On 23 April 2019, the British Virgin Islands International Tax Authority (ITA) published a draft Economic Substance Code (the Code). The Code is supplementary to the Economic Substance (Companies and Limited Partnerships) Act, 2018 (ESA) and contains rules on how the economic substance requirements may be met and guidance on the interpretation of the legislation and the manner in which the ITA will carry out its obligations.
Key points to note from the draft Code include:
- An entity will be treated as carrying on a relevant activity in the BVI during any financial period in which it receives income from that activity. (Rule 3)
- Guidance on the meaning of “holding business” and “pure equity holding entity” will be of particular interest. Ownership by an entity of any investment other than equity participations will mean that it is not a pure equity holding entity. (Para 60)
- A framework for the initial financial periods for both new entities (formed since 1 January 2019) and existing entities (formed prior to 1 January 2019) that outlines key requirements. The initial financial period for new entities is deemed to be 12 months from the date of formation. For existing entities, the initial financial period is deemed to be 12 months from 30 June 2019. (Rules 14 to 18)
- The business of being an investment fund is not a relevant activity. An investment fund is outside of scope of the economic substance requirements, unless it carries on relevant activities besides being an investment fund. We await further technical guidance on funds from the EU’s Code of Conduct Group which is expected mid-2019. (Para 18)
- An entity which provides credit as “an incidental part of a different sort of business” will not be treated as carrying on financing and leasing business (one of the relevant activities under the ESA). Only where the provision of credit can be seen to be a business activity in its own right will the entity be treated as conducting financing and leasing business. (Para 47)
- Entities which hold debt or debt instruments for the purposes of investment will not be regarded as being in the business of providing credit facilities (and therefore outside of financing and leasing business). (Para 48)
The ITA has announced that the final Code will be issued in early May following a brief education campaign and will incorporate any amendments deemed necessary by the BVI government. In our view, amendments made to the draft before final publication next month are likely to be minor.