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Mastering the Economic Substance Rules in the British Virgin Islands

The British Virgin Islands (BVI) introduced Economic Substance rules with The Economic Substance (Companies and Limited Partnerships) Act, 2018, which came into force on January 1, 2019. In addition, to supplement the Act, the BVI introduced Economic Substance Rules on October 9, 2019.

BVI Legal Entities

The Act imposes Economic Substance requirements on BVI legal entities carrying on a Relevant Activity to demonstrate adequate Economic Substance in the BVI, with annual reporting obligations. BVI legal entities include companies incorporated in the BVI, and foreign companies registered in the BVI, as well as BVI limited partnerships and foreign limited partnerships registered in the BVI. The rules do not apply to trusts or general partnerships. 

Relevant Activities

Conducting a Relevant Activity is defined as carrying on the following businesses: Banking Business; Insurance Business; Fund Management Business; Finance and Leasing Business; Headquarters Business; Shipping Business; Holding Company Business; Intellectual Property Business; and Distribution and Service Centre Business. These terms are defined in the legislation. However, entities that do not carry on a Relevant Activity are not required to demonstrate substance in the BVI.

Holding Companies

Holding companies that exclusively hold non-debt equity interests in other companies are subject to a more streamlined regime. Under the Holding Company regime, the relevant entity will be deemed to have adequate substance if it complies with its statutory obligations under BVI laws, and maintains a Registered Agent and Registered Office in the BVI. 

Economic Substance

In respect of Economic Substance, the entity must meet 3 requirements: the activity of the entity must be managed and directed from the BVI; the core income-generating activity of the entity must be conducted in the BVI; and the entity must have adequate staffing, premises, and expenditure in the BVI for the core income generating activity. 

Annual Return

Entities that carry on one or more of the Relevant Activities are subject to the Economic Substance requirements must submit an annual declaration identifying the relevant activity and must demonstrate substance in the BVI or prove that the entity is resident in a cooperative jurisdiction.

BOSS Filing

BVI entities carrying on a Relevant Activity are required to provide certain information to the International Tax Authority (ITA) via the BOSS system. The obligation is imposed on the Resident Agent of the entity. The information reported may be provided by the ITA to relevant overseas authorities in certain cases. Penalties apply for non-compliance, including monetary penalties, criminal penalties, and entities may also be struck off the Register.

In conclusion, the British Virgin Islands (BVI) have enforced stringent Economic Substance rules, necessitating BVI legal entities involved in Relevant Activities to meet specific requirements. These entities must annually declare their activities, demonstrate their operational presence in the BVI, and report via the BOSS system managed by the International Tax Authority (ITA). Non-compliance can result in significant penalties, including removal from the Register. To succeed in the BVI, businesses must adhere to these regulations and stay updated on any changes.

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Economic Substance Rules