Following the introduction of the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the Act) in the British Virgin Islands (BVI) on 1st January 2019, BVI entities conducting certain business activities must meet economic substance requirements in the BVI.
This BVI legislation was enacted in response to requirements established by the EU Code of Conduct Group in June 2018. Similar legislation has been enacted in other offshore jurisdictions such as Bermuda, Cayman Islands, Jersey, Guernsey and the Isle of Man.
Which entities are caught by the Act?
Under the Act, “legal entities” carrying on “relevant activities” are caught. Legal entities are, broadly speaking all BVI companies and limited partnerships (except for limited partnerships without legal personality), excluding those which are tax resident in a jurisdiction outside the BVI that is not listed by the European Union as a non-cooperative jurisdiction.
Which activities are caught?
Only relevant activities (as defined in the Act) are caught, being:
- banking business
- insurance business
- fund management business
- finance and leasing business
- headquarters business
- shipping business
- holding business
- intellectual property business
- distribution and service centre business.
Legal entities conducting any of these relevant activities will have to comply with the economic substance requirements as set out in the Act.
What does Holding Business mean?
Holding business means the business of being a legal entity that only holds equity participations in other entities and only earns dividends and capital gains.
What does Fund Management Business mean?
Fund Management Business means the conduct of an activity that requires the legal entity to hold an investment business licence pursuant to section 4 and category 3 of Schedule 4 of the Securities and Investment Business Act, 2010.
How does a Legal Entity comply with the Economic Substance Requirements under the Act?
The spectrum of economic substance requirements depends on the type of the relevant business the legal entity is conducting.
The requirements for legal entities conducting holding business are less onerous than for other relevant activities. A holding company will need to comply with existing statutory obligations, to have adequate employees and premises for holding equitable interests and where it manages those equitable interests it will need to have adequate employees and premises for carrying out that management. Further guidance from the BVI legislator on what constitutes “adequate employees and premises” in this context is expected to be published towards the end of April 2019.
Legal entities carrying on relevant activities other than holding business must manage and direct the relevant activity and conduct core income-generating activity in the BVI. They must also have an adequate level of employees and expenditure in the BVI and appropriate office space for the core income generating activity in the BVI. Outsourcing is permitted in certain circumstances. Again, it is expected that further guidance on the requirements will be published by the BVI legislator shortly.
Entities carrying on intellectual property business will be subject to more onerous requirements than entities carrying on other relevant activities.
What is the Timeline?
Legal Entities formed in 2019 will have to comply for a reporting period ending on or after 31 December 2019, depending on the date of formation. Legal entities formed before 2019 will need to show compliance with economic substance requirements no later than 30 June 2019.
Importantly, non-compliance may lead to substantial penalties, imprisonment and/or strike off.
How can Hatstone help you?
The much-awaited legislative guidance will provide further detail and clarity as to the precise scope of the Act. We will be circulating follow-on client updates once such guidance is available and will be happy to advise you on whether or not your BVI entity is caught by the Act and, if it is, how to ensure compliance with the Act.
Lastly, we share the prevalent view in the BVI finance industry that not all clients will be impacted by this.