BVI ECONOMIC SUBSTANCE RULES
The BVI Internal Tax Authorities issued recently their guidelines as to Economic Substance. The following are the main issues to be considered:
1. Is the entity obliged to comply?
Entities obliged to comply with the economic substance legislation:
(a) is the entity of a type which falls within the economic substance legislation?
(b) if it is, is it carrying on a relevant activity?
(c) if it is carrying on a relevant activity, is it resident for tax purposes in a jurisdiction outside the BVI (and which is not on the EU list of non¬cooperative jurisdictions for tax purposes)?
Only if the answers to (a) and (b) are affirmative and the answer to (c) is negative will the economic substance requirements apply to the entity.
2. Different requirements
If it has been determined that the entity is required to comply with the economic substance requirement it must be noted that, different substance requirements apply depending on whether the entity is carrying on:
(a) holding business,
(b) intellectual property business or
(c) any other type of relevant activity.
It is a common requirement for all three of the above categories that, in relation to the relevant activity in question, the legal entity has an adequate number of employees and has adequate premises. It is, in addition, a requirement for categories (b) and (c) that relevant activity is directed and managed from the BVI, that adequate expenditure is incurred in the BVI and that core income generating activity (“CIGA”) is carried on in the BVI. Activities within category (b) may, in addition, be subject to presumptions against compliance with the economic substance requirements which the legal entity may have to displace by evidence.
3. Entities not taxed outside BVI
Entities which carry on a relevant activity, which cannot demonstrate tax residence outside the BVI, and which fail to meet the economic substance requirements will be subject to enforcement action. This can result in substantial fines, and the striking off of the entity.
4. Options
Any entity carrying on a relevant activity which is potentially within the scope of the legislation has, broadly speaking, three options:
(a) it can ensure that the substance of the relevant activity is carried on within the BVI,
(b) it can discontinue the activity, or modify it so it no longer falls within the scope of a relevant activity, or
(c) it can demonstrate a tax residence in a jurisdiction outside the BVI.
An entity which does not take steps either to take its relevant activity outside the scope of the legislation, or to bring it into compliance with the legislation, can expect to be the subject of enforcement proceedings.
5. General Approach
Below is a guide to the general approach which the ITA will take to the construction and application of the legislation.
(1) The ITA will take a pragmatic and commercially realistic approach to the interpretation of the legislation.
(2) The ITA will apply criteria such as the “adequacy” of expenditure and employment, the “suitability” of employee qualifications and the “appropriateness” of premises having regard to the usual way in which businesses carrying on the relevant activity on a commercial basis are structured and operate.