Substance Filing Deadline Approaches for BVI Companies and Partnerships

• New OECD rules mean BVI companies must submit economic substance reports
  
  
• The reports include details like turnover, employee locations and premises
  
  
• Any breaches in the law can carry hefty fines

The report covers the 12 month period ending 29 June 2020. The deadline is relevant not only to directors of such companies – many of which are administered from financial centres outside of the BVI, such as Jersey and Guernsey – but also to those who manage BVI limited partnerships with legal personality which must also submit a report. Failure to make the filing or comply with the requirements may result in penalties.

It is particularly relevant to note that the filing must be made in respect of each such company and such partnership regardless of whether the company or partnership has conducted any activities that fall within the scope of the BVI economic substance regime. This short note summarises the background, the reporting requirements, and the necessary steps ahead of the filing deadline applicable to those companies and partnerships that were incorporated prior to 1 January 2019.

Background

Economic substance legislation was recently introduced in many offshore jurisdictions (including the BVI) to meet OECD standards on global tax. The text of legislation is subtly different from jurisdiction to jurisdiction, but the fundamentals are the same: the law creates requirements for legal entities conducting specific activities to have, and to demonstrate that they have, adequate economic presence and activity within their jurisdictions unless they successfully file a claim to be tax resident in another jurisdiction2.

There are a limited number of activities which are subject to substance requirements. These are: banking, licensed fund management, finance and leasing, insurance, headquarters, holding, shipping, intellectual property, and distribution and service centre business.

Where substance requirements apply, the relevant activity must be directed and managed in the BVI, and the entity must have adequate people, premises and expenditure in the BVI, and undertake in the BVI the activities which generate its core income. There are two exceptions to these general rules: the first is holding business, which is subject to substantially reduced requirements (which would typically be already satisfied by most entities); the second is IP business, the requirements for which are more prescriptive.

Economic Substance Reports

The legislation requires in scope companies and partnerships to file certain information annually in respect of their activities during their last 12 month financial period.

The information is filed electronically by the registered agent via the BVI’s secure electronic BOSS portal. The information is not public and can only be shared with relevant international law enforcement agencies and certain other government bodies in specifically prescribed circumstances. One of these circumstances is where the company or partnership claims tax residency in another jurisdiction. In this case, the filed information is shared automatically with that other jurisdiction.

For companies incorporated before 1 January 2019, 30 June 2020 marked the beginning of the 6 month period for such companies to file an economic substance report in respect of the activities in the last 12 months. That period closes at the end of December. The position is the same for in scope partnerships.

The report must include details of any relevant activities carried out and the turnover generated, together with the locations of employees engaged in the activities, and details of premises and relevant equipment connected with the activities. The exception to including this detailed information is where the entity is making a claim to be tax resident outside the BVI. In this case, supporting documents must be filed so that the claim may be assessed by the BVI competent authority, the International Tax Authority (the ITA).

For entities which conduct holding business (a very significant majority of those in scope), substantially reduced reporting requirements apply. If a company has been dissolved, there is no obligation for it to make the annual report.

Penalties

Penalties for breaches of the law can be severe. If the ITA determines that there has been a breach, it must levy (in the case of a first determination) an initial fine of up to US$20,000 (or up to US$50,000 for high risk IP legal entities) with a minimum fine of US$5,000. Continued failure to meet the requirements in the following year will lead to an additional penalty of up to $200,000 (or up to $400,000 for high risk IP legal entities). There are further criminal penalties for failing to provide information, and the knowing provision of false information. These are also applicable to individuals. A company may also be struck off from the Register in certain circumstances.

If a penalty is imposed, the ITA will issue a notice to the relevant company or partnership setting out what steps need to be taken to bring the entity into compliance with the economic substance requirements.

Next Steps

To the extent an entity has not assessed its position under the economic substance law, or its substance obligations, it is imperative that it do so now. The ITA has stated that it is prepared to agree a compliance plan with entities who relocate their business to the BVI, and directors should consider this if their company is not yet compliant.

In any event, entities should be providing the requisite information to their registered agents to enable filing by the deadline of the end of this calendar year. Some registered agents have established earlier dates, and entities must ensure they understand any consequences of not sending the information to the registered agent by this earlier date.

As it is a developing area, directors should also keep the activities of the companies they direct, and the BVI economic substance legislation, under review, to ensure they are fulfilling their fiduciary obligations to the company, and that the company is in compliance with its obligations. In some circumstances, taking all relevant costs and benefits into account, the new requirements may ultimately mean that a jurisdiction is no longer suitable. Reorganisational steps may be required for a small proportion of entities as a result. The BVI has a flexible regime and there is a range of options available if this turns out to be the case, including liquidations, mergers, migrating to or from a different jurisdiction or becoming tax resident in another jurisdiction – however, if the intention is to complete such a reorganisation before the year end, legal advice should be obtained and preparations started now.

Walkers has highly experienced lawyers practising BVI law in different time zones across the globe to ensure real time client service. The Walkers team in Europe includes lawyers who are specialists in BVI corporate and regulatory law with significant experience of advising on economic substance issues. The team also includes Cayman, Jersey and Guernsey corporate and regulatory law specialists. Please contact us for help with any questions of economic substance classification and/or compliance, or any corporate mitigation or reorganisational steps.