BVI Economic Substance: A Detailed Guide

Tetra Consultants advises our international clients on the new BVI economic substance requirements. Our team of experts will ensure your business is legally compliant and can enjoy the multiple tax benefits in BVI. If required, Tetra Consultants will provide the services required to meet these new regulatory obligations.

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BVI Economic Substance

  • Tetra Consultants advises our international clients on the new British Virgin Islands (BVI) economic substance requirements. Simply put, this new regulation is introduced to curb tax evasion and other harmful tax practices. Prior to BVI company registration, Tetra Consultants will review your business activity and corporate structure, before advising whether you are required to adhere to the new BVI economic substance.

Introduction

  • With the European Union’s increasing scrutiny on non-cooperative jurisdictions, the criteria of ‘economic substance’ was imposed on many jurisdictions such as Bermuda, Cayman Islands and Mauritius. Needless to say, Tax Havens, the British Virgin Islands was not spared either. The BVI economic substance test is based on the guidelines proposed by the European Union as well as the Organisation for Economic Cooperation and Development.
  • Essentially, companies and foreign companies incorporated under the BVI Business Companies Act, 2004 as well as limited partnerships and foreign limited partnerships incorporated under the Partnership Act excluding companies and limited partnerships which are not resident in the British Virgin Islands are to observe this new law. Investment funds, however, are exempted from the BVI Economic Substance Test.

What is BVI economic substance?

  • The BVI Economic Substance dictates that all BVI companies and limited partnerships with legal personality (LP) engaged in relevant activities adhere strictly to the terms and conditions stipulated in the Economic Substance Act 2019. Relevant activities include banking business, distribution and service centre business, finance and leasing business, fund management business, headquarter business, holding company business, insurance business, intellectual property (IP) business and shipping business.
  • Under the Economic Substance Act, companies are required to “build economic substance” locally. This means that the relevant activity undertaken by the company must be administered within the BVI and there must be physical offices present to conduct the activity. Companies are also required to report information such as their revenue, expenditure, number of employees and relevant facilities to their registered agents.

BVI Economic Substance

BVI Economic Substance Test

  • Based on the test, the resident entity will need to demonstrate that their business has conducted core income-generating activities in the British Virgin Islands.
  • The test comes in 3 forms:
    • The ‘Directed and Managed’ Test
    • The ‘Core Income Generating Activities’ Test
    • The ‘Adequate’ Test
  • In essence, your company (i) must conduct core income-generating activities, (ii) is directed and managed in an appropriate manner and (iii) conducts certain operating functions adequately.
  • Non-compliance to the law may result in a fine of up to US$20,000 for the first year and may steadily increase to US$200,000 in cases of consecutive non-compliance. Additionally, tax authorities may also strike-off the company if non-compliance is observed persistently.

BVI Economic Substance Guidance

  • The Economic Substance declaration will come into effect as of 1 January 2019 for all new companies registered in the BVI. For existing BVI companies, the economic substance deadline will be 6 months from the start of 2019.
  • Under the Limited Partnership Act enacted in 2017, business owners can choose to form a limited partnership with or without legal personality (LP). The requirements listed in the Economic Substance Act will only be applicable to all local and foreign BVI companies and limited partnerships with legal personality, that are considered to be a tax resident 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
    • Shipping business
  • The International Tax Authority (ITA) in the Virgin Islands mandates that all companies that meet the above requirements must adhere strictly to the Economic Substance Act. There will be a compliance check for companies through the reporting of relevant information on an annual basis.
  • The following section provides greater details about each component of the test required to prove that the company has adhered to the BVI ITA Economic Substance Test.

#1 The ‘Directed and Managed’ Test

  • The company will be required to prove that the relevant activities the company engage in, have been directed and managed in the jurisdiction. This means that the company must provide evidence that board meetings are conducted frequently with an adequate number of directors physically present, and all directors are equipped with the relevant knowledge and experience to fulfil their role. This can be achieved through meeting minutes and other records, which are to be kept in the registered office in the BVI.

#2 The ‘Core Income Generating Activities (CIGA)’ Test

  • In essence, these are the core activities that account for the profit earned by the company. The CIGA will differ based on the relevant activity conducted by the company and more details can be found in the Economic Substance Act. 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.
  • A holding company, according to the BVI economic substance regulatory code, is a pure equity holding entity that does not undertake any other relevant activity besides holding equity. In essence, if you register a banking and insurance holding company that only holds equity participation in other entities and allows for company dividend distribution from the dividends and capital your company earns, your company will be subjected to less stringent requirements according to the BVI economic substance law.
  • 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.

#3 The ‘Adequate’ Test

  • Based on the scale and type of relevant activity conducted within the BVI, the company must demonstrate the following:
    • 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.
    • The company has at least one physical office.
    • 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 as it will depend on the type of relevant activity undertaken by the company and the size of the company’s business.

