As it is known, in 2019 the large-scale reform took place in Belize. As a result, the economic substance rules (ES rules) and territorial taxation principle for International Business Companies (IBC) have been established simultaneously. Since then, corporate and tax legislation of Belize have changed, and many questions of its interpretation and application have arisen. This material is dedicated to said questions.
What companies are in scope of ES requirements?
In order to know how ES rules apply to a particular IBC company in Belize, it is necessary to have detailed information of the company’s activity and the structure of its revenues.
Then, such information must be correlated with the list of relevant activities established by the Economic Substance Act (Act № 15 of 11th October, 2019, hereinafter – the Act). In accordance with section 5 of the Act, relevant activities are:
- banking business;
- insurance business;
- fund management business;
- financing and leasing business (provision of a loan with interest and leasing of any property apart from land);
- headquarters business;
- distribution and service centre business (this is defined as the acquisition of goods from foreign affiliates and its sale to third parties, and provision of services to foreign affiliates);
- shipping business (except ownership of pleasure or fishing vessel);
- holding company business, if subsidiaries of a holding company are engaged in the abovementioned relevant activities;
- activities subject to special licensing by the International Financial Services Commission (IFSC), such as international corporate service and trust service providers or management agent.
In contrast with most offshore jurisdictions which apply ES rules, the list of relevant activities in Belize does not include intellectual property business. The reason for this is that in 2019 this activity was utterly prohibited for IBC companies by law. The amendment to IBC Act has been enacted accordingly, repealing all the provisions requiring to comply with ES rules while conducting intellectual property business and establishing penalties for conducting such business. The grandfathering period until 30th June, 2021 is provided to IBC companies that were registered on or before 16th October, 2017 and started owning intellectual property on or before 16th October, 2017.
Subsection 4 of section 6 of the Act subdivide relevant activities on core income generating activities (CIGA) which must be carried on in Belize:
- Banking business:
- raising funds, managing risk including credit, currency and interest risk;
- taking hedging positions;
- providing loans, credit or other financial services to customers;
- managing regulatory capital and preparing regulatory reports and returns.
- Insurance business:
- predicting and calculating risk;
- insuring or re-insuring against risk and providing insurance business services to clients.
- Fund management business:
- taking decisions on the holding and selling of investments;
- calculating risks and reserves;
- taking decisions on currency or interest fluctuations and hedging positions;
- preparing relevant regulatory or other reports for government authorities and investors.
- Finance or leasing business:
- agreeing funding terms;
- identifying and acquiring assets to be leased (in the case of leasing);
- setting the terms and duration of any financing or leasing;
- monitoring and revising any agreements;
- managing any risks.
- Headquarters business:
- taking relevant management decisions;
- incurring expenditures on behalf of affiliates;
- coordinating group activities.
- Distribution and service center business, the core activities of which are:
- transporting and storing goods;
- managing stocks;
- taking orders;
- providing consulting or other administrative services.
- Shipping business. It includes the following core activities:
- managing the crew (including hiring, paying and overseeing crewmembers);
- hauling and maintaining ships;
- overseeing and tracking deliveries;
- determining what goods to order and when to deliver them;
- organizing and overseeing voyages.
- Holding activity is not subdivided into CIGAs. However, subsection 1 of the Act defines holding company as a commercial entity, a holding body, having a primary function to acquire and hold shares or equitable interests of other companies, which does not carry on any other relevant activity.
It is essential that ES rules are not applicable as to IBC companies that do not conduct relevant activities, so to IBC companies resident in foreign jurisdictions and managed from such jurisdictions (subsection 2 of section 1 of the Act). Domestic companies in Belize are also out of scope of ES rules.
Despite the fact that Belize legislation establishes the exhaustive list of criteria to qualify a company’s activity as a relevant activity and explicitly exempts all other IBC companies from ES requirements, the issues of qualification are still the most complicated ones.
Current Guidance notes on ES rules issued by the IFSC give some examples:
IBC company is not obliged to comply with ES requirements if it has no income, e.g., when it does not have commercial transactions during its financial year or is in liquidation phase.
Belize IBC company is tax resident in some foreign jurisdiction and is managed from such jurisdiction. It is also out of scope of ES requirements if its country of residence is not blacklisted by the EU as a “non-cooperative jurisdiction”. It must provide the following evidence:
The information can be requested by tax authority of Belize from foreign tax authorities to approve tax residency of Belize company abroad.
