December 29, 2020 marks the date by which most companies and limited partnerships registered in the BVI are required to submit their first Economic Substance filing to the BVI International Tax Authority.
The Economic Substance (Companies and Limited Partnerships) Act, 2018 (“TheAct”) came into force on 1 January 2019. The Act requires all BVI entities classified as a “legal entity” conducting “relevant activity”, to maintain economic substance and make reports to the BVI International Tax Authority (“ITA”) via its registered agent. A legal entitywhich does not conduct relevant activity is required only to submit notifications to the ITA.
The deadline for submission of an economic substance filing to the ITA is 6 months after the end of the Reporting Period.
- For New Entities (incorporated after 1/1/2019), the Reporting Period ends 12 months from the date of incorporation. For example, if incorporated on May 1, 2019, the reporting period ends on April 30, 2020 and submission is due by October 29, 2020.
- For Existing Entities (incorporated pre-2019), the initial Reporting Period was set to end on June 29, 2020 which means that submission is due by December 29, 2020.
Therefore,for the majority of BVI companies the deadline for submission is fast approaching.
Companies are required to provide their relevant agents with the relevant information to enable them to submit the filing by the deadline date to avoid potentially severe fines and consequences.
The Act provides that on a first determination of non-compliance, the ITA shall issue a notice to the legal entity notifying:
(a) that it has determined that the legal entity has not complied with the economic substance requirements for that financial period,
(b) the reasons for determination,
(c) the amount of penalty imposed,
(d) the date on which the penalty is due, being not less than 28 days after the issue of the notice,
(e) what action should be taken by the legal entity to meet the economic substance requirements and the date by which such action needs to be taken, and
(f) the legal entity’s right of appeal.
In terms of the quantum of penalties, the initial fine can be up to US$20,000 or $50,000 for high-risk IP legal entitieswith $5,000 being pegged as the minimum fine. Continued failure to comply can lead to maximum penalties of up to $200,000 or $400,000 for high-risk IP legal entities. Furthermore, there may be criminal penalties assessed for failing to provide information or knowingly providing false information and ultimately a company may be struck from the Register.
In light of the above, companies incorporated before January 1, 2019 that have not yet filed, should now be taking urgent, positive and deliberate steps to ensure that they comply on or before December 29, 2020.
Written by:Glenn Harrigan, ACA