LEGAL GUIDE: Economic Substance (Companies and Limited Partnerships) Act, 2018 (ESA)
The Economic Substance (Companies and Limited Partnerships) Act, 2018 (ESA) was enacted in the British Virgin Islands on 31 December 2018. Its purpose is to fulfil the BVI’s commitment to ensuring the highest standards of tax governance and to ensure that the BVI is not included in Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes (List) when it is reviewed in early 2019. All of the other key tax neutral jurisdictions (such as Bermuda, the Cayman Islands, Guernsey, Jersey, Isle of Man) have recently passed similar legislation.
The EU’s Code of Conduct Group is responsible for preparing the List, the latest version of which was adopted by the ECOFIN Council on 5 December 2017. The Code of Conduct Group also produces a document (State of Play) setting out the state of play of the cooperation with the EU with respect to commitments taken to implement tax good governance principles.
The BVI tax regime is currently included in the State of Play as one that facilitates offshore structures which attract profits without real economic activity. The BVI, mindful of the need to ensure tax good governance, made a commitment to address the EU’s concerns relating to economic substance by 2018.
2. Who does it apply to?
Companies and limited partnerships (with legal personality) incorporated in BVI or registered as foreign companies or limited partnerships in BVI which are tax resident in BVI and carrying on Relevant Activities.
Essentially ESA provides that companies and limited partnerships (with legal personality) which are tax resident in the BVI must, if they carry out a “Relevant Activity” (listed below) satisfy certain economic substance requirements. A company or limited partnership is tax resident in the BVI if it is not tax resident in another jurisdiction (other
than a jurisdiction on Annex 1 of the List, currently only American Samoa, Guam, Samoa, Trinidad and Tobago and the US Virgin Islands).
3. Relevant Activities
The “Relevant Activities” are defined in ESA as: banking (defined as the business of providing credit facilities of any kind for consideration), insurance, fund management, finance and leasing, headquarters, shipping, holding business, intellectual property and distribution and service centre business. These are defined in more detail in ESA and certain “core income-generating activities” are specified in respect of each “relevant activity”.
It is worth noting here that “Holding Business” is narrowly defined as “the business of being a pure equity holding entity”.
4. Pure Equity Holding Entities
A pure equity holding entity which carries on no Relevant Activity other than Holding Business (i.e. just holding equity) will have “adequate substance” if it (a) complies with the BVI Business Companies Act, 2004 or the Limited Partnership Act, 2017; and (b) has adequate employees and premises for holding equitable interests.
5. What do you have to do if ESA applies to your company or limited partnership?
A company or limited partnership which carries out Relevant Activities is required to (1) either provide evidence that it is tax resident in a jurisdiction other than the BVI; or (2) establish economic substance in the BVI. Any entity that intends to establish economic substance in the BVI will need to provide additional information evidencing this to its registered agent which will be entered into the Beneficial Ownership Secure Search System (BOSS) (the current system through which beneficial ownership information is centrally uploaded in the BVI).
6. Economic substance requirements
The economic substance requirements for the Relevant Activities other than Holding Business are:
- the relevant activity is directed and managed in the BVI;
- having regard to the scale and nature of the relevant activity:
a. there are adequate, suitably qualified staff located in the BVI;
b. there is adequate expenditure incurred in the BVI;
c. there are physical offices or premises appropriate for the “core income-generating activities”;
d. where an intellectual property business requires specific equipment, that equipment is in the BVI;
3. the company or limited partnership conducts core income-generating activity;
4. if the income-generating activity is carried out by another entity it is done within the BVI and can be monitored
and controlled by the original entity.
7. New BOSS Information
ESA has made various amendments to the BOSS Act so that each company and limited partnership carrying out one or more Relevant Activity is now required under the BOSS Act to provide additional information to the registered agent in the BVI, including: (i) details of any Relevant Activities that it carries on; (ii) details of its parent (iii) if non-resident in the BVI for tax purposes, details of where it is tax resident; (iv) if resident in the BVI for tax purposes, in respect of each Relevant Activity: total turnover; expenditure incurred in BVI; number of employees; address[es] in the BVI; equipment located in BVI; names of the persons responsible for the direction and management of the Relevant Activity; and the name of any entity that carries out a core income-generating activity for the company or limited partnership.
