As part of its Base Erosion and Profit Shifting (BEPS) Framework, the European Union imposed requirements on jurisdictions with low or no taxation, to enact legislation that would provide for economic substance for companies wanting to benefit from being incorporated in those jurisdictions. In response to EU concerns, offshore jurisdictions have passed legislation to address this requirement for companies wanting to obtain the advantages of being tax resident in those jurisdictions. Similar legislation has been passed in Bermuda, Cayman, Guernsey, Jersey, Mauritius, Seychelles and the Virgin Islands.
The Economic Substance (Companies and Limited Partnerships) Act, 2018 (ESA) came into force on 1 July 2019. The ITA has issued revised Economic Substance Rules on 2 April 2024.
Relevant Activities
ESA applies to all BVI Companies carrying on “relevant activities”, unless they can demonstrate that they are tax-resident elsewhere. The Company would be subject to the economic substance requirements if it conducts any of the following “relevant activities”:
- banking business
- insurance business
- fund management business
- finance and leasing business
- headquarters business
- shipping business
- holding business
- intellectual property business
- distribution and service centre business.
The definition of “holding business” is very narrow. Entities that own more than just “equity participations” will not fall within this definition and will therefore not be carrying on a relevant activity. Entities that fall within the definition of holding business are subject to reduced requirements and do not have to be managed and directed from the Virgin Islands. It is our current understanding that an entity with passively managed equity participations needs to comply with its statutory obligations under the BVI Business Companies Act and that having a registered agent would likely satisfy the ‘adequate’ personnel and premises requirements.
Entities that not carrying on a relevant activity are exempt from the substance requirements and have very limited reporting obligations.
Entities that are carrying on a relevant activity and can demonstrate that they are tax resident in a jurisdiction outside the Virgin Islands are exempt from the substance requirements but need to provide evidence supporting their tax residence.
Entities that are carrying on a relevant activity and are NOT tax resident outside the Virgin Islands, need to comply with the requirements to demonstrate economic substance.
What you need to do
Periodically review the economic activity to determine if the Company is conducting a relevant activity. If the Company is conducting a relevant activity and is not tax resident in a jurisdiction outside the Virgin Islands, it will be subject to the economic substance requirements.
The International Tax Authority is reviewing submissions. We recommend that if your company changes its relevant activity classification, document the reason for the change of status.
How we can assist you
If you are unsure about whether the Company is conducting a relevant activity and need assistance with the classification process you may require professional advice.
We can assist you with the following:
- If the Company is conducting a relevant activity, we can advise what the requirements are and provide suggestions for compliance.
- Provide substance solutions, including, Core Income Generating Activities (CIGA) for each Relevant Activity must be undertaken in the BVI. Depending on the relevant activity, we have personnel available who may be able to perform this activity and therefore satisfy the economic substance requirements.
- Provide professional directors.
- Provide premises and personnel requirements, subject to an outsourcing agreement.
Copies of the legislation and ITA Rules are available on request. Please let us know if you have any questions.
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