Economic Substance Requirements

Effective 1 January 2019, the British Virgin Islands introduced the Economic Substance (Companies and Limited Partnerships) Act, 2018, implementing economic substance requirements that are primarily meant to address EU concerns. Hence, the companies and limited partnerships incorporated or formed on or after 1 January 2019 must comply with the economic substance requirements.

The Economic Substance (Companies and Limited Partnerships) Act, 2018, was amended effective 30 June 2021, and the Rules were revised and updated on 24 February 2023. An overview of the amended economic substance requirements is as follows:

Conditions Triggering Compliance

The economic substance requirements must be met if an entity:

• Is a company or a limited partnership registered or incorporated in the British Virgin Islands;
• Carries on a relevant activity during any financial period; and
• Is not tax resident in a jurisdiction outside the British Virgin Islands, except if it is a resident in a jurisdiction that is on the EU’s list of non-cooperative jurisdictions for tax purposes (see below), in which case it will not be considered tax resident in a jurisdiction outside the British Virgin Islands.

Relevant Activities

Relevant activities include the following:

• Banking business;
• Insurance business;
• Fund management business;
• Finance and leasing business;
• Headquarters business;
• Shipping business;
• Holding business;
• Intellectual-property business; and
• Distribution and service center business.

Effective 30 June 2021, investment funds such as mutual funds and private investment funds are excluded from the list of relevant activities.

Tax Residency

To prove tax residency in a cooperative jurisdiction (i.e., in a jurisdiction that is not on the EU’s list of non-cooperative jurisdictions for tax purposes) outside the British Virgin Islands, any of the following documents issued by the competent tax authority of the other jurisdiction can be submitted to the tax authorities:

• Certificates or letters;
• Tax assessments, demands, or evidence of payment;
• Tax returns; or
• Rulings.

Note that the following jurisdictions are included in the EU’s list of non-cooperative jurisdictions (Annex 1) as of 14 February 2023:

Reporting Requirements

A legal entity is considered to have complied with the economic substance requirements if:

• The relevant activity is directed and managed in the British Virgin Islands;
• Having regard to the nature and scale of the relevant activity:
  • there are an adequate number of suitably qualified employees in relation to that activity who are physically present in the British Virgin Islands (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 British Virgin Islands;
  • there are physical offices or premises as may be appropriate; and
  • where the relevant activity is intellectual property business and requires the use of specific equipment, that equipment is located in the British Virgin Islands; and
• The legal entity conducts core income-generating activity. If the income-generating activities are carried out for the legal entity by another entity, it is subject to the fulfillment of certain conditions.

A legal entity must file its annual substance declaration on the Beneficial Ownership Secure Search Database through its registered agent within six months from the end of the relevant financial period.

Legal entities carrying on relevant activities, failing to demonstrate tax residence outside the British Virgin Islands, and failing to meet the economic substance requirements, are subject to enforcement measures that may result in penalties and liquidation of the legal entity.

If the information or documentation submitted under the reporting regime is not sufficient to determine whether an entity is complying with the economic substance requirements, additional information may be sought by the tax authorities.

Penalties

Failure to provide information or provision of false information in relation to the substance requirements may attract a fine of up to USD 40,000 and/or imprisonment of up to two years (applicable on summary conviction), which may be increased to USD 75,000 and/or imprisonment up to five years for conviction on indictment.

Where a determination is made that the economic substance requirements are not met, a penalty of USD 5,000 up to USD 20,000 may be imposed (USD 50,000 for defined high-risk IP companies). If a legal entity fails to act to comply and a second determination is made about a failure to comply with the substance requirements, an additional penalty of USD 10,000 up to USD 200,000 may be imposed (USD 400,000 for defined high-risk IP companies).

Tax Information Exchange Agreements (TIEAs)

Tax Information Exchange Agreements (TIEAs) provide for the exchange of information on tax matters. The British Virgin Islands has concluded TIEAs with various jurisdictions, including Aruba, Australia, Canada, China, Curacao, Czech Republic, Denmark, Faroe Islands, Finland, France, Germany, Greenland, Guernsey, Iceland, India, Ireland, Isle of Man, Japan, the Netherlands, New Zealand, Norway, Poland, Portugal, Sint Maarten, South Korea, Sweden, United Kingdom, and the United States.

Financial Account Information Reporting and Exchange

Effective 18 September 2018, the financial institutions in the British Virgin Islands are required to report and exchange their financial account information under the Common Reporting Standard (CRS). The annual deadlines for enrolment and filing for CRS are 30 April and 31 May, respectively.

Further, effective 30 June 2014, the British Virgin Islands concluded an Intergovernmental Agreement (IGA) with the US for the implementation of the U.S. Foreign Account Tax Compliance Act (FATCA).

Ultimate Beneficiary Disclosure

Effective 30 June 2017, the British Virgin Islands introduced the Beneficial Ownership Regime (BO regime), wherein companies incorporated under the BVI Companies Act are required to maintain information of the beneficial owners through a registered agent. However, partnerships, trusts, funds, and companies listed on a regulated market or a multilateral trading mechanism are not required to maintain such information.

A beneficial owner is generally an individual that ultimately owns or controls a company and includes:

• In the case of a legal person other than a corporate and legal entity whose securities are listed on a recognized stock exchange, a natural person who ultimately owns or controls, whether directly or indirectly, 25% or more of the shares or voting rights in the legal person;
• In the case of a legal person, a natural person who otherwise exercises control over the management of the legal person;
• In the case of a legal arrangement, partners of a partnership arrangement, trustee, settlor or any other person by whom the legal arrangement is made;
• In the case of a corporate and legal entity that is in insolvent liquidation, administration or administrative receivership, the natural person who is appointed as a liquidator, administrator or administrative receiver of the corporate and legal entity;
• In the case of a receiver being appointed over 25% or more of the shares or voting rights in a corporate and legal entity, the creditor who appoints the receiver; or
• In the case of a shareholder in the corporate and legal entity who would otherwise be a beneficial owner but is deceased, the natural person acting as a personal representative of the deceased’s estate.

The British Virgin Islands has created a secure, non-public search platform called Beneficial Ownership Secure Search System (BOSS). The BOSS is an electronic search engine that enables the competent authorities in the British Virgin Islands and the UK to have a searchable database (RA Database) with information on British Virgin Islands companies and their beneficial owners.

Registered agents are responsible for maintaining the BO information on the RA Database on behalf of legal entities. Any change in BO information must be notified to the registered agent within 15 days. The notified information must be reported by the registered agent within 15 days.

Failure to comply with the regime or wilful contravention of the BO requirements attracts a penalty ranging between USD 10,000 and USD 250,000.

Public Register of Persons with Significant Control

The British Virgin Islands committed to introducing a public register of persons with significant control by 2023, to comply with the EU’s Anti-money Laundering Directive (EU 2015/849), requiring Member States to ensure that beneficial ownership information is publicly accessible.

However, the Court of Justice of the European Union (CJEU) issued a ruling on 22 November 2022, invalidating the disclosure requirements under the Directive and observing that public access to beneficial ownership information constitutes a severe infringement of the EU’s Charter of Fundamental Rights, specifically Article 7 (right to private and family life) and Article 8 (right to protection of personal data).

The decision of the CJEU may have implications on the commitments made by the British Overseas Territories, including the British Virgin Islands, to introduce the public register by 2023 and may cause them to re-evaluate their commitments.

Note that the BVI Business Companies Act, 2004, underwent amendments effective 1 January 2023, providing a mechanism for but not actually introducing or implementing a public register of persons with significant control.