British Virgin Islands Economic Substance - Frequently Asked Questions

• Published date: 01 April 2024
• Subject Matter: Finance and Banking, Tax, Financial Services, Fund Management/ REITs, Income Tax, Capital Gains Tax, Tax Authorities
• Law Firm: Carey Olsen
• Author: Ms Elizabeth Killeen and Katrina Lindsay

This guidance note has been prepared in relation to: (1) the Economic Substance (Companies and Limited Partnerships) Act, 2018; (2) the Economic Substance (Companies and Limited Partnership) (Amendment) Act, 2021; and (3) the Rules on Economic Substance in the Virgin Islands, updated on 24 February 2023 (together the "Substance Legislation").

Who has to comply with the Substance Legislation?

All companies and limited partnerships that are registered or incorporated in the British Virgin Islands ("Entities") must comply with the Substance Legislation. The Substance Legislation does not apply to trusts or general partnerships.

How does an Entity comply with the Substance Legislation?

The Entity should carry out an annual review of its assets, activities, and tax residency (an "Annual Review") and then prepare a formal written declaration confirming the results of its Annual Review (a "Declaration"). A copy of the Declaration should be given to the Entity's registered agent (the "Registered Agent"), with instructions to file the relevant information and documents with the BVI International Tax Authority (the "ITA").

How does an Entity conduct an Annual Review?

The Entity should consider and answer the following three questions:

Has the Entity carried on a Relevant Activity?

The Entity must review its assets and activities, to determine what (if any) Relevant Activity it has carried on. There are nine Relevant Activities: (1) Banking Business; (2) Insurance Business; (3) Shipping Business; (4) Fund Management Business; (5) Finance and Leasing Business; (6) Headquarters Business; (7) Holding Business; (8) Intellectual Property Business; and (9) Distribution and Service Centre Business. Please see Schedule 1 for more information about each Relevant Activity.

We appreciate the definitions are quite technical and the analysis of each Relevant Activity is very fact-based, but it is important to correctly classify the Entity or it may be liable to fines. If required, we can help your Entity conduct its Annual Review and prepare its Declaration.

Where is the Entity resident for tax purposes?

The Entity must consider where it is resident, for tax purposes. This is important because its economic substance requirements and obligations will vary, depending on where it is tax resident.

British Virgin Islands

An Entity will only be tax resident in the British Virgin Islands (the "BVI") if pays tax to the BVI Inland Revenue. Usually, this is restricted to Entities that: (1) own property in the BVI; or (2) physically operate in the BVI under a trade licence issued by the BVI Government. An Entity that is tax resident in the BVI will be able to obtain a tax certificate from the BVI Inland Revenue Department, to support this classification.

Foreign Jurisdiction

An Entity will be tax resident in a jurisdiction outside the BVI (the "Foreign Jurisdiction") if it pays tax in the Foreign Jurisdiction. An Entity that is tax resident in a Foreign Jurisdiction will be able to obtain a tax certificate from the relevant tax authority, to support this classification.

Cannot Prove

Many Entities cannot prove where they are tax resident. Provided this is confirmed in the Declaration, this will not cause any problems when submitting the annual economic substance submission.

Does the Entity have to demonstrate substance in the BVI?

The Entity must consider what (if any) Relevant Activity it carried on, and where it is tax resident. This is important because it will determine whether or not the Entity has to demonstrate substance in the BVI.

No substance

If an Entity has not carried on a Relevant Activity, it will not have to demonstrate substance in the BVI. However, the Entity is still required to carry out an Annual Review, prepare a Declaration and instruct its Registered Agent to file its annual economic substance declaration with the ITA.

If an Entity has carried on a Relevant Activity, but is tax resident in a cooperative Foreign Jurisdiction, it will not have to demonstrate substance in the BVI. However, the Entity is still required to carry out an Annual Review, prepare a Declaration, provide a copy of its foreign tax certificate and instruct its Registered Agent to file its annual economic substance declaration with the ITA. The Entity may also have to demonstrate substance...