BVI economic substance reporting changes and deadlines
Most companies and limited partnerships (Entities) registered in the BVI have an economic substance (ES) “financial period” (FP) of 30 June to 29 June. Reports to the International Tax Authority (ITA) are due within six months of the financial period end, typically falling around the end of the calendar year.
This is a reminder to leave sufficient time to deal with reporting – particularly for FPs ending in 2023, as the reporting requirements have changed significantly.
Entities registered on or after 1 January 2019 or limited partnerships without separate legal personality are subject to different FPs, so should check with their BVI registered agent (RA) what deadlines apply to them if they are uncertain.
In practice, most RAs set a practical deadline in advance of the deadline for submission to the ITA, as RAs must process the reports.
What has changed?
We previously discussed these changes in our client update of 27 June 2022 (hyperlinked here for reference).
Broadly, the ES reporting requirements have been expanded significantly for FPs commencing on or after 1 January 2022. Most Entities must file their first report under the new regime in 2023 and some may not be aware of the changes.
On 24 February 2023, the ITA published version 3 of its ES rules and explanatory notes (the Rules) – hyperlinked here. Full details of the new reporting requirements appear in Part 12 of the Rules.
What does my Entity need to do?
We recommend that Entities and their advisors consider Part 12 of the Rules and seek advice if they are uncertain regarding what information needs to be collected and reported for the FP.
Importantly, every Entity (unless it is an “exempt person” that does not carry on any ES “relevant activity”) is required to identify and report details of any “immediate parent” and “ultimate parent” – even if the Entity did not carry on or receive gross income from any relevant activity during the FP.
Broadly, Entities are now required by law to have adequate systems and controls in place to ensure compliance with the ES regime and the ITA has increased enforcement powers – including to impose late-filing penalties. We recommend that Entities record in writing (eg, board resolutions) the steps they have taken in relation to the ES compliance and reporting requirements.
I have heard there is a new annual return requirement – is this the same thing?
No, this is not the same. The annual return is broadly a statutory requirement for every company incorporated or registered under the BVI Business Companies Act 2004 to file a balance sheet and profit and loss account for each financial year or fiscal year of the company (called the Financial Year) with its RA. Our client update on that topic is hyperlinked here.
It is important to note that:
- The ES FP may well not be the same as the Financial Year but it is possible to align the two for future periods
- The ES reporting should be consistent with the annual return but, if the ES FP and Financial Year do not match, this may require preparation of special accounts for ES reporting
- The annual return would generally be disclosable to the ITA if it requests a copy from the RA
Frequently asked questions (FAQs)
Where can I find more information on the reporting forms and requirements?
The Entity’s RA is responsible for collecting the ES information and each RA has its own forms for this purpose – so you should contact the RA first if you are uncertain (and Harneys’ specialist lawyers will of course be happy to advise further if needed).
What is gross income?
This is defined by Rule 20 as all income from whatever source derived, including revenues from sales of inventory and properties, services, royalties, interest, premium, dividends, and other amounts.
Is my Entity part of an “MNE Group” and do I need to report this?
Broadly, not unless the Entity’s group is subject to country-by-country reporting (CbCR) requirements (ie, a “group” with total consolidated group revenue of €750 million or more during the previous “fiscal year”, as defined). Rule 19 makes clear that “MNE Group” is construed consistently with the CbCR definition in the Mutual Legal Assistance (Tax Matters) Act 2003, as amended.
Constituent BVI Entities of CbCR groups should already be aware of their obligations and should seek advice if they are uncertain.
It is only mandatory to report the name of the Entity’s MNE Group for ES purposes if the Entity carries on relevant activity and is claiming exemption as a tax “non-resident” Entity under Part 4 of the Rules.
What is an “immediate parent” and “ultimate parent” (and what if there have been changes)?
An immediate parent means any entity(ies) that own(s) directly 25 per cent or more of the ownership or voting interests in the Entity (and may be a corporate or a non-corporate entity – eg, a partnership).
The ultimate parent (if any) is an entity (“X”) that meets the following criteria: (a) entity X owns directly or indirectly a sufficient interest in the Entity such that entity X is required to prepare consolidated financial statements under accounting principles generally applied in entity X’s jurisdiction of residence, or would be so required if entity X’s equity interest were traded on a public securities exchange in its jurisdiction of residence; and (b) there is no other entity that owns directly or indirectly an interest described in paragraph (a) above in entity X. This is based on CbCR definitions.
Although it is not clear from the legislation, we understand that the ITA expects that any changes in immediate parent or ultimate parent during an FP should be reported via the additional disclosure options in the ES reporting forms.
In certain circumstances, the ITA may be required to disclose the beneficial ownership and ES information held on the RA database with overseas tax and other authorities.
These definitions can sometimes be complex to apply and report in practice. We recommend to seek advice as soon as possible if you are uncertain, as this may require discussion between BVI and non-BVI counsel.
What if my Entity (or immediate parent or ultimate parent) doesn’t have a TIN?
The BVI does not issue taxpayer identification numbers (TINs) or equivalent so the Entity may not have a TIN.
If the immediate parent or ultimate parent is not a BVI entity and you are uncertain, we recommend to seek appropriate advice to check whether it has or needs a TIN.
Who can I ask for advice?
Please contact the author or Harneys’ team of ES specialist lawyers via email at BVIeconomicsubstance@harneys.com.