The IBC company conducts holding activity and owns shares of its subsidiaries. Its subsidiaries do not carry on relevant activities so that the holding company itself is not subject to ES requirements at all.
If one of several subsidiaries carry on relevant activities (e.g. shipping business), then the holding company itself is in scope of ES rules (see next part).
The examples of Guidance notes, as well as the wordings of the Act, deal with the most prominent and trivial situations, so there are no answers to questions of ES rules application that are more close to practice, such as:
- IBC company generates income from different activities, one of which falls within the definition of relevant activities (e.g. shipping business), and others do not (e.g. rent of real estate located abroad). What is the proportion of such incomes which allows being exempted from ES requirements?
- Is the IBC company obliged to meet ES requirements if it owns securities of foreign public companies? Guidance Notes issued in Belize do not include the analysis of such a practically common case in contrast with ES Guidance of the British Virgin Islands (BVI). In BVI, such companies are not in scope of ES rules. Presumably, there are no ES requirements for such companies in Belize as well;
- Is the holding company obliged to meet the ES requirements if it receives loans from its subsidiaries, and then such subsidiaries decide to pay dividends and to set them off against the loan?
The legal uncertainty and lack of instruments to qualify different activities persist in Belize to the present day. In each particular case, it is necessary to seek legal advice from specialists in corporate law of Belize if no answers can be found in subsequent versions of Guidance Notes.
What is the essence of ES requirements in Belize?
The initial version of the Act established three components of ES requirements (management and control in Belize, expenditures in Belize and employees), but the number of such components has been extended to eight (the management and control component was extended, the requirements to have premises and keep financial documents in Belize were established for the first time). The current list of requirements is stipulated by sections 6 and 8 of the Act:
- an adequate number of meetings of the Board of Directors are conducted in Belize;
- there is a quorum of the Board of Directors present for meetings in Belize;
- strategic decisions of IBC company are recorded in the minutes of the meetings;
- financial documents of IBC company are kept in Belize;
- the Board of Directors has the necessary knowledge and expertise to discharge its duties;
- IBC company incurs adequate expenditures in Belize which are attributable to CIGAs of its relevant activity;
- IBC company has an adequate number of employees to conduct CIGAs in Belize;
- IBC company disposes of the “physical” premises in Belize to carry on CIGAs.
In accordance with section 9 of the Act, holding companies are subject to reduced ES requirements. Such requirements consist only of two components, namely adequate number of employees in Belize and premises in Belize, and are applicable when the holding company receives only dividends from the subsidiaries which are engaged in relevant activities and/or capital gains from the sale of shares or interest of such subsidiaries.
Section 7 of the Act allows the companies subject to ES requirements at any extent to comply with them through outsourcing by entering into agreement with Management Agent licensed to provide outsourcing services by the IFSC. The subject matter of the agreement may be the settlement of ES at necessary extent: rent of the office, employment of staff, appointment of resident director, etc. Currently, there is no information on whether some company obtained a Management Agent license in Belize.
The grandfathering period to meet ES requirements until 30th June, 2021 is granted to IBC companies registered on or before 16th October, 2017. If a company was registered after 16th October, 2017, it must ensure compliance with ES rules starting from 1st January, 2020.
Guidance Notes do not define in details what is an “adequate number of employees” for particular relevant activities and/or CIGAs. They only provide a general wording that the “adequacy” depends on “the particular facts of the company and its business activity” without stating the certain number or methodology of calculation of such number (like the methodology in the BVI).
Moot points arise also regarding the ES requirements for holding companies with mixed incomes (dividends + incomes from activities that are not qualified as relevant ones).
Consider the case, similar to one from the previous questions: holding company grants interest-bearing loans to its subsidiaries and receives dividends from them. It is assumed that in described situation holding company is subject to Belize ES requirements anyway. However, they may be qualified as conducting two relevant activities, finance business and holding company business, at the same time.
But to what extent ES requirements are applicable to this holding company? Is it obliged to have only employees and premises in Belize? Or must it also have a resident director, incur expenditures in Belize and keel financial documents in Belize? The answer to this question cannot be traced in Guidance Notes, so the possible solution may be the request of legal opinion in Belize.
How is the ES reporting procedure designed?
