We are pleased to update you the latest news on the BVI Economic Substance (Companies & Limited Partnership) Act, 2018 (hereafter refer to as the Act). The Act was carried out by BVI before the end of 2018 to stay in commitment with EU regarding the concerns about a 'lack of economic substance'.

On 23 April 2019, a draft Economic Substance Code (the draft Code) was issued by the British Virgin Islands International Tax Authority (ITA) as a supplementary to the Act but not deemed legally binding. It details the guidance on how to meet the economic substance requirements, the legislation interpretation and the scope that ITA will carry out its functions.

Some highlights in the draft Code:

Based on Rule 3 (which may be possibly changed) in the draft Code, all legal entities incorporated or registered under the BVI Business Companies Act and the BVI Limited Partnerships Act and satisfying all following conditions are subject to the Act:
-       performing a relevant activity,
-       receive income from that relevant activity,
-       be resident for tax purposes in the BVI.

Key points regarding relevant activities:

1. Investment funds: are not subject to economic substance requirements unless they carry on any relevant activities which are in scope of the Act. 
2. Holding company business and pure equity holding entity: ownership by an entity of any investment other than equity participations (ie. not a pure equity holding entity) will not be subject to economic substance unless the entity is conducting other types of relevant activity.  
3. Financing and leasing business: Only where the provision of credit can be seen to be a business activity in its own right will the entity be treated as conducting financing and leasing business (possibly include interest bearing inter-company loans between entities), and thus in scope of the legislation. 
4. Headquarters business:  whether an entity carries on headquarters business is not dependent on its position in the group structure. It is entirely dependent on the services it provides to other companies in the group, whether parents or subsidiaries.