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British Virgin Islands: Economic substance requirements, information reporting

British Virgin Islands: Economic substance requirements

The tax authority of the British Virgin Islands is expected to issue a draft “economic substance code” (rules or regulations) that would implement and serve as supplemental guidance with regard to legislation known as the “Economic Substance (Companies and Limited Partnerships) Act, 2018.”

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Background

The Economic Substance Act—effective 1 January 2019—was enacted to impose substantive economic requirements on relevant legal entities and was a response to concerns raised by the European Union Code of Conduct Group for Business Taxation (COCG) and the OECD with respect to the economic substance of entities located in jurisdictions that have a zero percent (0%) or a “near-zero” percent rate of corporate income tax (such as the British Virgin Islands).

Requirements

Legal entities (defined to include foreign companies and foreign limited partnerships) conducting “relevant activities” in the BVI are required to report to the tax authority certain information. The reporting of economic substance requirements only applies to “legal entities” conducting “relevant activities.”  For these purposes, an entity is a legal entity subject to the economic substance rules if it is:

  • An entity identified as being subject to the new law
  • A tax resident in the BVI
  • Conducting a “relevant activity” during any financial period in which it receives income from that activity


For these purposes, “relevant activity” is defined with reference to nine types of businesses:

  • 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

Even if an entity concludes that it does not conduct a “relevant activity,” or is not considered to be a tax resident in the British Virgin Islands, it still may have an obligation to report certain information. Failure to comply with the economic substance requirements may give rise to penalties and possible removal from the BVI company register.

Guidance expected

The tax authority is expected to issue a draft economic substance code to supplement the Economic Substance Act, including:

  • Rules on how the economic substance requirements may be met
  • Guidance on the interpretation of the legislation
  • Information relating to the manner in which the ITA will carry out its obligations

The deadline for filing the first report for legal entities conducting relevant activities is expected to be 30 June 2020.


Read a June 2019 report [PDF 148 KB] prepared by the KPMG member firm in the British Virgin Islands

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