All IBC companies without exception must fill in and file ES reports in a form approved by IFSC, i.e. companies that conduct relevant activities or do not conduct them. It has reasonable grounds because the only document which allows IFSC to determine the activity of IBC company initially and subsequently require or not require the compliance with ES rules is the ES report filed by IBC’s registered agent.
The date of commencement of the first ES reporting period for IBC companies registered on or before 1st January, 2020 is 30th April, 2020, and the date of its end is 30th April, 2021. The ES report must be filed with IFSC not later than nine months from the ES reporting period end, that is, before 30th January, 2022.
For IBC companies registered after 1st January, 2020 first ES reporting period commences on the company’s registration date and ends at the same date one year later. For example, the ES reporting period of a company registered on 27th July, 2020 ends on 27th July, 2021, and it must file the ES report on or before 27th April, 2022.
Current forms of ES reports (forms B, C, D, Е) for IBC companies with different types of activities are published on the official website of the IFSC. Form A is designed for Management Agents responsible for the outsourcing of economic substance, not for IBC companies, and was published as an annexe to the Act.
What is the liability for non-compliance with ES requirements?
Under subsection 1 of section 13 of the Act, IFSC has a right to arrange and conduct an on-site inspection of IBC company to verify the information included by the IBC company in its ES report. The on-site inspection will be conducted by IFSC itself or by an independent auditor appointed by IFSC.
If the results of the on-site inspection demonstrate that the IBC company does not comply with ES requirements, the term of 90 days to eliminate the deficiencies is granted to such company. In case when the deficiencies are not eliminated, IFSC can oblige IBC company to conduct a mandatory audit at the expense of the company in 60 following days. After expiration of both said terms, IBC company can be subject to administrative penalty:
- In the amount of 150 000 Belize dollars (approximately 75 000 US dollars) for evasion of mandatory audit in accordance with subsection 3 of section 17 of the Act;
- In the amount of 300 000 Belize dollars if the mandatory audit has been arranged and it has detected non-compliance with ES requirements (subsection 3 of section 17 of the Act). In addition to this, the license to conduct particular activity may be revoked from IBC company, and such a company may be struck off the Register.
Generally, the maximum total amount of all administrative penalties cannot exceed 350 000 Belize dollars. The exception from this rule is prescribed for cases when the violation is continuing, and the committing person does not eliminate its consequences: the penalty in the amount of 1 000 Belize dollars can be imposed on the said person for each day the violation continues in addition to the maximum total amount.
Apart from the administrative violations revealed during the on-site inspection and/or mandatory audit, section 18 of the Act establishes the liability for the commission of the following offences:
- Non-compliance with ES requirements;
- Failure to file ES reports in due time or provision of inaccurate information in it (if the accurate information is not provided to IFSC afterwards intentionally);
- Failure to keep documentary evidence essential for the ES rules for 5 years:
- Obstruction of the performance of IFSCs functions;
- Alteration, destruction, mutilation, defacing, hide or removal of information which causes a third person to contravene the Act, and inducement of the third person to commit said offences.
Persons who commit such offences are liable to a fine in the amount of 200 000 Belize dollars and/or imprisonment for a term of 1 year on summary conviction.
Subsection 2 of section 21 of the Act provides a list of persons who may be liable for contraventions of ES rules: IBC company itself, or its director, officer or agent whose actions lead to the contravention. IFSC must name the liable person in the notification of contravention and send the notification to such person’s address.
In most cases, the time limit to hold a person liable for violations of ES rules is 12 months from the date of violation (paragraph “a”, subsection 6 of section 21 of the Act). The time limit for offence in the form of provision of inaccurate information in the ES report is 12 months from the date when the inaccuracy came to the attention of the IFSC or five years from the date of filing of the ES report.
What is the principle of IBC companies taxation?
In 2019 the rule that only Belize-sourced incomes of IBCs are subject to taxation by Corporate Income Tax and/or Business Tax had been set up. Foreign incomes were not subject to taxation by none of the two types of tax. This principle was established by subsection 6 of Section 21 of the Income and Business Tax Act (added to the main act by paragraph “b” of section 4 of the Act №26 of 20th December, 2018).
But later, the principle of IBC companies taxation was changed by the adoption of the Act №25 of 23rd December, 2019. The Corporate Income Tax has been abolished for all domestic and IBC companies except petroleum industry enterprises. Another tax called Business Tax (BT) became chargeable on worldwide incomes of IBC companies, i.e. Belize-sourced incomes and foreign-source incomes.
