Alongside other major international financial centres (including Bermuda, the Cayman Islands, Guernsey, the Isle of Man and Jersey), the BVI has introduced economic substance legislation to address EU and OECD requirements in this area."
The general compliance requirements appear in the Economic Substance (Companies and Limited Partnerships) Act 2018 (the ESA), which came into effect on 1 January 2019. Guidance is provided by the International Tax Authority (ITA) rules and explanatory notes, which appeared April 2019 as a draft code and were finalised in October 2019 following comments from industry and the EU and OECD.
Related reporting obligations were introduced via several amendments to the Beneficial Ownership Secure Search System Act 2017 (the BOSS Act) - the most significant of which took effect from 1 October 2019.
What entities are affected?
The new compliance and reporting obligations fall on any "legal entity", which broadly includes all companies and all limited partnerships with separate legal personality registered in the BVI (including registered foreign entities). The vast majority of BVI legal entities are incorporated as companies and so we only consider companies in this article.
Compliance under the ESA is assessed by reference to consecutive periods of time (generally of 12 months each) called "financial periods". Unless adjusted by notification to the ITA, for companies incorporated in 2019, the first financial period commenced on their incorporation date. For pre-2019 companies, the first financial period commenced by 30 June 2019 by default.
Directors' duties and potential liability
Responsibility for ensuring compliance with the ESA and the BOSS Act falls on a company's directors (who, in certain circumstances, may incur personal liability for failure to comply).
Directors' duties generally
Directors of BVI companies are subject to general duties under common law and the under the BVI Business Companies Act 2004 (the BCA). Broadly, the main duties are:
- to act in good faith in what they consider to be the best interest of the company
- to exercise their powers for a proper purpose and in accordance with the BCA and the company's memorandum and articles of association, and
- to exercise reasonable care and skill.
Although there is no specific duty to comply with all BVI legislation in the BCA, it is clear that allowing a company to incur fines or penalties for non-compliance with BVI law requirements generally may prima facie constitute a breach of the director's duties. Generally, such duties are owed to the company and a claim should be brought by the company itself rather than the shareholders, but BVI law does allow derivative claims in some circumstances.
Specific obligations under the ESA and BOSS Act
Generally, the general financial penalties for non-compliance with the ESA do not fall on directors or officers but on the company, subject to the point made above regarding directors' duties generally.
However, there are some specific provisions under the ESA and the BOSS Act of which directors should be aware - in particular:-
- Since 1 October 2019 there has been a continuing obligation on every BVI company and other "corporate and legal entity" to identify whether it carries on one more "relevant activities" under the ESA (and if so which activities). Failure to do so without "reasonable cause" is a criminal offence.
- The ITA has very broad investigation powers under the ESA to serve notice on any person requiring them to provide such documents and information as the ITA may reasonably require to exercise its functions under the ESA - failure to provide information without "reasonable excuse" or intentionally providing false information is a criminal offence.
- Where an offence is committed by a company, it may technically be committed by directors, officers and other senior managers of the company by virtue of section 22 of the BVI Interpretation Act (Cap. 136). Proceedings against such persons would need to be approved by the Attorney General and are subject to a relatively high evidential burden and so are extremely uncommon in practice.
What should directors and fiduciary service providers be doing now?
Our general recommendations are:
- Any company which had not already classified itself and identified relevant activities by 1 October 2019 (when the BOSS Act identification obligation came into force) do so as soon as possible. This obligation also means that material changes to the company's business activities should be monitored by the directors going forward, in case they change the analysis under the ESA.
- Directors and fiduciary service providers may wish to take appropriate legal and/or tax advice where they are uncertain regarding their companies' compliance and reporting obligations under the ESA. BVI legal advice may benefit from legal advice privilege and, broadly, reliance which has been reasonably placed on such advice may discharge a director's duties by virtue of specific provisions in the BCA and may also provide "reasonable cause" if the ITA investigates or challenges the basis of the classification.
- Directors should ensure they have understood these new obligations and classified their company and may wish to pass resolutions or hold a meeting to record the basis of their determination of their company's position under ESA and the BOSS Act and to record the fact that they took appropriate advice.
- Directors may wish to review their D&O insurance, their service agreement and any indemnities granted by the company or any other person, to ensure that these are appropriate and fit for purpose.
This article was first published on International Investment.