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Economic Substance Requirements in the British Virgin Islands


In response to the OECD’s global Base Erosion and Profit Shifting (“BEPS”) initiative and EU Code of Conduct Group substance requirements modelled on BEPS Action 5, the British Virgin Islands (“BVI”) has enacted the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the “ES Law”). Similar legislation has been introduced in numerous jurisdictions, including the Channel Islands and the Cayman Islands. We note that a draft Economic Substance Code to accompany the ES Law was issued on 23 April 2019 by the British Virgin Islands International Tax Authority (“ITA”)  and it is expected that following a period of public consultation a final Economic Substance Code will be published shortly.

Under the ES Law, legal entities formed or registered in the BVI are required to have economic substance in the BVI. The requirement to show economic substance is primarily aimed at preventing base erosion and profit shifting.

Which entities will be affected?

The ES Law applies to certain BVI companies, BVI limited partnerships with legal personality, and foreign companies and foreign limited partnerships with legal personality registered in the BVI carrying on “relevant activities”. The ES Law does not apply to limited partnerships that do not have legal personality.

Entities that are tax resident in a jurisdiction outside of the BVI (other than in a jurisdiction included on the EU non-cooperative jurisdictions list) do not need to comply with the economic substance requirements but will need to provide satisfactory evidence of their tax residency.

What activities are covered?

Legal entities carrying on any “relevant activities” will be required to satisfy an economic substance test. Relevant activities include the following types of business: banking, fund management, insurance, intellectual property, shipping, finance and leasing (meaning the provision of credit facilities), headquarters, holding company and distribution and service centre.  The draft Economic Substance Code clarifies two important points. First, it states that the business of being an investment fund is not a relevant activity (it is expected that the EU Code of Conduct Group will provide further technical guidance on the economic substance requirements of collective investment funds later in 2019). Second, it notes that entities which hold debt instruments for the purposes of investment will not be regarded as being in the business of finance and leasing, nor will an entity providing credit as an incidental part of a different sort of business.


A relevant entity which is tax resident in the BVI and carries on a relevant activity for which it receives income  must satisfy the economic substance test (“ES Test”) as follows:

  • for relevant entities in existence prior to 1 January 2019 – from 30 June 2019;
  • for relevant entities established on or after 1 January 2019 – from the date on which the relevant entity commences the relevant activity.

Legal entities that fall within the scope of the BVI Law must notify their registered agent in the BVI of any relevant activities they carry on as well as certain other prescribed information. The draft Economic Substance Code states that this information must be provided within 6 months of the end of the relevant financial period (such financial period will normally be the one year period beginning on the date that the ES Test needs to be satisfied as set out above). The registered agent is also required to take reasonable steps to collect the prescribed information with respect to each such legal entity for which it acts as registered agent. This information is then made available to the ITA  by means of a database whose contents is made accessible to designated persons.

Economic substance test

Subject to below, in order to meet the ES Test a legal entity carrying on a relevant activity must:

  • conduct core income generating activities (“CIGA”) in the BVI;
  • be directed and managed in the BVI; and
  • taking into account the nature and scale of the relevant activity, have:
  • an adequate number of suitably qualified employees physically present in the BVI;
  • an adequate amount of expenditure incurred in the BVI; and
  • appropriate physical offices for CIGA.

The Economic Substance Code does not seek to provide specific definitions of “adequate”, “suitable” or “appropriate” for the ES Test, instead noting that such terms should be given their ordinary English meaning and that the size of the particular business should be taken into consideration.

It is possible to outsource some or all of the BVI CIGA provided the legal entity is able to demonstrate that it is able to monitor and control the outsourced activities and that those activities are undertaken in the BVI.

Note that if a company is 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, the ES Law provides that it satisfies the ES Test if it (i) complies with its statutory obligations under the BVI Business Companies Act; and (ii) has in the British Virgin Islands adequate employees and premises for holding equity participations and, where it manages those equity participations, has in the British Virgin Islands adequate employees and premises for carrying out that management. A pure equity holding entity for these purposes means a legal entity that only holds equity participations in other entities and only earns dividends and capital gains.

On the other hand, high risk intellectual property (“IP”) businesses face more stringent requirements.

Enforcement and penalties

The ES Law contains penalties for failure to satisfy the ES Test, including:

  • for the first determination of non-compliance, a minimum penalty of $5,000 and a maximum penalty of $20,000 ($50,000 for high risk IP entities) may be imposed by the ITA;
  • for the second determination of non-compliance, a minimum penalty of $10,000 and a maximum penalty of $200,000 ($400,000 for high risk IP entities) may be imposed by the ITA;

The ITA may also serve notice on the Financial Services Commission requiring that the legal entity be struck off the Register of Companies or Register of Limited Partnerships as applicable.

What to do now?

Where a legal entity is subject to the economic substance regime, it will need to demonstrate that it adheres to the BVI Law. Full details on the requirements for compliance will follow once further clarification has been provided by the final Economic Substance Code. In the interim, the first step is to consider whether a legal entity is carrying on a “relevant activity”.  If it is, the next step is to consider whether it has sufficient substance or is tax resident in another jurisdiction.  If not, appropriate action, which will depend on the particular facts and circumstances, needs to be taken.

Further information

Campbells can advise and assist on compliance with requirements of the economic substance regime.  For further information, please contact one of the authors listed below or your usual Campbells contact.

Robert C. Searle - Managing Partner, Campbells Hong Kong - Corporate Law

Robert C. Searle

+852 3708 3014