The British Virgin Islands (“BVI”) has met the criteria set by the European Union (“EU”) in relation to transparency, the OECD’s Base Erosion and Profit Shifting rules and fair taxation principles. However, in the EU’s 2017 assessment of 92 countries, it was determined that the BVI was deficient in failing to require entities to establish economic substance in the jurisdiction. In October 2018 the BVI Government announced that it was taking steps to implement legislation that would comply with this requirement.
The Premier, Dr. the Honourable D. Orlando Smith, announced in early December that legislation to be entitled the Economic Substance (Companies and Limited Partnerships) Act 2018 (the “Act”) would be passed by the end of December. The Act was passed and came into effect on 1 January 2019. During the debate on the proposed legislation, the Hon. Premier, advised the House of Assembly that public guidance will be issued to assist in its implementation together with the Regulations which will be promulgated pursuant to the Act. It is clear that this legislation will have a significant impact on the compliance obligations of certain businesses by requiring “relevant entities” which include BVI companies, BVI limited partnerships (which do not have legal personality), foreign companies and limited partnerships registered in the BVI that are both tax resident and carrying on “relevant activity”, to have an adequate level of economic substance in the BVI. Currently, “relevant activities” are stated to be:
- banking business,
- insurance business,
- fund management business,
- finance and leasing business,
- headquarters business,
- shipping business,
- holding business,
- intellectual property business, and
- distribution and service centre business.
It will be necessary to determine whether a relevant entity is conducting relevant activity. If an entity is subject to the economic substance requirements it will need to manage its’ relevant activity and conduct core income generating activity in the BVI. There are specific provisions in the Act for pure equity holding entities which only hold equity participation in other entities and earn dividends and capital gains, if they comply with the relevant BVI statutory requirements in addition to having “adequate” employees and premises. There are also specific legislative requirements for intellectual property business as well as a higher level of penalties in certain circumstances for breach of the Act.
In addition, there will be extra requirements for corporate service providers to ensure that they know where a client entity is tax resident. If a client is tax resident in the BVI then it should carefully consider from whom and when they should seek initial guidance on applicability followed by a legal impact assessment (if any) and advice on continuing obligations under the Act. BVI businesses may seek the advice from their usual law firm but should keep in mind that almost all BVI firms own their own corporate services business arm which may then be asked to provide a fee quote for additional services which it may wish to provide.
BVI businesses may consider potential cost savings that might be obtained through a competitive quote for legal advice from an independent law firm that does not sell services through any corporate services business it has an interest in.
Regardless of where legal advice is obtained it will also be important to seek a competitive quote for ongoing services from corporate service providers that are entirely independent of any law firm.
The key takeaways are therefore:
- Diarize the initial engagement request for competitive quotes;
- Engage in a timely way to ensure compliance;
- Implement and diarize immediate and ongoing obligations or verify this will be taken care of by your corporate services provider.