BVI Economic Substance Legislation the topic you should know.
The British Virgin Islands (BVI) passed Economic Substance Legislation requiring legal entities performing relevant activities to demonstrate adequate economic substance within the BVI.
Owners of any company or limited partnership, the “legal entities”, incorporated or continued in the British Virgin Islands should be aware of this legislation and consider how they may be affected.
In this article we help you understand how it works and how investors can take advantage of BVI Economic Substance Legislations.
After having adhered to the listing process in the European Union and the Inclusive Framework OECD BEPS, the British Virgin Islands (abbreviated BVI) enacted the Economic Substance (Companies and Limited Partnerships) Act, 2018 (abbreviated ES Act), which entered into force on January 1, 2019. Furthermore, the BVI International Tax Authority issued the Rules on Economic Substance (abbreviated ES Rules) which further define the scope of the ES Act in detail and provides examples.
The Economic Substance Legislation sets out requirements for the legal entities that carry on nine (9) relevant activities within the BVI, and which are not registered tax residents in another jurisdiction that is not in the EU list of non-cooperative jurisdictions for tax purposes.
Relevant Activities Sanctioned by Legislation – BVI Economic Substance Legislation
To better understand BVI Economic Substance Legislation, it is necessary to talk about the nine relevant activities defined in Section 6 of the ES Act:
(a) banking business;
(b) insurance business;
(c) fund management business;
(d) finance and leasing business;
(e) headquarters business;
(f) shipping business;
(g) holding business;
(h) intellectual property business;
(i) distribution and service centre business.
All legal entities carrying on any of the above relevant activities are potentially within the scope of the Economic Substance requirements.
Therefore, they must perform a self-assessment of their current business activity in order to determine whether they fall inside or outside the scope of the Economic Substance.
Then, the legal entity can consider the options set forth by Section 2, Sub section 2.9 of the ES Rules:
2.9 Any entity carrying on a relevant activity which is potentially within the scope of the legislation has, broadly speaking, three options:
- it can ensure that the substance of the relevant activity is carried out within the BVI,
- it can discontinue the activity, or modify it so it no longer falls within the scope of a relevant activity, or
- it can demonstrate tax residence in a jurisdiction outside the BVI.
If the legal entity decides to demonstrate substance within the BVI, it may proceed with the necessary steps to do so as detailed in the next section.
It should be noted that the substance requirements may vary depending on the relevant activity. For example, different substance requirements apply depending on whether the entity is carrying on:
(a) holding business,
(b) intellectual property business or
(c) any other type of relevant activity.
It is a common requirement for all three of the above categories that, in relation to the relevant activity in question, the legal entity has an adequate number of employees and has adequate premises.
It is, in addition, a requirement for categories (b) and (c) that relevant activity is directed and managed from the BVI, that adequate expenditure is incurred in the BVI and that CIGA’s are carried on in the BVI.
Activities within category (b) may, in addition, be subject to presumptions against compliance with the economic substance requirements which the legal entity may have to displace by evidence.
Meeting Economic Substance Requirements – BVI Economic Substance Legislation
There are three main conditions that legal entities must meet, according to Section 7, Sub section 7.3 of the ESA Rules.
First, you must ensure that the relevant activity is directed and managed within the territory of the BVI throughout the financial period.
Secondly, the legal entity must demonstrate adequacy considering a series of variables:
- Expenditure, a figure of expenses during your activities within the Islands.
- Number of qualified employees, equipment and infrastructure located within the territory of the Islands.
- Premises possess adequate physical presence to conduct their main activities, related to the primary profits generated by that company.
Third, the legal entity must carry on the Core Income Generating Activities (abbreviated CIGA’s) that directly relate to its relevant activity from within the BVI.
Each relevant activity has a set of CIGA’s attached to it, you might review the CIGA’s for each relevant activity.
It is important to note that not all legal entities have to carry on all CIGA’s for the relevant activity.
However, if a CIGA is being carried on, this needs to happen within the BVI.
The ES Act, defines Holding Business as the business of being a pure equity holding entity, and then “pure equity holding entity” means a legal entity that only holds equity participations in other entities and only earns dividends and capital gains.
This means that if the legal entity owns any other form of property, such as bonds, real estate or movable property, it falls outside the definition and will not be treated as carrying on holding business.
Pure Equity Holding Companies can also operate within the territory of the BVI.
There is no requirement that the legal entity is directed or managed in the BVI for a Pure Equity Holding entity, and, since there are no CIGA relating to holding business, nor is there a requirement that the entity carries on CIGA in the BVI.
However, it remains necessary to have in the BVI adequate employees and premises for holding or managing its equity participations.
Nonetheless, the ES Rules states that
“the requirement for being a pure equity holding entity is simply holding equity participations. If this is all the legal entity does during a given financial period, the relevant activity will be entirely passive in nature and the requirements for adequate and suitably qualified employees and for appropriate premises will be applied accordingly. Any legal entity will of course retain the services of a registered agent, and the performance of those services will be taken into account when assessing economic substance for pure equity holding entities”.
It should be noted that the registration process of a company of this nature does not present major complications.
Intellectual Property Business
The other relevant activity that has a series of requirements somewhat different from the main ones is the Intellectual Property Business.
Without a doubt one of the most important activities in the world, the management of intellectual property has seen exponential growth during the last two years; now driven faster by increased web traffic following the events of the global COVID-19 pandemic.
Because income derived from intellectual property assets can pose a higher risk of artificial profit shifting than non-IP assets, a legal entity that carries on Intellectual Property Business must meet certain requisites.
This higher risk is reflected in the presumptions of non-compliance with the economic substance requirements which apply in the two scenarios identified in ESA section 9(2).
First, a legal entity carrying on Intellectual Property Business must demonstrate that taking the strategic decisions and managing the principal risks relating to the development, exploitation and acquisition of the intangible assets is carried on within the BVI.
These in turn are closely related to the generation of profits from the management of intangible assets related to their branch of activities.
All of the above activities would need to be carried on within the territory of the BVI, again meeting the qualified personnel; premises, and of course complying with expenditures.
Additionally, the requirements for Intellectual Property Business also include that if there is a need for the use of specific equipment, that equipment is located in the BVI.
Investing in the British Virgin Islands, an increasingly palpable reality
BVI Economic Substance Legislation.
Taking this Legislation into account, many companies and investors have decided to bet on investing significant sums of capital in the territory of the BVI.
The scenario is attractive, and when approached correctly, it can provide a very viable alternative for capital investment and long-term profit generation.
The most important benefit is having a perfectly functioning BVI structure in accordance with all current legal requirements.
Considering the current global context, the British Virgin Islands prove to be a very interesting place to invest and carry on activities.
The Internet and related electronic business activities can be a golden opportunity for non-traditional businesses.
The opportunity is there, you just have to go on and look for it.
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