BVI Economic Substance Law
Recent changes in global tax laws have compelled governments to increase the regulation and oversight of companies that reside within their borders. In order to conform with the latest standards on international reporting and compliance, the British Virgin Islands (“BVI”), together with many other countries around the world, has enacted new laws and guidance as part of its longstanding participation in efforts to fight international money laundering and other financial crimes involving offshore entities.
As part of this pursuit, in 2018, the BVI enacted the Economic Substance (Companies and Limited Partnerships) Act (the “Act”). Together with the Act, the BVI intends to collect information through a system known as the Beneficial Ownership Secure Search (“BOSS”) system, which has yet to be released.
On October 10th, 2019, the BVI published the final version of the Code—the Economic Substance Rules (and Explanatory Notes) (the “Rules.”) These rules clarified a number of important items and provided guidance on some crucial details of the requirements, while leaving a few matters unaddressed and unresolved. Though some of the previous Economic Substance and BOSS legislation is already in effect, the recently released Rules are scheduled to take effect on the date when the Beneficial Ownership Secure Search System (Amendment) (No.3) Act comes into effect, a date that is expected to occur soon.
The Rules clarified the following items. Please note that this list is not exhaustive.
1. Economic substance requirements must be complied with during and prior to liquidation;
2. Additional requirements for BVI’s electing to be treated as a tax resident outside of the BVI;
3. Requirements of information to be provided to and uploaded into the BOSS system:
a. Whether a legal entity carries out a relevant activity
b. Residential address of the beneficial owner
c. Total amount of expenses incurred in the relevant activity both as a whole and within the BVI
d. Total number of employees engaged in the relevant activity both as a whole and within the BVI
e. Additional requirements for intellectual property business
i. Concrete evidence that decision making takes place in the BVI
ii. A detailed business plan including the business reasons of holding IP in the BVI
Information not provided in the new Rules includes regulations related to funds, the process through which information will be gathered, and the release of the BOSS platform itself. Once the BVI government releases the mandatory information required by the BOSS system, we will advise as to how the information will be collected.
Though there is a great deal that we still do not know regarding the law and its implementation, we do know that information will be due immediately for companies formed prior to January 1st, 2019. For companies formed on or after January 1st, 2019, the rules will be applied to the company’s first financial period, which is 12 months after the incorporation date. This means that for companies incorporated on or after January 1st, 2019, the entity classification information will be due twelve months after the company’s formation date. We strongly advise that directors of companies prepare and submit this information immediately, regardless of a company’s formation date.
Reporting obligations per the new rules will be twofold. The first step will involve entity classification. The second step will require the registered agent to file the economic substance information with the BVI authorities. Both the entity classification process and filing with the BVI authorities will generate fees.
Directors of BVI companies will be responsible for classifying the entities and providing any required information. We will assist you through the entity classification process. Depending on each company’s particular circumstances, the entity classification process will vary in complexity and requirements. As we receive more information from the BVI government, we will contact clients with precise details on what the next steps will be and what supporting information or documentation may be required. If a BVI company holds only a bank account and financial investments, for example, then it will not be classified as conducting a relevant activity and not be subject to economic substance requirements.
If an entity is considered to be conducting a relevant activity, it will be subject to additional rules and requirements, the details of which remain forthcoming. Depending on the type of relevant activity conducted, economic substance requirements may range from obtaining a trade license, to appointing a local director, to employing individuals at a local office in the BVI. Analysis must be performed on a case by case basis.
Any failure to provide information requested by the BVI or intentionally providing false information is punishable by a fine of up to $75,000 and five years imprisonment.
This information is based on the latest laws enacted by the BVI government and may change as the BVI legislates the final versions of laws related to its economic substance requirements. Trust that you can rely on Barbosa Legal to keep you informed as to the latest developments in international tax.