Update to BVI Economic Substance Rules: Important update for entities claiming non-residence via UAE corporate income taxes
On 2 April 2024, the BVI International Tax Authority (ITA) published version four of its economic substance rules and explanatory notes (the Rules), following the introduction of a federal corporate income tax (CIT) system in the United Arab Emirates (UAE) in respect of financial years beginning on or after 1 June 2023.
Broadly, Rule 5 has been amended to allow for claims of tax non-residence under the UAE CIT for economic substance financial periods commencing on or after that date.
Background
By way of reminder:
- An entity qualifying under Part 4 of the Rules as resident for tax purposes in a jurisdiction outside the BVI (which is not on Annex I to the EU list of non-cooperative jurisdictions for tax purposes) is treated as Non-Resident. Broadly, if an entity is Non-Resident for a financial period, it will be exempt from any economic substance requirements for that period (but will be required to provide evidence of its tax status, if it carries on any “relevant activity” and wishes to claim Non-Resident status).
- Part 4 of the Rules expands the traditional concept of residence to treat as Non-Resident certain “transparent” entities (see Rule 4) and entities whose only sources of income from relevant activity are subject to tax (Rule 5), in each case under applicable tax laws. Withholding taxes are not relevant for these purposes.
- Rule 5 makes clear that an entity cannot be regarded as resident for tax purposes in a jurisdiction that does not have a CIT system – and previously named the UAE as one such jurisdiction.
The Rules now confirm that an entity will not be regarded as resident for tax purposes in the UAE for financial periods commencing before 1 June 2023 (and any such claim will be rejected by the ITA). An entity claiming to be tax resident in the UAE must ensure that such claim only relates to a financial period beginning on or after 1 June 2023. All claims made concerning the UAE must be made under Rule 2 and the entity must ensure that proper evidence (outlined in Rule 3) is submitted to support such claims. Such evidence must be in English (or accompanied by a certified English translation).
Economic Substance Classification Solution
Our online Economic Substance Classification Solution remains available for your benefit. This tool provides formal legal advice on a reliance basis for a low fixed fee. We recommend it as a primary resource for entity classification.
Version four of the Rules can be found here.
The official press release can be found here.
Please let the authors know if you require further information.