The standard BT tax rate for general Trade and Business is 1,75%, and there are other tax rates for specific activities, such as 6% for professional services, 3% for licensable financial services provided to non-residents, 3% for rent, etc. The BT tax base is defined as all receipts, i.e. revenues, without any deduction of operation costs.
If a company is engaged in trading business and generates income from such activity, the first 75 000 Belize dollars (37 500 US dollars) of annual income are non-taxable by BT. If a company is engaged in the provision of professional services, the first 20 000 Belize dollars earned from such activity are non-taxable by BT.
In addition to this, if IBC company pays dividends and interest to non-residents, it must levy withholding tax at required rates and pay it to the Belizean budget. The withholding tax rate for both dividends and interest is 15%, and it is applicable unless the Double Tax Avoidance Agreements of Belize and foreign jurisdictions prescribe reduced withholding tax (WHT) rates.
Permanent exemption from BT and WHT is granted to IBC companies that meet all of the following requirements:
- IBC company is a tax resident in foreign jurisdiction not included in the EU blacklist and has documentary evidence of its tax residency;
- IBC company does not have a permanent establishment in the territory of Belize, that is:
- a place of management;
- a branch;
- an office;
- a factory;
- a workshop;
- a mine or any other place of extraction of natural resources;
- a building site of immovable property;
- the place of provision of services to non-residents through employees present in Belize.
- IBC company files exemption tax return which must contain:
- The name of the jurisdiction of tax residency of IBC company;
- Names of beneficial owners, nominee shareholders and other persons holding more than 5% of company’s shares;
- Names of jurisdictions of tax residency of shareholders and beneficial owners.
In some cases, tax authorities of Belize will exchange information with jurisdictions that are declared by IBC companies as the place of their tax residency for purposes of exemption from Belize tax and ES requirements. This instrument is aimed to decrease the number of possible abuse practices of creating artificial tax residency abroad.
If IBC company is liable to pay BT tax for such foreign-sourced incomes as dividends, interest, rents of property located outside of Belize, insurance premiums, transporting by sea, transmitting information by analogue or digital channels, any activity of permanent establishment abroad and foreign capital gains, it is possible to credit foreign tax against BT in Belize. If the amount of foreign tax exceeds the amount of BT, the overpaid sums are not subject to a refund from the budget.
When do the taxation rules start to apply?
Generally, the obligation to pay tax is effective for IBC companies starting from 1st January, 2020. However, sections 3 and 4 of Act №26 of 20th December, 2018, which were not amended or repealed by further legislative acts, establish grandfathering (tax exemption) period until 30th June, 2021. The applicability of grandfathering period was subsequently clarified by Guidance Notes G-CD-No.8. 3 of 2020, which state that IBC company may use the exemption if:
- It was registered on or before 16th October, 2017$
- It is not engaged in ES relevant activities at all or conducts relevant activities using the assets acquired on or before 16th October, 2017.
Unfortunately, current versions of Guidance Notes do not give examples of using grandfathering period and exemption from BT close to some practical cases, providing only general interpretation of legal acts.
Consider again the situation described in previous parts of this article: holding company receives dividends and repayments of loan and interest from its subsidiaries. Admit that the company was registered before 16th October, 2017 and started holding subsidiaries’ shares before this date. The holding company has granted the loan and received it back in 2020. In this case, the following questions regarding grandfathering period arise:
- Are incoming dividends exempt from taxation until 30th June, 2021? The company is engaged in a relevant activity, but the asset in the form of shares of subsidiaries was acquired before 16th October, 2017;
- Is it correct that interest accrued and received in 2020 is subject to taxation in 2021? The asset in a form of the right to claim the repayment of loan and interest accrued was acquired after 16th October, 2017 (in 2020).
Note that in a practical case similar to the example above, the opinion that both interest and dividends are fully exempt from taxation until 30th June, 2021 was expressed. In our opinion, it contradicts the provisions of section 14 of the Act №26 of 20th December, 2018 and its interpretation by the IFSC: the asset which generates interest income has been acquired after 16th October, 2017; thus, the company is not entitled to apply grandfathering period to this particular interest income. Dividends are not subject to taxation until the end of grandfathering period.
