Actualización 2024: Guía sobre los requisitos de las Islas Vírgenes Británicas en materia de sustancia económica

Have you ever wondered how offshore jurisdictions are tackling concerns about harmful tax practices? In response to the EU and OECD pressures, leading offshore financial centers, including the British Virgin Islands (BVI), have implemented economic substance legislation. This legislation mandates that businesses show substantial economic activity and genuine substance within the jurisdiction.

Reminder of BVI Economic Substance Filing Deadline for 2024

For all in-scope companies and partnerships in the BVI, an annual economic substance report must be submitted within six months of the financial year-end (FYE).

Overview of the BVI Economic Substance Act (BVI ESA)

Economic substance is a critical concept for all “no or only nominal tax” offshore jurisdictions, including the British Virgin Islands. To adhere to the EU’s listing process and the OECD’s Base Erosion and Profit Shifting (BEPS) Inclusive Framework, the BVI enacted the Economic Substance (Companies and Limited Partnerships) Act, 2018, which came into force on January 1, 2019.

On October 9, 2019, the BVI’s International Tax Authority (ITA) issued the final Rules and Explanatory Notes on Economic Substance (the Rules). The updated version was released in February 2020, detailing reporting requirements and submission periods under the BVI ESA.

Key Amendments to the BVI ESA

Several important amendments have been made to the BVI Economic Substance Act:

• January 30, 2019:Initial amendments were ratified.
• April 22, 2019:A draft Economic Substance Code was introduced, providing further guidance.
• June 29, 2021:The Economic Substance (Companies and Limited Partnerships) (Amendment) Act 2021 came into effect. This clarified that investment fund businesses are not considered a “relevant activity” and extended the definition of “legal entity” to include all limited partnerships, with or without legal personality.

BVI Limited Partnerships and Economic Substance

As of the 2021 update, all BVI limited partnerships, regardless of legal personality, are now considered “legal entities.” This means they must comply with the BVI Economic Substance Regulations and meet reporting obligations.

Investment Fund Business Exemption

The 2021 amendment clarifies that Investment Fund Business is not classified as a “relevant activity” under the Economic Substance Regulations. Thus, entities engaged solely in this business do not fall within the scope of the BVI Economic Substance rules.

For more information about the BVI’s economic substance laws, visit the BVI Financial Services Commission.

Entities Within the Scope of BVI ESA

BVI legal entities that engage in relevant activities are subject to the Economic Substance rules.

What is a “Legal Entity”?

As per the Amendment Act 2021, “legal entity” refers to:

• All registered BVI business companies and foreign companies.
• All registered BVI limited partnerships and foreign limited partnerships (with or without legal personality).

Entities may be classified as out-of-scope if they qualify as non-resident companies. To be considered non-resident, a company must:

1. Be tax resident in a country other than the BVI.
2. Ensure that the tax-resident country is not on the EU’s non-cooperative list.

For a comprehensive understanding of what qualifies as a non-resident company, check out the OECD’s Guide on Tax Residency.

What is a “Relevant Activity”?

Nine relevant activities are defined under the economic substance regime, covering a broad range of sectors:

1. Banking
2. Insurance
3. Fund Management
4. Finance and Leasing
5. Headquarters
6. Shipping
7. Holding Company
8. Intellectual Property
9. Distribution and Service Centers

For more details on each relevant activity, refer to the OECD BEPS Framework.

What if You Are a “Within-the-Scope” Entity?

Entities engaging in any of the nine relevant activities must meet economic substance compliance and reporting requirements. Below are the compliance duties under the BVI ESA:

1. Direction and Management Test

The entity must ensure that its relevant activities are directed and controlled within the BVI during the financial period.

2. Adequacy Test

This test evaluates if the entity has:

• A sufficient number of qualified employees in the BVI.
• Adequate operational expenditure in the BVI.
• An appropriate physical presence in the BVI.
• Equipment situated within the BVI, if necessary.

3. Core Income-Generating Activities (CIGA) Test

CIGA refers to the essential activities generating relevant income for an entity. Each of the nine relevant activities has specific CIGA requirements, which must be conducted in the BVI.

Compliance for Pure Equity Holding Companies

A BVI pure equity holding company is subject to a reduced economic substance test. It must:

1. Comply with the BVI Business Companies Actor the Limited Partnership Act.
2. Have adequate premises and employees for holding or managing equity participation.

For more on the reduced substance test, visit the BVI International Tax Authority.

Reporting Requirements for BVI Economic Substance

All legal entities must submit an annual economic substance report via their registered agent. The documentation required depends on the entity’s activity and tax residency.

Entities that fail to comply with the economic substance requirements will face penalties, including possible strike-off.

For professional support on BVI Economic Substance reporting, reach out to Fionza at marketing@fionzagroup.com or explore their BVI incorporation packages on Fionza Global.

Non-Compliance Penalties

Non-compliance with BVI economic substance rules results in penalties and enforcement actions by the ITA. The ITA may also exchange economic substance details with tax authorities from other jurisdictions, including EU member states, if the entity is found non-compliant or engages in intellectual property business.

Compliance Timeline

Legal entities must submit their economic substance reports within six months of the financial year-end. Newly incorporated entities after January 1, 2019, must comply within one year of incorporation.

Conclusion

Failure to comply with the BVI Economic Substance requirements can lead to financial penalties or even strike-offs. All BVI companies need to be aware of the regulations and reporting timelines. If you’re unsure whether your entity falls under the BVI Economic Substance regime, contact Fionza at marketing@fionzagroup.com for expert advice and solutions tailored to your business.

For further information on BVI compliance, check the OECD’s resources or visit the BVI Financial Services Commission.