Q:
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In what circumstances does the economic substance requirement apply?
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A:
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First, according to the Economic Substance Law Guide, every relevant activity engaged in by a relevant subject should satisfy the economic substance requirement. The usual determination consists of three tests: 1) whether it is a relevant subject; 2) whether it is engaged in a relevant activity; and 3) whether it can provide proof of tax residency in other jurisdictions.
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What is the relevant subject?
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A related entity includes entities (companies and limited partnerships) incorporated or registered in BVI, but does not include non-tax resident entities, or limited partnerships that do not have legal personality. See the definition in section 2 of the ESA.
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Q:
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What is the relevant activity?
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There are nine categories of related activities, including banking, insurance, funds management, finance and leasing, head office, shipping, distribution and service centre, holding and IP. In addition to the definition of the relevant activity itself, the determination of whether the business activity engaged in by the relevant entity falls within the scope of the relevant activity is based on whether it meets the "Core Income-Generating Activities" (CIGA) for each category of relevant activity.
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Q:
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What are the specific elements of the economic substance requirement?
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Two main types of economic substance requirements exist for different relevant activities. The standard requirements applicable to a holding business are relatively low compared to other relevant activities. In addition, IP businesses, in addition to meeting the general economic substance requirements, may in certain circumstances be deemed not to carry out any income-generating activities (i.e. only receiving profits without economic substance) and require counter-evidence from the relevant entity.
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Q:
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When is the economic substance requirement to be met?
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There are different rules depending on whether the relevant entity was established prior to the entry into force of the ESA (1 January 2019). From the first financial period after the entry into force of the ESA, and for each successive one-year period thereafter, the relevant entity is required to determine whether the economic substance requirement applies and is met, depending on the actual business situation, and is required to comply with the information reporting obligations within the statutory period following the end of each financial period.
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FAQ
