Is BVI a tax haven? Yes, the British Virgin Islands (BVI) is no doubt one of the world’s most popular tax havens due to its zero income tax policy and stable political and economic environment. The BVI has traditionally attracted many individuals seeking to incorporate a BVI holding company to hold investment and assets while remaining confidential. The minimal reporting requirements, zero corporate and personal income tax and high levels of confidentiality are the main reasons why business owners choose to incorporate in the BVI. Although the BVI had previously been listed in the European Union (EU) tax haven blacklist, it has since been completely removed from the blacklist after the jurisdiction demonstrated compliance to the Economic Substance legislation recommended by the EU. As such, it is important to understand whether your business activities fall under the Economic Substance Act before you choose to register company in BVI. This article lists the top 5 things you should know about BVI tax haven before you start your BVI company registration.
Is BVI a tax haven? Top 5 things to know
#1 What is the Economic Substance legislation?
- Enacted in 2019, the Economic Substance Act was introduced by the EU to ensure that the profits earned by business entities in a jurisdiction are consistent with the extent of economic activities that take place in the jurisdiction. The purpose of the legislation is to justify the absence of income tax in tax havens such as the BVI. Otherwise, the jurisdiction would be deemed to be conducting unfair tax practices as it would encourage individuals from other countries to set up a company in the BVI for the sole purpose of evading taxes. By ensuring that all companies in the BVI have economic substance (i.e. conduct a significant portion of business activities within the BVI), business owners will be prevented from having a large number of operations outside of the BVI.
#2 What are the business activities governed by the Economic Substance legislation?
- The requirements listed in the Economic Substance Act will be applicable to all local and foreign BVI companies and limited partnerships with legal personalities, that are considered to be tax residents in the BVI and are conducting the following relevant activities: banking business, distribution and service centre business, fund management business, finance and leasing business, headquarter business, holding business, insurance business, intellectual Property (IP) business and shipping business
#3 How will I be affected if my company conducts the aforementioned business activities?
- Your company will be required to show that it meets the BVI Economic Substance requirements through a series of Economic Substance Tests.
- The first test is the ‘Directed and Managed’ Test which proves that the relevant activities the company engages in, have been directed and managed in the jurisdiction. The company will be required to provide evidence that board meetings are conducted frequently with an adequate number of directors physically present, and that all directors are equipped with the relevant knowledge and experience to fulfil their roles. This can be achieved through meeting minutes and other records, which are to be kept in the registered office in the BVI.
- The second test is the ‘Core Income Generating Activities (CIGA)’ Test which proves that the company is engaging in relevant core activities. The CIGA undertaken by the company will differ based on the relevant activity conducted by the company. Companies do not need to engage in all the activities listed in the requirements but will need to at least undertake some of these activities. All CIGA must be conducted within the BVI and only the portion of the activities of the company that is conducted within the BVI will be considered when deciding whether the company meets the revenue requirement for the Economic Substance Act 2019. In the case that the company chooses to outsource some of its activities, it will need to prove that there is sufficient management and supervision of these outsourced activities undertaken within the BVI.
- The third test is the ‘Adequate’ Test. Based on the scale and type of relevant activity conducted within the BVI, the company must demonstrate that the company has at least one physical office; there is an adequate number of qualified employees that are physically present in the BVI to carry out the relevant activity conducted by the company; the operating expenditure incurred by the company in the BVI is of an adequate amount; there are sufficient facilities and office space in the BVI for the company to conduct its relevant core income-generating activities.
- The determining factor for an “adequate” amount is subjective and will depend on the type of relevant activity undertaken by the company and the size of the company’s business.
#4 Can I still enjoy zero taxes?
- There is no corporate income tax or personal income tax in the BVI. Hence, individuals in the BVI do not have to pay taxes on any income earned from their business. There is also no capital gains tax, gift tax, sales tax, inheritance tax and corporation tax in the BVI, hence making it attractive to set up a BVI holding company to hold investments. However, employers and employees are required to pay payroll taxes on employees’ wages. Employees will contribute 8% while employers will contribute 2% or 6% depending on the size of the company.
- Companies that do not adhere to the Economic Substance Act 2019 will be subjected to a fine or in the worst case, be forced to shut down. Hence, it is important to adhere to the requirements of the Economic Substance legislation if you are conducting a relevant business activity and wish to enjoy the zero tax rate in the BVI.
#5 Are there annual reporting requirements in the BVI?
- Although a company in the BVI is not required to prepare audited financial statements or file a tax return, it is required to submit some information about its company on an annual basis. The information required includes total revenue, expenditure incurred, number of employees, facilities located within the BVI, details of the personnel in charge of directing and managing the relevant activities and the name and jurisdiction of the parent company if applicable.
- There will be no public disclosure of any of this information submitted to the British Virgin Islands business registry. All information provided by the company will be used solely for ensuring that the company adheres to the Economic Substance legislation.
Is BVI a tax haven? Conclusion
Generally, many business owners tend to set up an International Business Company (IBC) in the BVI due to the stable political landscape, absence of income taxes, ease of incorporation, high levels of confidentiality and minimal reporting requirements. Although the BVI is known as a tax haven, the jurisdiction’s strict adherence to the Economic Substance Act has helped to improve its reputation by ensuring that at least a majority of the business activities conducted are within the BVI.
As such, it is advantageous to register company in BVI. Tetra Consultants provides you with a fast and simple way to complete BVI company registration through our service package, which includes registration of your company with the British Virgin Islands Financial Services Commission; provision of local company secretary and a registered address; opening of corporate bank account; financial license application if applicable; and annual accounting and tax services. Tetra Consultants will also recommend a business structure based on your company’s long-term goals and business activities. The most common business entity in the BVI is a company limited by shares.
Contact us to find out more about starting a business in BVI. Our team of experts will revert within the next 24 hours.