Questions about the expected practice of implementation of the BVI Economic Substance Code are answered by Aniko Sebok, Attorney-at-Law, UK Solicitor, GSL BVI Compliance Officer.
The BVI Economic Substance Act (ESA) shall be complied with for each financial period of a company.
The first financial period for which compliance must be demonstrated starts:
The financial year is a calendar year, but a company can opt for it to be shorter or longer in order to bring it in sync with accounting periods elsewhere.
The reporting of the compliance with the ESA should take place within 6 months of the end of the first financial period. For companies incorporated prior to 1 January 2019, the end of the first financial period is 30 June 2020. Then companies have 6 months to report their information through BOSS, so until 31 December 2020.
As these companies are most likely to have been incorporated prior to 1 January 2019, they have no relevant financial period to report about.
A company only needs to comply with the ESA if it carries on a relevant activity and does receive income from that activity. A company that has already ceased trading (although not struck off the register) would not receive income, so no need to comply. Whether such a company will need to report in BOSS “no relevant activity carried on” – is not clear yet, as the self-reporting regime has not been published.
A company only needs to comply with the ESA if it carries on a relevant activity and does receive income from that activity. A company in liquidation has already ceased trading and would not receive income, so no need to comply. Whether such a company will need to report in BOSS “no relevant activity carried on” – is not clear yet, as the self-reporting regime has not been published.
These companies remain capable of carrying on a relevant activity / receiving income from it, so must comply with the ESA. Companies which have or planning to set up residency outside the BVI may report to the International Tax Authority (ITA) this intention and will be treated as provisionally resident in the new jurisdiction until the final evidence is available (tax certificate, tax return). But since the first reporting deadline is 1.5 years from 30 June 2019 (i.e. until 31 December 2020), these redomiciliations are likely to be completed by then.
If a company does not conduct any activity at all, including relevant activities, and does not earn income, then the ESA provisions do not apply to it. But whether such a company will have to submit a negative report through the BOSS is still unknown.
The tax certificate must cover the entire financial period. So it should say the company has been resident of the country for the year ending 30 June 2020. Accordingly, such a certificate can only be obtained after this date. If the accounting period does not cover the BVI financial period, the company may choose a new financial period in the BVI so they overlap. Or the company asks for a tax certificate for each accounting period and be provisionally tax resident in that country until the tax certificate becomes available.
The guidance issued by the International Tax Authority (ITA) does not say that the company must be actually subject to taxes. It says that the company must be subject to taxes on its worldwide income to the extent the jurisdiction charges taxes. In other words, there is no minimum tax payment criteria, it may be zero.
On 7 May 2019, a seminar was held in London by the BVI authorities (namely BVI Finance) together with the English lawyers who drafted the Economic Substance Act (ESA). We attended this seminar and share with you the answers to the questions that we addressed to the legislators, the authors of the Economic Substance Act:
In the first couple of years, there will be a period of leniency in enforcement. The first reporting deadline is the end of December 2020. But the authorities understand that compliance in the first year (given that it starts on 30 June 2019) is impossible. The British Virgin Islands has yet to develop the necessary infrastructure to provide companies with economic substance. For a start, create Internet and mobile networks.
For operating companies having their board meetings in the BVI is a good start. Renting a desk from the registered agent, hire a person, someone who works for the registered agent, for a few hours is also the first step.
For pure equity holding companies (owning shares/stakes in other companies), having a registered agent already provides sufficient substance. It is worth noting that in general such companies are captured by the Act only if they hold no other assets. For example, even a few thousand dollars deposit on a deposit account or small interest received on a loan takes the company out of the scope of this legislation. But, again, even if the company is a purely holding company, having a registered agent in the BVI is expected to satisfy the ESA requirements.
If a company has any cost incurred in the BVI on substance and none or not much outside the BVI, it is unlikely that anyone will question if the BVI spending is enough or not. But if there are a lot outside, then it is more likely to be picked upon.
Rule 5 of the draft Economic Substance Code says that in order to demonstrate that an entity is resident for tax purposes in another jurisdiction, it should provide a tax certificate OR evidence of payment of taxes. It is either or, not both of them. A document from the tax authority of another state that shows that the company is resident there is sufficient proof of foreign tax residence, it is not required that the company actually pays taxes there. The tax residency certificate is needed for every year.
It is all going online, accommodating trade licensing is coming.
The reporting portal is being on trial; they plan it to go live on 30 July. The way it will work is that companies are expected to fill out an online electronic form, and that form will be sent to the registered agent and the registered agent submits the form to BOSS. There will be a fee for reporting. If there is no relevant activity or there is but no income is generated from it in a given year, there will be a tick the box option on the annual return and that is it.