Q:
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What is Economic Substance Law and why does it exist in the BVI?
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A:
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Economic Substance Law refers to new legislation introduced in the BVI which responding to the concerns and actions of worldwide unfair tax practices from EU. The new law requires certain entities that are incorporated or registered in the BVI, and which conduct one or more of a set list of nine relevant activities, to comply with local requirements and demonstrate adequate ‘economic substance’ either in or outside BVI.
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Q:
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Which BVI Company need to demonstrate adequate ‘economic substance’ in BVI? What is BVI economic substance test?
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Refer to the Economic Substance Act 2019 (“ESA”), only for the entities which are carrying on business falls within the relevant activities categories are required to have the substance in the BVI or demonstrate its substance in the place of its operation or management.
These entities required to satisfy Economic Substance Test (“ES Test”) which depends on the business and type of relevant activities. There are three general aspects to BVI economic substance:
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direction and management in BVI;
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adequate expenditure and employees and appropriate premises in the BVI; and
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Core Income Generating Activity (CIGA) carried on in the BVI.
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What are relevant activities?
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A relevant entity that conducts anyone or more “relevant activity(ies)” that required to satisfy the ES Test in relation to each relevant activity. These relevant activities are:
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Banking business;
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Distribution and service center business;
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Finance and leasing business;
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Fund management business;
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Headquarters business;
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Holding business;
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Insurance business;
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Intellectual property business; and
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Shipping business.
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What kind of proof is required to provide to demonstrate the substance of my BVI company is outside the BVI?
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Generally, a BVI company which carries on the relevant activities and declares its tax residency in other jurisdictions other than the BVI, it will be required to supply the following documents to demonstrate the company is a tax resident and has the substance in that jurisdiction:
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Letter or certificate issued by the competent authority;
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An assessment to tax on your company;
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A confirmation of self-assessment to tax of your company;
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Tax payable demand note; and
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Evidence of tax payment.
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Q:
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When should I make an annual declaration of Economic Substance for my BVI Company?
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A:
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BVI Companies require to complete and submit the BVI Economic Substance Filing (“ES filing”) within 6 months following the end of the company’s financial period date (“ES period”).
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Do I need to fix the ES period for relevant reporting?
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No. The first ES period has been fixed by relevant law unless you want to make your ES period (for Economic Substance reporting purpose) in line with your accounting period.
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What is the ES period of my BVI Company?
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A:
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For existing companies registered before 1 January 2019, the first ES period has been fixed by the relevant law from 30 June 2019 to 29 June 2020, then the ES end date of the company is 29 June.
While for companies incorporated on or after 1 January 2019, the ES period is calculated based on the incorporation date (the start date of the period) plus 365 days (the period cannot longer than 12 months cycle). For example, if the company is incorporated on 1 April 2019, the first ES period of the company will be from 1 April 2019 to 31 March 2020. Thus, the ES year end date of the company will be 31 March.
However, the company is allowed to alter its ES period. The company can write to the International Tax Authority (“ITA”) of BVI to apply for the change of its ES period but the change cannot prolong the period for more than 12 months.
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Q:
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What are the penalties of failure to satisfy the Economic Substance requirements or providing false or misleading information?
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A:
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There are different penalties imposed by ESA and the Beneficial Ownership Secure System Act, (“BOSS”) which include financial penalties, strike off and imprisonment.
Once ITA has determined that a party is failure to satisfy the ES Test requirements, the ITA must impose a minimum penalty of five thousand dollars on a first determination of non-compliance and ten thousand dollars on a second determination of non-compliance according to ESA section 12(2) & 12(4).
If a party wishes to challenge the imposition, they can submit an appeal under ESA section 13.
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