Important economic legislation came into effect on January 1, 2019, in the British Virgin Islands (BVI) when the region’s government passed the Economic Substance Act (ESA). The Act has significant ramifications for any business entity operating in the BVI. This update explains what the ESA is, the key requirements of the law, which entities must comply, and where to find help.
What is the Economic Substance Act?
The ESA requires that relevant legal entities must demonstrate adequate presence and/or conduct economic activities if they are located in the BVI for tax purposes.
Like other substance laws, such as the one passed in the Cayman Islands, the ESA is intended to ensure that BVI entities (whether formed in the BVI or registered foreign entities) that carry on particular activities have demonstrable economic substance in the BVI. That is to say, relevant entities must demonstrate they have sufficient economic activity in the country to justify the profits they’re making.
The Act was passed in response to concerns from the European Union (specifically its Code of Conduct Group for Business Taxation or COCG) and the Organisation for Economic Co-operation and Development (OECG) about a previous absence of economic substance requirements and the potential this created for profit shifting and tax avoidance strategies.
The legislation was a proactive initiative on the part of the BVI government to reform its tax structures to comply with the requirements of the COCG taxation criteria.
What are the requirements of the law?
The ESA requires that all BVI companies and relevant entities must report to tax authorities in 2020 whether they engaged in any of the relevant activities, listed below, at any point during the financial period beginning January 1, 2019.
There are nine types of relevant activities:
- banking business
- insurance business
- fund management business
- finance and leasing business
- headquarters business
- shipping business
- holding business
- intellectual-property business
Even if your business does not conduct any of these “relevant activities” or is not a tax resident of the BVI, you may still be required to report certain information.
There is a six-month transitional period for existing legal entities to comply with ESA and compliance with the Act will be measured over “financial periods” of not more than 12 months each.
A lack of compliance with these reporting requirements may result in penalties and possible removal of your BVI entity registration status.
What entities does the law affect?
Legal entities (including foreign companies and foreign limited partnerships) are subject to the economic substance rules if they meet the following criteria:
- Is the entity identified as being subject to the ESA
- Is a tax resident of the BVI
- Is a company who conducts “relevant activity” during any financial period in which it receives income from that activity
The ESA does not apply to non-resident companies, non-resident limited partnerships, or limited partnerships that do not have legal personality.
Get in touch with our experts
The British Virgin Islands offers a variety of attractive features that make it a magnet for prospective business owners and overseas investment. However, as the enactment of the ESA proves, regulations are constantly evolving, complex, and nuanced.
Our knowledge and expertise of the BVI’s rules and regulations, combined with a central point of contact, ensure on-going compliance. We can help you understand and navigate the local market and ensure compliance with the ESA.
Contact your CT representative or call us at (855) 444-5358 (toll-free U.S.) if you would like further guidance on how the economic substance requirements may impact your business.