ESA has also amended the BOSS Act so that limited partnerships now fall within the remit of that legislation, requiring beneficial ownership information to be provided by limited partnerships to the BVI registered agent. In addition, any exempt entity (under the BOSS Act), such as a listed company or a regulated fund, is required to provide beneficial ownership information to its registered agent (to be uploaded into BOSS) if such entity carries out a Relevant Activity.
8. Intellectual Property Business
ESA provides that there is a rebuttable presumption that any company or limited partnership which carries on an intellectual property business does not conduct core income-generating activities in the BVI (and therefore cannot comply with the economic substance requirements in ESA) if:
a) the activities carried on in the BVI do not include – intellectual property business concerning intellectual property
assets such as patents, research and development or non-trade, intangible assets such as brand, trademark and
customer data, marketing, branding and distribution; or
b) the company or limited partnership is a “high risk IP legal entity”.
A “high risk IP legal entity” is a legal entity which carries on an intellectual property business and which: (a) acquired the intellectual property asset (i) from an affiliate; or (ii) in consideration for funding research and development by another person situated in a country or territory other than the BVI; and (b) licences the intellectual property asset to one or more affiliates or otherwise generates income from the asset in consequence of activities (such as facilitating sale agreements) performed by foreign affiliates.
9. When do you have to comply by?
ESA came into force on 1 January 2019 and applies to companies and limited partnerships which carry on a Relevant Activity during any financial period. “Financial Period” for existing companies and limited partnerships (formed before 1 January 2019) is defined as a period of one year commencing on a date no later than 30 June 2019 and every following period of one year.
The International Tax Authority of the BVI (ITA) may determine that a company or limited partnership has not complied with the economic substance requirements during any financial period of the relevant entity ending on or after 31 December 2019.
10. How is it enforced?
The ITA can require a company or limited partnership to provide information to assist it in making its determination. This is in addition to the additional information requirements for BOSS.
11.Offences and Penalties
On a first determination of failing to satisfy the economic substance requirements the ITA can impose a penalty of between $5,000 and $20,000 or $50,000 for certain high risk intellectual property companies or limited partnerships. On a second determination the ITA can imposes a penalty of between $10,000 and $200,000 or $400,000 for certain high risk intellectual property companies or limited partnerships.
ESA creates an offence of failing to provide or providing false information which is punishable on summary conviction with a fine of up to $40,000 or 2 years imprisonment and for a conviction on indictment of up to $70,000 and 5 years in imprisonment.
The ITA can recommend to the BVI Financial Services Commission that the relevant company or limited partnership is struck off the relevant register.
12. Regulations and Guidance Notes
ESA also provides for regulations to be issued expanding on the meaning of terms defined in ESA and providing how the economic substance requirements can be met.
We anticipate that regulations and guidance will be issued shortly to clarify such matters as, in respect of compliance with the economic substance requirements, what will constitute “adequate number of suitably qualified employees”, “adequate expenditure”, and “physical offices or premises as may be appropriate”.
We will provide further guidance once any regulations or guidance notes are issued.
13. What you need to do now
1.Consider whether your BVI company or limited partnership carries out any Relevant Activities.
2. If your BVI company or limited partnership carries out any Relevant Activities, consider whether such entity is tax
resident outside the BVI and obtain evidence of this.
3. If your BVI company or limited partnership carries out any Relevant Activities and is not tax resident outside the BVI,
consider what is required for such entity to establish economic substance in the BVI.
4. Start contingency planning for complying with and or demonstrating compliance with the economic substance
requirements or restructure.
14. How can Forbes Hare help you?
1. We can advise you on applicability of and compliance with ESA and each of the above points.
2. We can provide BVI based directors, secretaries and other officers to help you establish economic substance in the
This article is intended to be for the general information of the clients and professional contacts of Forbes Hare. It is not intended to be comprehensive and should not be relied on as a substitute for independent legal advice in any circumstances.