In addition to this, legal uncertainty of grandfathering period application strengthened after the position of the EU Council on this matter has been mentioned in Council Conclusions on harmful tax regime in Belize. According to this position, no grandfathering is foreseen in the replacement taxation regime in Belize “in line with the request”. The text of the EU request addressed to Belizean authorities and the text of the response to that request is not integrated in the Council Conclusions dated 30th April, 2020. In May, 2020 the counterposition was stated in Guidance Notes published in Belize: there is a grandfathering period ending on 30th June, 2021, during which the tax exemption is granted to IBC companies.
What tax obligations apply to IBC companies?
Firstly, all IBC companies must file monthly BT returns before the 15th day of the following month. First returns are filed as follows: non-grandfathered entities file their BT returns for 2020 before 30th September, 2021, and grandfathered entities file their BT returns for 2021 before 31st March, 2022.
Secondly, all IBC companies must pay BT for each month at a standard rate of 1,75% or at special rate prescribed for their activity before the 15th day of the following month. Currently, it is presumed that the monthly tax payment system will be replaced by the yearly system for IBC companies, but still there are no official statements on this matter.
Thirdly, IBC companies must file withholding tax returns and pay withholding tax at the same date of payment of dividends or interest to non-residents.
Fourthly, despite no being obligation under the law, Guidance Notes expressly and clearly state that all IBC companies with no exception must obtain Tax Identification Number (TIN) “for regulatory and tax authorities to efficiently monitor the status of the IBC”. Having TIN does not mean that IBC company is liable to tax in Belize automatically.
IBC companies must also file Financial Statements together with BT returns, as it is the obligatory supporting document. Generally, Financial Statements must be audited if the company’s income exceeds 6 000 000 US dollars, but tax authorities in Belize have a right to request auditor’s report from particular IBC companies individually.
What is the liability for non-fulfilment of tax obligations?
The penalty for late filing of BT tax return is 10% of the tax due for every month that the return remains outstanding, but not less than 10 Belize dollars. 24 months is the maximum period for which the penalty is imposed.
The penalty for non-payment of tax is 1,5% of the unpaid amount of tax for every month while it remains outstanding.
In case of failure to file BT tax return at all the penalty in the amount not exceeding 10 000 Belize dollars may be imposed, and the person who is in default to pay the penalty (e.g. director of IBC company) may be imprisoned for a term not exceeding 2 years. These measures are sanctioned by a court on a summary conviction.
The time limit to collect outstanding tax and impose penalties by the court decision is 6 years from the date of contravention (subsection 1 of section 61 of the Tax Administration and Procedure Act).
Are there any other essential obligations of IBC companies?
In contrast with other offshore jurisdictions, there are currency control rules in Belize. They are effective since 1st January, 2019 and set up several obligations for IBC companies that maintain US dollar bank accounts:
- Open and use US dollar accounts only in Belizean banks or branches of foreign or international banks located in Belize;
- submit the monthly report to the Central Bank of Belize describing all transactions in the US dollar accounts and of sales and purchases of the company.
However, after the currency control was initially established in Belize, the legislator clarified that the requirements to have US dollar accounts only in Belize and to submit monthly reports on such accounts are applicable only to IBC companies resident in Belize.
As the main criterion of tax residency is using the office or other “fixed” place of business in Belize, all companies which must comply with ES requirements due to the type of their activity will fall within the scope of currency control. In light of the requirement to obtain TIN, which may also prove the resident status of the IBC in Belize, many companies will have to comply with currency control rules while trading in US dollars.
The only option for IBC company conducting relevant activity to be out of scope of ES rules and currency control is to prove tax resident status and payment of tax in a foreign jurisdiction.
Even if the activity of IBC company cannot be qualified as a relevant activity so that the ES rules and currency control rules do not apply to it, nevertheless, such company must declare and pay BT tax.
It is still not known whether the monthly BT taxation system will be replaced by the yearly system for IBC companies. It is obvious that some IBC companies that are not grandfathered until 30th June, 2021 will pay BT for 2020. The deadline for filing financial statements and tax returns for such companies has been extended to 30th September, 2021, but there is no clear guidance on the period of IBC companies taxation.
In addition to this, all IBC companies with no exception must apply for TIN and file ES reports independently of their type of activity and tax liability.
Tags: Belize, offshore, corporate tax, withholding tax