As many of you already know, the British Virgin Islands (BVI) enacted the Economic Substance (Companies and Limited Partnerships) Act (ESA) on December 2018, pursuant to the Beneficial Ownership Secure Search Act (BOSS) of 2017.
Scope of the Law
For those that don’t know, ESA basically requires that if a company or limited partnership (LP) claims that its tax residence is BVI, and it conducts an activity classified as one of the 9 relevant activities provided by law, it must conduct certain core income-generating activities within BVI, and its Manager or Director, or the General Partner in case of a LP, must also report all relevant information for its ultimate owners or beneficiaries, whether they are individuals or entities, in addition to its expenses, employees, and premises in BVI. In the end, all these activities must be reported, or file a determination that its activities or operations are exempt from the application of the law.
The deadlines to file the determinations and reports required by ESA depend on the ending date of their financial period, as defined by law. For those companies or LP, even if foreign, organized or registered in BVI starting in 2019, the deadline is from June 30, 2020 to June 30, 2021. Otherwise, for all those companies organized or registered prior to 2019, the deadline is December 20, 2020.
In case the determination and reports are not filed, or are not timely filed, economic fines from $5,000 to $50,000 shall be imposed depending on the specific facts and circumstances for each company.
In addition to these requirements, there are others that must be analyzed in order to determine if the company also has to hold directors’ meetings for which the quorum must be physically present in BVI to be able to make decisions, or if the company must manage and operate any of the relevant activities, not the company itself, from BVI.
Regardless of the requirements imposed by ESA, it does not include or obligate non-resident companies or LP, and those legal arrangements that do not have legal personality. Even though ESA does not define “Tax Residency,” however, it describes which companies and LP considers non-resident. Thus, it refers to the latter as those that are resident for tax purposes in a jurisdiction other than BVI.
Exclusive or pure equity holding companies that only earn dividends and capital gains and do not conduct any other activity, are subject to less onerous obligations, but are not exempt from ESA.
ESA basically requires two things, to wit: 1) that companies and LP auto-determine if they are exempt by it or if they do not conduct any of the 9 relevant activities prescribed by it, and report their conclusion to their registered agent; and 2) in case the auto-determination is that they are not exempt, in addition to informing their registered agent, they must file all returns and reports required by law, including ESA and BOSS.
In this case, ESA specifically requires those companies and LP that carry out any of the 9 relevant business activities to file and report their economic substance. These relevant business activities are:
- Fund Management
- Headquarters Business
- Maritime Shipping
- Holding Business
- Intellectual Property Business
- Distribution and Service Center Business
As part of the filing and reporting that must be made, tax resident companies in BVI that conduct one or more of the foregoing relevant activities must satisfy the following economic substance:
- That the relevant activity is managed and directed from BVI;
- That it has an adequate number of employees physically present in BVI;
- That adequate expenditures are made in BVI;
- That there are physical office or premises in BVI;
- When the relevant activity is the intellectual property business that requires special equipment, that the equipment is located in BVI; and
- That the legal entity directly conducts core income-generating activities, and in case a third-party carries out these activities in its name, that no core income-generating activities are carried out outside BVI, and the legal entity monitors and controls such activities.
If you own or manage a company or LP organized or registered in BVI, and do not know how to determine if your company or LP are resident in BVI for tax purposes, or if its business activities or operations are a relevant activity as provided by ESA, or are not sure if such activities could be exempt or excluded from ESA or BOSS, call us at (800) 694-6604 to schedule an appointment with us to help you make those determinations and comply with the provisions of ESA and BOSS.