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SOS Substance on Substance: Season two – Reporting criteria and tax non-residence claims

01 Dec 2020

In a bumper episode for the holiday season, Phil and Josh venture into the weeds of the Economic Substance (ES) reporting requirements, giving a "deep-dive" into the reporting criteria and their long-awaited discussion of tax non-residence claims and Part 4 of the International Tax Authority (ITA) Rules.

Key takeaways

  • Reports must be filed by every "corporate and legal entity" (which includes all BVI companies) under the Beneficial Ownership Secure Search System Act 2017 via the registered agent within six months of the end of the financial period.
  • The format of reporting via the BOSS(ES) database is prescribed by the ITA and reflects EU and OECD requirements.
  • Every entity must file a report within the deadline - even if this just a "nil return".
  • There are special regimes for "pure equity holding entities" (which only need to report on their "employees" and premises) and for "intellectual property business" - the latter is extremely complex and persons considering IP business are recommended to seek legal advice.
  • Entities with other relevant activities, which are not tax "non-resident", are subject to the "general economic substance requirements" and must broadly report on:
    1. Turnover (or revenue/gross income) from the relevant activity.
    2. The person(s) responsible for direction and management of the relevant activity.
    3. Expenditure incurred on the operation of the relevant activity (both total and within the BVI).
    4. "Employees" (which includes individuals managed as employees, if employed by someone else) engaged in the relevant activity (both total and physically present within the BVI).
    5. Premises used in the relevant activity in the BVI.
    6. Details of "core income-generating activity" (CIGA) carried on in the BVI.
    7. Further prescriptive details if any CIGA has been outsourced to any entity in the BVI.
  • The ITA has encouraged entities to make use of professional services and other providers in the BVI to provide substance - particularly given the Covid-19 pandemic.
  • Entities that carry on relevant activities may be treated as tax "non-resident" and exempted from ES requirements if, during the financial period:
    1. they are tax resident in another jurisdiction;
    2. they are "transparent", meaning all of the profits and gains are attributable to and taxable all some or all of the participators or partners in the entity; or
    3. they are not a "pure equity holding entity" and all of their income from relevant activities is subject to tax in another jurisdiction, provided that in each case the relevant jurisdiction does not appear on the EU's tax "blacklist".
  • These rules can be complex to apply in the case of territorial, sectoral or source-based tax regimes, and persons considering such regimes or making such claims are recommended to seek legal advice.
  • Entities making such a claim must report on any "parent" and provide evidence of their tax status with their report - there is a mechanism to be treated as provisionally non-resident by the ITA in certain circumstances where evidence cannot be provided within the six-month reporting window.
  • Making a non-residence claim will trigger spontaneous information exchange with the relevant overseas tax authorities (and any EU member state within which a beneficial owner or legal owner of the entity resides) to ensure the claim is valid.
  • BVI entities that do not carry on any ES-relevant activity do not need to report on (but should still ensure they have considered) any foreign tax status or obligations.

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