To address the concerns of the EU Code of Conduct Group and the OECD Forum on Harmful Tax Practices regarding economic substance, all BVI companies and limited partnerships (the “Entities”) must comply with the requirements under the Economic Substance (Companies and Limited Partnerships) Act 2018 (the “Act”) which came into force on 1 January 2019.  
 
On 9 October 2019, the BVI International Tax Authority (“ITA”) has published final Economic Substance Rules and Explanatory Notes (the “Rules”) to provide guidance on the interpretation of the Act and on the manner in which the ITA will carry out its obligations under the legislation.
 
Below are the highlights of the Act and the Rules:

Reporting obligations and mechanism

All Entities will be required to provide information to the BVI authority as to whether they are carrying on relevant activities and (if so) whether they are complying with the economic substance requirements. The Act also requires all Entities to submit their tax residency status.

Timing

(a)   Entities formed prior to 1 January 2019

• required to comply with the economic substance requirements by 30 June 2019 and file report within six months of the end of their first financial period ending no later than 30 June 2020, i.e. report filing on or before 31 December 2020.

(b)   Entities formed on or after 1 January 2019

• required to comply immediately and file report within six months of the end of the first year (or financial period) of incorporation.

Thereafter the reporting is an annual obligation.

Penalties

(a)   A person who fails to provide accurate information risks criminal penalties including a fine of up
       to USD75,000 and/or imprisonment for a term of up to five years.

(b)   Where an entity fails to provide accurate information risks criminal penalties including a fine of up
       to USD250,000 and/or imprisonment for a term of up to five years.

Relevant Activities

Entities may be subject to the economic substance requirements if they conduct any of the following relevant activities:

• banking business
• insurance business
• fund management business
• finance and leasing business
• headquarters business
• shipping business
• holding business
• intellectual property business
• distribution and service centre business

The Economic Substance Test

Under the Act, if Entities are subject to the economic substance requirements (with the exception of a pure equity holding entity), they must be able to demonstrate that:

(a)  the relevant activity undertaken is directed and managed in the BVI
(b)  the core income generating activities are carried out in the BVI
(c)  taking into account the level of income generated from that relevant activity carried out in or from
      within the BVI, it has

(i)   adequate number of full-time employees/personnel with appropriate qualifications in the BVI
(ii)  adequate physical assets or physical presence in the BVI (including maintaining a place
      of business)
(iii) adequate operating expenditure incurred in or from
      within the BVI

How we can help

We can assist our clients undergo a review in order to determine whether they are within the scope of the economic substance legislation. The output will include a report and director resolution.

For further information, please contact Ms. Amie Cheung at amie.cheung@lccpa.com.hk