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BVI Economic Substance Law

The British Virgin Islands (BVI) has passed legislation requiring certain legal entities which carry on 'relevant activities' to demonstrate that they have adequate economic substance in the BVI.

Any company (or limited partnership with separate legal identity) that is registered or incorporated in the BVI should be aware of this legislation and consider whether it is affected.

The Economic Substance (Companies and Limited Partnerships) Act 2018 (the Act) came into force on 1 January 2019. The Act demonstrates the BVI's continued commitment to international best practice including the BVI's implementation of the OECD's Base Erosion and Profit Shifting (BEPS) framework and related EU initiatives. In order to implement an economic substance reporting regime related amendments were made to the Beneficial Ownership Secure Search System Act 2017 (BOSS Act).

These amendments follow closely the approach taken to address the same issue in other international financial centres.


Which entities need to demonstrate economic substance in the BVI?

The Act imposes economic substance requirements on BVI companies and limited partnerships other than non-resident entities1 which carry on a 'relevant activity' (as well as any foreign company or limited partnership which is registered in the BVI as a foreign entity2). Entities which do not carry on a relevant activity are not subject to the economic substance requirements but may still be subject to certain reporting obligations (see 'What are the reporting obligations?' below).

The relevant activities are:

  • Banking business
  • Insurance business
  • Shipping business
  • Fund management business
  • Finance and leasing business
  • Headquarters business
  • Pure holding business (pure equity holding)
  • Intellectual property business
  • Distribution and service centre business


What will relevant entities that carry on relevant activities need to do?

An analysis will need to be carried out to assess whether a relevant entity is conducting any relevant activity and any affected entities will need to consider their position and take appropriate action.

Entities which are subject to the economic substance requirements (other than pure equity holding entities as described below) must manage and direct the relevant activity in the BVI and conduct core income-generating activity. They must also taking into account the nature and scale of the relevant activity show that they have an adequate level of employees and expenditure in the BVI and appropriate physical offices or premises for the core income generating activity. It should be noted that outsourcing of the income generating activity is permitted in certain circumstances.

Intellectual property businesses have a higher level of substance that needs to be achieved in order to satisfy the economic substance requirements.

A different test applies to 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. Under this test the relevant entity will be deemed to have adequate substance if it complies with its statutory obligations under the BVI companies / limited partnership laws and has adequate employees and premises for holding and where relevant managing those equity interests.


The Economic Substance Code

On 23 April 2019 the BVI ITA published a draft Economic Substance Code (the Code) this is expected to be finalised in August. The Code highlights the following key points:

an entity will be treated as carrying on a relevant activity in the BVI during any financial period in which it receives income from that activity.

The initial financial period for new entities is 12 months from the date of formation. For existing entities the initial financial period was due to be 12 months from 30 June 2019.

ownership by an entity of any investment including bonds and cash other than equity participations will mean that it is not a pure equity holding entity and providing no further relevant activities are undertaken will fall out of scope.

the business of being an investment fund (licensed by SIBA) is not a relevant activity and therefore outside of scope of the economic substance requirements . However if the fund carries on other activities that are 'relevant activities' then this will bring it back in scope.

an entity which provides credit as 'an incidental part of a different sort of business' will not be treated as carrying on financing and leasing business. For example a builder's merchant which supplies goods on account thereby offering short term credit will not be carrying on a finance 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.

entities which hold debt or debt instruments for the purposes of investment will not be regarded as being in the business of providing credit facilities (and therefore outside of financing and leasing business).


What are the reporting obligations?

The Act made changes to the BOSS Act as a result of which BVI and foreign registered companies and limited partnerships will generally be required to report certain information to Nerine Trust Company (BVI) Limited (Nerine) (their BVI Registered Agent) to be uploaded onto the BOSS system. Previously 'exempt persons' (including mutual funds) will remain exempt from the BOSS reporting requirements unless they carry on a relevant activity3.

This information will be provided to the BVI International Tax Authority (ITA) via the BOSS system on an annual basis.

Substantial fines and up to five years' imprisonment can be imposed for non-compliance and the relevant entity may be struck off the register.

If you have any questions please do not hesitate to contact your usual contact at Praxis or Nerine Trust (BVI) Limited which is part of the Praxis Group.



[1] Tax resident in a jurisdiction outside the BVI (which is not itself treated by the EU as non-cooperative for tax purposes). Proof of such alternative tax residence will be required.

[2] Other than certain limited partnerships registered without legal personality.

[3] It is possible that exempt persons not carrying on a relevant activity may be required to submit a 'nil return' confirming this to their registered agent at the end of each financial period. This is still being discussed and further clarity will be provided in due course.


This article was updated on 12 July 2019.

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