BVI Update on Economic Substance Implementation

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Earlier last year, the European Union created and set forth a list of ‘non-cooperative’ taxation jurisdictions, popularly referred to as the ‘EU Blacklist’. As part of this exercise, several of the traditional offshore jurisdictions, including the BVI, the Cayman Islands, Jersey and other crown dependencies, have been believed by the EU to be a part of such list.
Other jurisdictions in the greylist are suspected to be facilitating offshore structures or arrangements, aimed at attracting profits that do not reflect real economic activity or substance in the relevant jurisdiction. Offenders will subsequently be added to a Greylist- the halfway house between compliance with EU standards and regulatory disrepute.

The BVI, and other grey-listed jurisdictions, committed to address the EU’s concerns about a supposed ‘lack of economic substance’ by introducing so-called substance legislation by the end of 2018, in order to stay off the proposed EU Blacklist. Please note that each jurisdiction has taken a slightly different approach; BVI’s steps have been outlined below in depth.

The BVI passed the Economic Substance (Companies and Limited Partnership) Act, 2018. This law was gazetted on December 19th 2018 and came into force on January 1st 2019. We are awaiting further guidance from the BVI as to more detailed definitions of the relevant activities and also what substance might be required.

Scope of BVI Companies Affected by the Changes
Substance requirements are expected to apply to BVI entities that are tax resident in the BVI and that conduct relevant activities. A relevant entity is defined as follows:

All BVI companies and limited partnerships with legal personality (LPs) that are tax residents of BVI. Companies that are tax resident elsewhere outside of the BVI do not fall in the scope.
All foreign companies and limited partnerships with LPs doing business in the BVI.
Relevant activities identified by the EU and more recently by the OECD include:

Banking & financial institutions.
Insurance companies.
Fund management companies.
Finance & lending facilities.
Shipping companies.
Holding & subsidiary companies.
Legal offices & law firms.
Distribution & service centres.

Broadly speaking, if BVI companies that are BVI tax resident are conducting any of the relevant activities listed above, then substance may be required in the jurisdiction; if not, additional substance should not be required.

If required, existing companies were required to comply with economic substance requirements by June 30th 2019 and to have met the reporting obligation within one financial year of June 30th 2019.

New companies must comply with the economic substance requirement immediately and are required to meet the reporting obligations within one year of the date of incorporation or formation.

Contact us for further compliance guidance with the BVI economic substance update.