The British Virgin Islands International Tax Authority (ITA) published the updated Rules on Economic Substance in the Virgin Islands as of 24 February 2023. The new version of the Rules applies to financial periods starting on or after 1 January 2022.
The BVI economic substance legislation provides that the legal entities with “relevant activities” must observe the BVI’s economic substance (ES) requirements concerning these activities. By legal entities, the law understands companies and limited partnerships. The law provides an exemption for entities that are tax residents of countries outside the BVI. To apply for this exemption, a company must duly declare and confirm its tax residency to the ITA.
The ES requirements extend to such business activities as banking, insurance, fund management, finance and leasing, headquarters, shipping, holding, intellectual property, distribution and service centres. BVI companies that engage in these businesses but fail to fulfil the ES requirements may face substantial fines and further liquidation.
The key changes to the Rules:
1. The “investment fund business” has been removed from the list of relevant activities.
“Investment fund business” means operating an investment fund. The “investment fund” is an entity whose main activity is the issuing of investment interests to raise or pool investors’ funds aiming to enable a holder of such interest to benefit from the profits received as a result of the purchase, management, holding or alienation of investments by that entity and includes any organisation through which an investment fund directly or indirectly operates or invests, but excludes an entity that is itself the ultimate facility invested in.
The definition above does not fall within the scope of “fund management business”, a relevant activity requiring an investment license for managing segregated portfolios, mutual funds, pension or insurance products and others. It also does not cover companies with banking or insurance licenses.
Therefore, a BVI company acting as an investment fund and meeting the requirements of the Rules will be able to report the absence of relevant activities and not be obliged to ensure its economic substance in the BVI in relation to the said activity.
2. How to confirm an entity’s tax residency outside the BVI?
The revised version of the Rules clarifies the requirements for companies that declare their tax residency in a jurisdiction outside the Virgin Islands and the evidence to be attached to it.
A company is considered non-resident if it is a tax resident in a jurisdiction other than the BVI (exclusive of countries entered into the “EU blacklist” of non-cooperative jurisdictions in the field of taxation). A BVI company which claims to be a non-resident of the BVI for tax purposes must report this fact to the ITA and present the relevant evidence, namely:
- certificates or letters originating from a competent authority of a foreign jurisdiction;
- tax assessments, demands or confirmation of payment of taxes issued by a foreign tax authority;
- tax returns filed by the company with a foreign tax authority;
- rulings issued to the company by a foreign tax authority.
If the listed documents still leave questions, the ITA may request a letter from a qualified lawyer or accountant practising in the relevant jurisdiction, which would contain a professional opinion that the legal entity is a resident of such jurisdiction for tax purposes.
The revised version of the Rules also adjusts the requirements to the confirmation of tax residency in Guernsey, Jersey or the Isle of Man. In this case, the company must be taxable with local income tax.
If a company cannot provide the suitable evidence within the time for submitting the ES report (six months after the company’s financial period ends), the company may apply to the ITA to be treated as provisionally resident in a foreign jurisdiction. If the ITA satisfies such an application, it will give the company a “reasonable time” to provide the required evidence. For this period, the company will be recognised as a non-resident of the BVI.
3. The information a company must specify in the Economic Substance Report has been updated.
For all legal entities:
- registration number or its equivalent;
- date of incorporation;
- registered address;
- business address (if differs from the registered address);
- whether the company conducts any relevant activity;
- types of relevant activity the company is engaged in;
- name of the ultimate parent;
- name of the immediate parent;
- any other information as may be prescribed by the Minister.
For legal entities engaged in the relevant activity (except holding business) and do not claim to be treated as non-residents:
- taxpayer ID number (if any);
- type of income;
- gross income generated from the relevant activity;
- overall expenses incurred in connection with the relevant activity;
- expenses incurred in connection with the relevant activity in the BVI;
- assets and premises held for the relevant activity;
- net book value of tangibles held in connection with the relevant activity;
- total number of employees;
- number of personnel occupied with the relevant activity in the BVI;
- information on the staff occupied with the relevant activity (name, full or part-time work, qualifications, years of relevant experience);
- core income-generating activity in respect of each relevant activity;
- location of any premises in the BVI which are utilised for the relevant activity;
- details of persons in charge of the management of the relevant activity, their relationship to the company, and their country of residence;
- information of the board meetings convened by the company (total number of meetings; the number of meetings held in the BVI; the quorum; whether the minutes and resolutions were kept in the BVI; whether the quorum of directors was present in the BVI in person; directors’ details – name, qualifications, year of relevant experience, and whether they are physically present in the BVI).
For legal entities carrying on a holding business* and do not claim to be treated as non-residents, paragraphs 1 to 8 above plus:
- whether the company’s activities are active or passive;
- if active, the details of qualified employees engaged in the relevant activity (name, full or part-time work, qualifications or years of relevant experience), the details of the appropriate premises.
* The term “holding business” means that the company holds only equity participations in other companies, receiving dividends or capital gains.
As a reminder, any BVI company must submit its Economic Substance Report within six months after the end of its financial year. The financial year is 12 months from the company’s date of incorporation.