The Economic Substance (Companies and Limited Partnerships) Act, 2018 (the “Act”) came into force on 1 January 2019 in the British Virgin Islands (“BVI”). The Act requires certain legal entities carrying on relevant activities to demonstrate adequate economic substance in the BVI. The Act also introduces extended reporting obligations. Any company or limited partnership registered or incorporated in the BVI should monitor these developments closely.
What is the scope of the new Act?
The Act imposes economic substance requirements on all BVI companies and limited partnerships (“LPs”) which are carrying on “relevant activities” unless they are resident for tax purposes in a jurisdiction outside the BVI (provided that the other jurisdiction is not on Annex I to the EU list of non-cooperative jurisdictions), and on all foreign companies and limited LPs doing business in the BVI.
Any legal entity which carries on a relevant activity during any financial period must comply with economic substance requirements. Relevant activities mean any of the following:
- Banking business
- Insurance business
- Fund management business
- Finance and leasing business
- Headquarters business
- Shipping business
- Holding business
- Intellectual property business
- Distribution and service centre business
How soon will the substance requirements apply?
The Act differentiates between new companies and LPs respectively incorporated and formed on or after 1 January 2019, and companies and LPs which existed before that date.
New companies and LPs must comply with economic substance requirements immediately and meet the relevant reporting obligations within one year of the date of incorporation or formation respectively.
Existing companies must comply with economic substance requirements by 30 June 2019 and meet reporting obligations within one year of that date.
The International Tax Authority (“ITA”) of the BVI is in charged with enforcing the economic substance requirements. Penalties will be imposed both for failure to provide required information, and for operating a company or LP in breach of the economic substance requirements.
What are the reporting obligations and who will have access to information?
The Act made certain amendments to the BVI Beneficial Ownership Secure Search (“BOSS”) System Act 2017 on the same date of enforcement of the Act, i.e. 1 January 2019, as a result of which BVI and foreign registered companies and limited partnerships will generally be required to report certain information to their BVI registered agent to be uploaded onto the BOSS system. Previously “exempt persons” (including mutual funds) will remain exempt from the BOSS reporting requirements unless they carry on a relevant activity.
In addition to their existing obligations under the BOSS regime, BVI and foreign registered companies and limited partnerships which are subject to the BOSS reporting requirements will have to identify and provide their registered agent with certain information.
This information will be provided to ITA via the BOSS system. The ITA may use the information to discharge its duty to supervise and enforce the economic substance requirements. Information will be disclosed by the ITA to relevant overseas authorities in certain appropriate cases, including where there is breach of the economic substance requirements or where the entity claims to be tax resident in an EU member state.
Flowchart of the BVI Substance Requirements
For better understanding, the BVI Finance issued a flow chart (refer to the link below) to provide a high-level illustration of the Economic Substance (Companies and Limited Partnerships) Act 2018, in respect of its application to legal entities incorporated or formed under the law of the BVI.
http://www.bvihouseasia.com.hk/uploads/BVI-Substance-Requirements-Flowchart.pdf
Further Guidance
Further clarification of the substance requirements and formal guidance notes are expected to be issued soon. Sertus will provide more information about the new Act in due course and we believe the compliance requirements will be straightforward and minimal.
If you have any questions regarding the above, please feel free to contact your Sertus Client Services Representative or contact us at info@sertus-inc.com.