BVI Economic Substance (Companies and Limited Partnerships) Act, 2018

Entry into force and scope of application

Economic Substance Requirement

Determination by Competent Authority

Penalties

Striking off

 

Comments on the above Act:

First, following the coming into operation of the BVI Economic Substance (Companies and Limited Partnerships) Act (the ES Act), the use of the BVI company as a pure equity holding entity may not be possible if the holding company has no employees and a physical office premises for the holding or managing of shares or equitable interest in other entities.

Second, where a BVI company engaged in a relevant activity does not comply with the economic substance requirement, the ES Act provides for harsh penalties.

Third, taking the BVI intermediate holding company out of the ownership chain can be a solution to avoid the legal risks. 

 


 

 

 

 

Entry into force

The ES(CLP) Act came into force on 1st January 2019.

 

 

Scope of Application

The ES(CLP) Act applies to a legal entity (a company or a limited partnership) that conducts relevant activities in the BVI.

 

 

Economic Substance Requirement

 

As per section 8(1) of the EC(CLP) Act, subject to section 8(2), a legal entity complies with economic substance requirement if 

(a) the relevant activity is directed and managed in the Virgin Islands;

(b) having regard to the nature and scale of the relevant activity

(i) there are an adequate number of suitably qualified employees in relation to that activity who are physically present in the BVI;

(ii) there is adequate expenditure incurred in the BVI;

(ii) there are physical offices or premises as may be appropriate for the core income-generating activities; and

(iv) where the relevant activity is intellectual property business and requires the use of specific equipment, that equipment is located in the BVI;

(c) the legal activity conducts the income-generating activity; and

(d) in the case of income-generating activity carried out for the relevant legal entity by another entity

(i) no core income generating activity is carried on outside the BVI;

(ii) only that part of the activities of that other entity which are solely attributable to generating income for the relevant legal entity and not for any other legal entity shall be taken into account when considering if the relevant legal entity meets the economic substance requirements;

(iii) the relevant legal entity is able to monitor and control the carrying out of that activity by the other entity.

As per section 8(2), a pure equity holding entity, which carries on no relevant activity other than holding equity participations in other entities and earning dividends and capital gains, has adequate substance if it

(a) complies with its statutory obligations under the BVI Business Companies Act, 2004 or the Limited Partnership Act 2017 (whichever is relevant);

(b) has adequate employees and premises for holding equitable interests or shares and, where it manages those equitable interests or shares, has adequate employees and premises for carrying out that management. 

 

 

 

Determination by Competent Authority

 

The competent authority may determine that a legal entity has not complied with the economic substance requirements during any financial period of the legal entity ending on or after 31st December 2019.

 

 

Penalty

 

Penalty for a legal entity not providing information for the competent authority

 

Section 11 provides for the penalty for a legal entity not providing information for the competent authority

 

A legal entity shall provide any information reasonably required by the competent authority in order to assist the competent authority in making a determination under section 10.

 

A person who fails to provide information without reasonable excuse, or who intentionally provides false information in response to a request under this section commits an offence and is liable

(a) on summary conviction, to a fine not exceeding forty thousand dollars (USD40,000) or to imprisonment for a term not exceeding two years or both; or

(b) on conviction on indictment, to a fine not exceeding seventy five thousand dollars (USD75,000) or to imprisonment for a term not exceeding five years; or both.

 

Section 12 provides for the penalty on the determination of non-compliance.

 

12(1) provides that on a first determination of non-compliance under section 10, the competent authority shall issue a notice to the legal entity notifying it

(a) that the competent authority has determined that the legal entity has not complied with the economic substance requirements for that financial period;

(b) of the reasons for that determination;

(c) of the amount of penalty imposed on the legal entity under subsection (2);

(d) of the date from which the penalty under subsection (2) is due, being not less than 28 days after the issue of the notice;

(e) of what action the competent authority considers should be taken by the legal entity to meet the economic substance requirements and the date by which such action needs to have been taken; and

(f) of the legal entity's right of appeal under section 13.

 

12(2) provides that the amount of penalty referred to in subsection (1)(c) is such amount as is determined by the competent authority subject to a minimum penalty of five thousand dollars (USD5,000) and to a maximum penalty of

(a) in the case of a high risk IP legal entity, fifty thousand dollars (USD50,000); and

(b) in the case of all other legal entities, twenty thousand dollars (USD20,000).

 

12(3) If a legal entity fails to comply with any requirements imposed upon it under paragraph (e) of subsection (1) within the time there stated, or within such longer period as the competent authority may allow, the competent authority shall issue a second determination.

 

12(4) On a second determination of non-compliance under section 10, the competent authority shall issue a further notice to the legal entity notifying it

(a) that the competent authority has determined that the legal entity has not complied with the economic substance requirements;

(b) of the reasons for that determination;

(c) of the amount of the additional penalty imposed on the legal entity under subsection (5);

(d) of the date from which the penalty under subsection (5) is due, being not less than 28 days after the issue of the notice;

(e) that the competent authority may make a report to the Commission under subsection (6);

(f) of what action the competent authority considers should be taken by the legal entity to meet the economic substance requirements and the date by which such action needs to have been taken; and

(g) of the legal entity's right of appeal under section 13.

 

12(5) The amount of the additional penalty referred to in subsection (4)(c) is such amount as is determined by the competent authority subject to a minimum penalty of ten thousand dollars (USD10,000) and to a maximum penalty of

(a) in the case of a high risk IP legal entity, four hundred thousand dollars (USD400,000); and

(b) in the case of all other legal entities, two hundred thousand dollars (USD200,000).

 

 

 

Striking-Off

 

After issuing the notice of a second determination of non-compliance, the BVI authority has the power to strike the legal entity off the Register of Companies or the Register of Limited Partnerships.

 


 

Glossary

 

Financial Period

In this Act, unless the context otherwise requires, “financial period” means

(a) in the case of a company incorporated on or after 1 January 2019, such period of not more than one year from the date of incorporation as the company shall notify to the competent authority and thereafter each successive period of one year running from the end of that period;

(b) in the case of a limited partnership formed on or after 1 January 2019, such period of not more than one year from the date of formation as the limited partnership shall notify to the competent authority and thereafter each successive period of one year running from the end of that period;

(c) in any other case such period of one year commencing on a date no later than 30 June 2019 as the legal entity shall notify to the competent authority and thereafter each successive period of one year running from the end of that period. 

 

Pure Equity Holding Entity

"Pure equity holding entity" means a legal entity that only holds equity participations in other entities and only earns dividends and capital gains.

 

 

Relevant Activities

As per section 6 of the ES(CLP) Act, the relevant activities including the following:

(a) banking business;

(b) insurance business;

(c) fund management business;

(d) finance and leasing business;

(e) headquarters business;

(f) shipping business;

(g) holding business;

(h) intellectual property business;

(i) distribution and service center business.

 

See the full legal texts of the Economic Substance Act. [read]