In December 2018, the British Virgin Islands (“BVI”) introduced the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the “Act”) which came into effect on 1 January 2019. Supplemental to the Act, the BVI International Tax Authority (the “ITA”) has issued the BVI’s Economic Substance ‘Rules and Explanatory Notes’ (previously referred to as the BVI Economic Substance Draft Code) on 9 October 2019, containing rules on how the economic substance requirements may be met and guidance on the interpretation of the legislation.
The obligation to comply with the relevant substance requirements begins at the start of the initial financial period. However, the exact date in which BVI entities shall comply with the provisions of the Act and the economic substance requirements depends upon the date in which such entities have been incorporated or formed.
The Act introduces compliance obligations and economic substance requirements for any legal entity that carries on a business that constitutes a “relevant activity”. The Act provides for various categories of relevant activities to which economic substance requirements are set out. It should be noted that, entities may carry on more than one relevant activities at a time, provided that the economic substance requirements are satisfied in relation to each economic activity carried on.
In order to determine whether an entity is obliged to comply with the Act and whether it fulfils the economic substance requirements the following shall be considered:
- whether the company’s type falls within the economic substance legislation;
- whether such legal entity carries on a relevant activity; and
- if it is carrying on a relevant activity, whether it is resident in a jurisdiction outside the BVI for tax purposes (which is not in the EU list for non-cooperative jurisdictions for tax purposes).
The economic substance requirements can only be fulfilled if the answers to questions (a) and (b) above are affirmative while the answer to question (c) is negative.
In case the economic substance requirements apply, these requirements may vary depending on whether the entity is carrying on:
- a holding business;
- an intellectual property business; or
- any other type of relevant activity.
The ITA is responsible for assessing and enforcing compliance with the requirements imposed by the Act and where an entity fails to comply with its provisions, severe penalties might be imposed (i.e. financial penalties, striking off).
These developments are significant for Cyprus as a great proportion of Cyprus holding structures include a BVI entity. Our dedicated team can assist with the classification of your BVI entity through the completion of a classification questionnaire which will enable you to ascertain whether or not your BVI entity lies within the scope of the Act. If it does, our team will advise on what further actions you should consider taking in order to be compliant with the new economic substance rules.
For any further enquiry or assistance please contact Rafaella Michail or your usual contact at Elias Neocleous & Co LLC.