Reporting Requirements

  • Under the Economic Substance Act, all economic substance companies and limited partnerships without legal personality that undertake at least one of the relevant activities listed in the Act will be required to report the following information with regards to the relevant activity conducted within the BVI on an annual basis:
    • Company’s tax residence status
    • Total turnover
    • Expenditure incurred
    • Total number of employees employed
    • Address of office(s)
    • Equipment located within the BVI
    • Details of the personnel in charge of directing and managing the relevant activities
    • Name and jurisdiction where parent company was registered if applicable
  • BVI companies must provide supporting documentary evidence when necessary for the economic substance filing. All the relevant information and documents will be submitted to the registered agent and uploaded to the Beneficial Ownership Secured Search (BOSS) system within six months after the financial period has ended.
  • Additional documents and requirements will be needed for companies that engage in IP business or choose to outsource a portion of their CIGA.
  • In addition, financial institutions will need to report information pertaining to their US clients such as amount of assets hold to the Internal Revenue Service (IRS) in the US. This is in accordance with the Foreign Account Tax Compliance Act (FATCA) which was implemented by the US in 2010 in order to ameliorate the problem of tax evasion by US citizens. For financial institutions with no US clients or reportable accounts, they are still encouraged to submit a FATCA nil reporting.

How does this affect your BVI business?

  • The enactment of this law prevents many private equity firms and hedge funds from locating their investment funds and their fund management equity in the British Virgin Islands. Moreover, large corporations that are looking to base their subsidiaries in the British Virgin Islands to evade tax laws are now under threat. Essentially, this brings forth greater legitimacy to the shores of the British Virgin Islands’ Tax Haven.
  • Before the start of the engagement, Tetra Consultants will advise whether you are required to meet the BVI economic substance regulations based on your intended business activity. If required, our team will assist with the local office and recruitment of local employees.

Contact us to find more information about the BVI economic substance. Our team of experts will revert within the next 24 hours.

FAQ

Do BVI companies pay tax?

  • BVI companies do not need to pay corporate taxes or sale taxes. However, they are required to pay a payroll tax of 10% for small companies and 14% for larger companies. They are also subjected to stamp duty for certain transactions.
  • In addition, individuals in the BVI will have to pay property and land taxes. The BVI property guide stipulates the amount of property tax that an individual has to pay. While the amount is almost negligible for locals, it is significantly higher for foreigners.
  • We recommend you to speak to our international tax specialists to fully understand your tax obligations.

What is the meaning of economic substance?

  • Economic substance is a clause in the tax law that dictates that zero or low taxes in a jurisdiction must be justified by the positive effect the tax benefit has on the jurisdiction’s economy, and not simply by the reduction in tax liability on its tax residents. It was originally depicted in the Internal Revenue Code in the United State (US) tax laws to ensure local income protection but has since been used by the European Union (EU) in 2017 to evaluate the tax policies in jurisdictions with no or low tax rates.
  • According to the EU, every jurisdiction should be able to “demonstrate economic substance” by showing that the offshore companies they attract boost local economic activity in the jurisdiction.

What is the purpose of economic substance act?

  • The purpose of the Economic Substance Act is to prevent local companies in the EU from setting up offshore companies in a different jurisdiction with the sole aim of evading taxes in the EU.
  • It also helps to protect and defend the reputation of offshore jurisdictions which have traditionally been viewed as tax havens used by foreigners to evade taxes. By demonstrating compliance to the Economic Substance Act and proving that at least a sizeable portion of every company’s income is derived locally, offshore jurisdictions will be able to justify the allowance of low taxes for companies.

What is CIGA in BVI?

  • The Core Income Generating Activities (CIGA) are the principal activities that account for the company’s profits. These activities include activities in the banking business, distribution and service centre business, finance and leasing business, fund management business, headquarter business, holding company business, insurance business, intellectual property (IP) business and shipping business.
  • The activities are only considered to be CIGA if they are conducted within the BVI, earn an adequate revenue, incur an adequate expenditure in the BVI, employ an adequate number of local employees and have a physical office in the BVI to conduct activities.

Is BVI Blacklisted?

  • The BVI was blacklisted by the European Union (EU) in 2017 but has since been removed in February 2020. The EU tax haven blacklist is a list consisting of tax jurisdictions that are non-cooperative according to the EU. The BVI was originally added to the list, together with other popular tax havens such as the Cayman Islands and the Bahamas, because of its notoriety for tax evasion cases and tax scandals. However, it was eventually removed from the blacklist in 2020 after it demonstrated compliance with the new legislation enacted in the Economic Substance Act in 2019.

Can you move to the Virgin Islands?

  • Yes, but you will need to be employed in the BVI or have a business in the BVI. You will also be required to renew your work permit every three years.
  • If you wish to apply for permanent residence in the BVI, you must have resided in the Virgin Islands for 20 years consecutively and have only been absent from the BVI for 90 days in any calendar year, except when seeking further education or treatment for illnesses.

What is a BVI company tax resident?

  • A BVI company tax resident is a company or limited partnership with legal personality that “demonstrates economic substance” according to the Economic Substance Act enacted in 2019.  This means that the company must be incorporated in the BVI, conduct relevant activities as dictated in the Act and demonstrate that the activities generate profits from the local population.
  • Company tax residency in the BVI will not be granted to companies if they are already tax residents in another foreign jurisdiction that is not blacklisted by the EU.
  • To find out more information about a BVI company, you can use the BVI company search function to conduct a search through the BVI Commercial Registry.

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