The British Virgin Islands International Tax Authority (ITA) published the Rules on Economic Substance in the British Virgin Islands (Rules) on 9 October 2019. The Rules, which replace the draft Economic Substance Code (Draft ES Code) published in April 2019, will become effective in tandem with further amendments to the Beneficial Ownership Secure Search System Act.
On 9 October 2019, the ITA published the Rules on Economic Substance (Rules), which provide detailed explanations and interpretations of the legislative requirements of the Economic Substance (Companies and Limited Partnerships) Act, 2018 (ES Act). The Rules closely follow the Draft ES Code that has been in circulation since April 2019.
The changes to the Draft ES Code as reflected in the new Rules are mainly stylistic. The Rules are more closely aligned to the text of the primary legislation (which has been amended in various respects since the Draft ES Code was prepared). However, there are some notable differences as set out below.
What happens to in-scope entities in liquidation? The Rules make it clear that entities that have commenced the winding up process remain subject to their obligations to meet the relevant economic substance test throughout the liquidation process. What will constitute 'adequate' substance for an entity in liquidation will depend entirely on the facts of each case.
What is meant by the word "expenditure"? The Rules specify that "expenditure" (as required to meet substance requirements under the ES Law) means only expenditure arising from the relevant activity.
What filing obligations does a non-resident entity face? An entity that is exempt from the economic substance regime because it is tax resident outside of the BVI will be required to submit for the database maintained by its registered agent information about whether or not it carries on a relevant activity, even though it has no obligations to meet any economic substance test.
What documentary evidence is expected? When an entity files its annual report, it will only have to submit supporting documentary evidence if specifically requested by the ITA.
The Rules are stated to become effective on the coming into force of the Beneficial Ownership Secure Search System (Amendment) (No. 3) Act, 2019, which we expect will be gazetted in the near future.
Regulations in relation to filing requirements and submission periods are expected to be released in due course. We also anticipate that the ES Rules will be revised from time to time to keep pace with legislative changes and to address industry feedback. Appleby's experts are closely involved with these efforts and we will keep our clients and contacts updated with any new developments.
The British Virgin Islands has enacted legislation that will require certain BVI entities carrying on specified activities to have 'adequate substance' in the BVI. You can read more here. Any relevant entity that may be impacted by this legislation will wish to monitor these developments closely. Appleby has made available online free of charge an Economic Substance Entity Classification Questionnaire which offers guidance through the economic substance regime. It was developed by our legal and regulatory experts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.