- Physical presence in Cyprus
- Physical presence in the United Arab Emirates
- Physical presence in the United Kingdom
- Physical presence in Estonia
- Physical presence in Malta
- Physical presence in the British Virgin Islands
- Pysical presence in Belize
After the EU and Organization for Economic Cooperation and Development’s (OECD) expressed concern for the British Virgin Islands’ lack of compelling tax residency rules, the territory enacted The Economic Substance (Companies and Limited Partnership) Act in 2018. Economic substance is a legal theory applied to businesses in order to determine their tax residency. Therefore, in order for a company to claim the tax rights and benefits of a specific locale, the company is required to establish a solid physical presence in the area.
The British Virgin Islands’ economic substance rules, as established in the Act, are relatively unique due to a set of exemptions and specific relevant economic activity requirements. If your business entity or relevant activities fall within a specified exemption, then your business or activity may not be subject to the economic substance requirements laid out in the Act.
Our qualified legal consultants have outlined below the steps for determining if your business entity or activities (1) fall within the scope of the Act and (2) how to meet the economic substance requirements in the BVI.
- Scope of the Act
The first step to ensuring legal compliance with the Act is to determine if your business entity or business activities fall within the scope. The Act applies to legal entities performing relevant activities which are specifically outlined within the Act. Therefore, if a company’s core generating activities are not related to the business activities prescribed, it does not fall within the scope of the Act. Legal entities, for the purposes of the Act, include domestic and foreign companies or limited partnerships with legal personalities that are formed or do business in the British Virgin Islands.
Relevant activities that fall within the scope of the Act are:
- Banking business;
- Insurance business;
- Fund management business;
- Finance and leasing business;
- Headquarters business;
- Shipping business;
- Holding business;
- Intellectual property business;
- Distribution and service center business.
Therefore, if a business performs at least one of these activities, it is subject to the tax residency requirements of the Act.
Examples of non-relevant activities that are not within the scope of the Act are the holding of immovable property or basic investment funds. Holding companies may be subject to lessened economic substance requirements depending on the characteristics of the company.
- Economic Substance Requirements
Once you have determined if your business is within the scope of the Act, then you are required to comply with the economic substance requirements to take advantage of tax benefits offered by the British Virgin Islands. In order to meet the requirements, the legal entity must pass the economic substance test and demonstrate that it:
- Maintains a physical presence in the BVI;
- Retains an adequate number of local employees;
- Is managed and controlled from the territory;
- Conducts its core generating activities from within the British Virgin Islands; and
- Can show adequate local expenditure.
The Act includes reporting requirements that should not be overlooked. If a business does not comply with the Act’s regulations, it may be charged up to $50,000 for an initial violation, and up to $200,000 for subsequent violations. If the shareholder/beneficial owner fails to provide information, they may be fined for up to $40,000 or face criminal imprisonment for 2 years as well as be subject automatic exchange of information in their country of tax residence. Furthermore, it is worth noting that if a BVI registered entity that falls within the scope of the Act is not to be considered a tax resident of the islands, it needs to provide proof of its tax residency in another jurisdiction such as a tax residency certificate or evidence of tax payment in another country.
To ensure that your business is complying with the new BVI laws, please do not hesitate to reach out and contact a qualified member of our team. Our experts have developed a variety of packages to suit each business’s individual needs and are always available for a professional consultation on any substance queries that you may have.
- 1 Choose your package
- 2Submit documents
- 3Get registration documents