Offshore

Exploring British Virgin Islands' New "Economic Substance" Tests

Josh Mangeot, Harneys, Counsel, British Virgin Islands, 29 November 2019

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We should not be unduly alarmist. The ITA has stated that it will take a pragmatic approach and it does appreciate the timing difficulties that it has caused the BVI. The requirements are not intended to make people impose artificial substance or to make changes that do not make sense commercially. That said, the ITA has been clear that people cannot stick their heads in the sand and ignore the new rulebook. The ITA has indicated that, if an entity has been “wrong-footed” by a material change between the April version and the October version of the Rules, it is likely to take that into account. So, for example, rule 5 has been changed in a way which could have affected a “pure equity holding entity,” although this is likely to be quite a narrow category.

Industry updates – what to expect this year and in 2020
The ITA and BVI Finance (the promotional agency for the BVI’s financial sector) have also spoken to the industry on several public occasions recently. The most recent session was the first public presentation since the Rules came out last month. It explored the changes that the Government had made between the April version and the final version, with some comments to the industry about what to expect towards the end of this year and in 2020. There were several items on the agenda.

The first point to note is that there will be a second version of the Rules, with some further amendments, in 2020. Nobody expects these to be truly seismic or to displace people's classifications but there is likely to be some information in there about related amendments to the company and partnership laws in the BVI and some other consequential changes that will flow from the way in which the economic substance regime works. The second version of the rules is going to have to be approved by the EU tax Code of Conduct Group.

There has been a third amendment to the BOSS Act (published on 31 October) to bring it into line with the final version of the Rules. The changes are fairly technical and not something that ought to excite most people.

However, every BVI legal entity will have to tell the ITA whether it carried on any relevant activity in a period (and if so, which ones) – so “nil returns” will be required. We expect that every relevant BVI entity will report this through its BVI registered agent, even if that entity is then going to go on to claim tax non-residence under part 4 of the rules.

This is for various reasons. There are some rules (rule 5, in particular) about tax residence that cannot work mechanically unless you ask the questions in that way. This is a helpful clarification and we also expect this to be a ‘filing’ that every company or entity may have to make every year (even if it is just to confirm that no relevant activities have taken place) to ensure that the information that is ultimately being presented back to the ITA (and, in some cases, to overseas tax authorities) is accurate and to make sure that entities have thought about this.

With that in mind, the ITA was very clear about the continuing obligation that all affected legal entities – which includes all BVI companies – have to identify whether or not they perform a relevant activity. This obligation commenced on 1 October. The ITA is encouraging people to take appropriate legal and professional advice if they are unsure about the formal classification of their activities or their tax status, because that cannot be done by their BVI registered agents. That is something that the entity has to do itself and the directors or general partners of the entity may well feel that they ought to take advice on the economic substance classification to discharge their own duties to the entity.

The ITA has also been very clear that it is going to expect every entity to have ‘robust’ written records that set out the basis for its classification (and, if necessary, these may refer to the fact that the entity sought professional advice). Broadly speaking, we expect that if an entity has reasonably relied on legal advice, it may have a reasonable cause for improperly identifying activities in its efforts to comply with the BOSS Act, if the ITA were to challenge that entity’s position. The ITA might still investigate the entity and impose administrative fines and penalties if it decides that the entity has failed to comply with any applicable economic substance requirements but, unless there is some more impropriety involved or misleading information has been provided, it may be less likely to pursue criminal proceedings.

We have also been told to expect some changes to the BOSS Act system itself. We should have an outline of those before January 2020 because registered agents and entities are going to have to know what information and what data they are going to submit when the economic substance reporting really starts in earnest in 2020. We expect the timing and format of reporting to be set out in some new regulations or rules to be published. We have been told that each entity will have 6 months to give that information to its registered agent after the end of the relevant financial period, which depends on the incorporation date and whether the entity has elected or applied to the ITA to change the default periods in accordance with the Act.

We are expecting some interesting communications regarding collective investment vehicles and funds in general. As most people know, the BVI (alongside the Cayman Islands, Bermuda and the Bahamas) is awaiting further technical guidance from the EU regarding collective investment vehicles generally. Both the public and private sectors are working hard on that front in the BVI.

We have also heard clients asking whether economic substance requires a trade licence or some other licence in the BVI. The short answer to that is that it depends. If your entity is carrying on a relevant activity, cannot claim non-residence and is a passive “pure equity holding entity,” the answer is probably no. In such cases, we expect that many such entities may rely on their existing registered agent and registered office provider. That does not require a trade licence of itself because that provider should already be licensed appropriately. Any BVI professional directors are generally employed by licensees already.

Conversely, if the entity does one of the other types of relevant activity and is going to need to introduce “boots on the ground” in the BVI, then that may require some form of licence. If the activity is a banking business, an insurance business or a fund management business, you should already have a licence under the relevant financial services legislation. If you are one of the other types and you are going to be bringing human resources into the BVI, then this may well require a trade licence and work permit(s). The BVI Government stands ready to help clients with that and we have been told that the BVI Labour and Immigration Departments are lined up to make that process as smooth as possible.

Our key message remains unchanged: “classify, classify, classify”. Once you have conducted the initial entity classification, the rest of the entity’s obligations flow from there.

* Josh Mangeot can be reached on +1 284 852 4387 or at joshua.mangeot@harneys.com

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