Introduction
The Economic Substance (Companies and Limited Partnerships) Act, as amended (the "ESA"), requires BVI legal entities which engage in relevant activities to maintain economic substance in the BVI. Our 'Overview of the British Virgin Islands Economic Substance Requirements' can be found here: The British Virgin Islands International Tax Authority ("ITA") is the designated competent authority with power to make rules under the ESA on how these economic substance requirements may be met. The ITA issued such rules (the "ES Rules") on 9 October 2019, and these were updated on 10 February 2020. The ITA further updated the ES Rules on 24 February 2023, and this most recent update provides additional guidance on the application of the ESA, and addresses the amendments made to the ESA following the Economic Substance (Companies and Limited Partnerships) (Amendment) Act, 2021.
Changes to the ES Rules
The most recent update to the ES Rules makes the following amendments to the previous version:
- No income does not necessarily mean no relevant activity
– the ES Rules now clarify that, other than with regards to
holding business and intellectual property business, not receiving
income does not necessarily mean the entity is not conducting a
relevant activity (although see 'finance and leasing
business' below with regards to that relevant activity).
However, the ES Rules confirm that a legal entity which carries on
a relevant activity, but which has no gross income from such
activity in a specific financial period, will not be expected to
meet the economic substance requirements even though it will still
be required to satisfy its notification and reporting
requirements.
- Investment funds conducting relevant activity – the ES
Rules clarify that although an investment fund may qualify as a
"legal entity", the business of an investment fund is not
regarded as a relevant activity. Any activities that a legal entity
conducts in the course of being an investment fund will not be
treated as a relevant activity. For a legal entity that is an
investment fund to be found to be conducting a relevant activity,
it will need to be shown that the investment fund is conducting a
relevant activity as a separate and distinct business activity in
its own right.
- ES Rules apply to limited partnerships with no legal
personality – following amendments to the ESA to extend the
definition of legal entity to cover limited partnerships with no
legal personality, the ES Rules have been amended and modified to
provide guidance on how the ES Rules apply to such legal
entities.
- Tax residency overseas – the ES Rules provide further
practical guidance on the circumstances in which a legal entity may
be tax resident in a jurisdiction other than the BVI and what will
be accepted by the ITA as evidence of tax residency overseas.
- Finance and leasing business – the ES Rules clarify that
consideration must be received in order for a legal entity to be
conducting finance and leasing business.
- Operation of yachts is not shipping business – the ES
Rules confirm that the ownership, operation and chartering of
yachts will not be considered shipping business by the ITA.
- Winding up – the ES Rules clarify that if a legal entity
is in liquidation or is being wound up, it must continue to comply
with any applicable economic substance requirements for any
financial period during which it carries on relevant
activities.
- These changes mainly reflect the most recent amendments to the ESA, and are consistent with industry standards and how economic substance has been implemented in other jurisdictions. As a result, the updates may not affect the existing economic substance compliance procedures that have already been implemented by most legal entities. However, the ES Rules do provide helpful practical guidance and confirmation of the approach taken by the ITA when assessing a legal entity's compliance with the ESA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
