Economic Substance Services

Economic Substance Services

As part of its long-standing commitment to tax transparency, the British Virgin Islands (BVI) passed the Economic Substance (Companies and Limited Partnerships) Act 2018 (ESA) which came into force on January 1, 2019.  This act requires legal entities carrying on relevant activities to demonstrate economic substance and imposes certain reporting requirements.

In April 2019 the British Virgin Islands International Tax Authority (ITA) the designated Competent Authority for the ESA, published a draft Economic Substance Code (the Code) which provided guidance on the interpretation of the ESA and on the manner in which the ITA will carry out its obligations under the legislation.

The ESA provides that:

 (1) No legal entity may carry on a relevant activity in the Virgin Islands during any financial period ending on or after 31 December 2019 unless it complies with the economic substance requirements in relation to that activity.

(2) A legal entity which carries on more than one relevant activity shall comply with the economic substance requirements in respect of each activity.

A legal entity will be treated as carrying on a relevant activity in the Virgin Islands during any financial period in which it receives income from that activity. In order to determine whether a legal entity is obliged to comply with the ESA, the following questions need to be addressed:

(a) is the entity of a type which falls within the economic substance legislation

(b) if it is, is it carrying on a relevant activity?

(c) if it is carrying on a relevant activity, is it resident for tax purposes in a jurisdiction outside theBVI (and which is not on the EU list of non-cooperative jurisdictions for tax purposes).

Only if the answers to (a) and (b) are affirmative and the answer to (c) is negative will the economic substance requirements apply to the entity.  However, all qualifying legal entities are mandated to make an annual report as to their compliance with the ESA during the previous financial period.

The ESA and the Code rely on a self-reporting regime, pursuant to which registered agents are required to take steps to collect the economic substance information from clients, and clients are required to provide the information.

During the year 2020, each legal entity will need to undergo a classification process and report its Economic Substance position to the International Tax Authority (ITA) via its Registered Agent.  Please be advised that this is not a one-time requirement but rather an annual obligation for each entity to undergo the classification and reporting procedure.

Legal entities formed before January 1, 2019 were given a default period end of June 30, 2020 and are required to file within six months thereafter.  Therefore, such entities must report no later than December 30, 2020.   However Legal entities formed on or after January 1, 2019 are required to comply with the Economic Substance Act immediately and to meet the reporting obligations within six months of the end of the first year (or financial period) of operation. Therefore, an entity whose first year or financial period ends on Feb 1, 2020 for example would need to report by July 1, 2020.  Similarly if the first year ended on April 6, 2020 such entity would need to file by October 6, 2020.

To simplify the process and make things easier for our clients we have deployed an online portal to enable them to conduct an initial and thereafter annual economic substance assessments.  Please click here to access our online tool.

If it is determined that your company is subject to economic substance we can provide a a suite of services to meet Economic Substance requirements such as provision of office space and personnel, book-keeping, payroll processing, directorships, call center, local audit and other valuable services.