In the end of 2018, there has been a number of changes in the legislation of common tax-free jurisdictions, which were ambiguously perceived by the public: on the one hand, there was a unification of mandatory requirements for economic substance to legal entities between the British Virgin Islands, the Bermudas, the European Union and another countries, and on the other hand, there were significant risks of negative consequences for companies, its beneficiaries and managers.
According to the Report of the Council of the European Union (doc. 15429/17 from 05.12.2017) several countries (such as Anguilla, Bahamas, Bahrain, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, Marshall Islands, Turks and Caicos Islands, United Arab Emirates and Vanuatu), have tax regimes which facilitate the operations of offshore structures which accumulate profits without any substantial economic activity. In light of this report many of these States have expressed their intention to harmonize their national legislation in 2018 to prevent such offshore structures from functioning in their jurisdiction without an actual economic substance.
Recently a number of economic substance acts have entered into force in British Virgin Islands and several other countries in relation to all companies that carry out these activities: banking, insurance, fund management, financing, leasing, headquarters, shipping, distribution, intellectual property and holding entity.
For example, a legal entity (other than a pure equity holding entity) complies with the economic substance requirements in the BVI if:
the relevant activity is directed and managed in the BVI;
having regard to the nature and scale of the relevant activity carried on in the BVI:
there is an adequate number of suitably qualified employees in relation to that activity who are physically present in the BVIs (whether or not employed by the relevant legal entity or by another entity and whether on temporary or long-term contracts),
there is adequate expenditure incurred in the BVI,
there are physical offices or premises as may be appropriate for the BVI core income-generating activities; and
where the relevant activity is intellectual property business and requires the use of specific equipment, that equipment is located in the Virgin Islands;
the legal entity conducts BVI core income-generating activity; and
in the case of income-generating activity carried out for the relevant legal entity by another entity:
no core income generating activity is carried on out outside the BVI;
only that part of the activities of that other entity which are attributable to generating income for the relevant legal entity shall be taken into account when considering if the relevant legal entity meets the economic substance requirements;
the relevant legal entity is able to monitor and control the carrying out of that activity by the other entity.
A pure equity holding entity has adequate substance if it:
complies with its statutory obligations under the BVI Business Companies Act, 2004, the Partnership Act, 1996 or the Limited Partnership Act, 2017 (whichever is relevant);
has adequate employees and premises for holding equitable interests or shares and, where it manages those equitable interests or shares, has adequate employees and premises for carrying out that management.
If a legal entity does not comply with the requirement of economic substance, the relevant penalty involves various sanctions, such as:
civil penalty of an amount of not less then 20 000 $ and not exceeding 400 000 $; or
the strike-off of the legal entity from the companies register.
In order to get more information about new rules of economic substance in the BVI and other jurisdictions, sanctions and ways to protect the business against the latest changes in legislation, please contact us using the form below.