to explore the subject further.
Paolo Balen, Vice-Chairman of Fidinam Group Worldwide