Economic substance requirements — What should BVI entities be doing now?
Philip Graham and Joshua Mangeot outline the recent British Virgin Islands legislation on economic substance and the key deadlines involved, and highlight the initial classification exercise which relevant entities should be conducting now.
The British Virgin Islands (BVI), alongside the other U.K. Crown Dependencies and Overseas Territories and other major international financial centres, passed legislation in 2018 addressing the concerns of the EU’s Business Taxation Code of Conduct Group and the OECD’s Forum on Harmful Tax Practices (FHTP) regarding “economic substance.”
The implementation timetable, which was entirely imposed by the EU, was extremely short. However, on July 23, 2019, the FHTP published the results of its review of the BVI’s legislation, together with that of a number of other jurisdictions. For 11 of these jurisdictions (including the BVI and the Cayman Islands), the FHTP concluded that the domestic legal frameworks adopted are in line with their expected standard and are therefore deemed “not harmful.”
The BVI Legislation and Entity Classifications
The Economic Substance (Companies and Limited Partnerships) Act, 2018 (the Act) came into force on January 1, 2019. Key guidance on compliance and reporting requirements appear in economic substance rules and explanatory notes (the Rules), which were published by the BVI International Tax Authority (ITA) in draft on April 23, 2019 and finalized on October 9, 2019 to reflect comments from the EU and industry. The Rules comprise rules with statutory effect and also non-binding explanatory notes on the approach the ITA will generally take as the competent authority under the new regime.
The Act requires any “legal entity” which carries on any “relevant activity” during any “financial period” to comply with the “economic substance requirements” in relation to each such activity.
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Reproduced with permission from Daily Tax Report: International, Published 10/25/2019. Copyright R 2019 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.