British Virgin Islands Economic Substance Notification and Reporting

• Form Zero
• Form One
• Form Two (R)
• Form Two (N)
• Form Three (R)
• Form Three (N)
• Form Four (R)
• Form Four (N)

Relevant Activity – Banking business¹

Banking Business – has the meaning specified in section 2¹ of the Banks and Trust Companies Act (2020 Revision)², that is, the business of accepting deposits of money which may be withdrawn or repaid on demand or after a fixed period or after notice, by cheque or otherwise and the employment of such deposits, either in whole or in part,

(a) in making or giving loans, advances, overdrafts, guarantees or similar facilities, or
(b) the making of investments,

for the account and at the risk of the person accepting such deposits.

This means that any entity which is either incorporated in the BVI or a foreign entity doing business in the BVI, which is carrying on banking business (as defined above) must have a licence from the FSC, in order to carry on the business lawfully.

Core Income Generating Activity (CIGA) – Banking Business³

• Raising funds, managing risk including credit, currency and interest risk.
• Taking hedging positions.
• Providing loans, credit or other financial services to customers.
• Managing regulatory capital.
• Preparing regulatory reports and returns.

The definition of core income generating activity is non-exclusive. Core income generating activity “includes” the activities listed but is not confined to them. What constitutes the CIGA of a particular activity is a fact sensitive issue which can vary from business to business. In some cases it may be possible to carry on a relevant activity without also conducting all the related core income generating activities listed in the statute.

¹s.2 Economic Substance (Companies and Limited Partnerships) Act (as revised)
²s.2(1)(b) Banks and Trust Companies Act (2020 Revision)
³s.7(a) Economic Substance (Companies and Limited Partnerships) Act (as revised)

Relevant Activity – Insurance business¹

Insurance business² – means the business of undertaking liability under a contract of insurance to indemnify or compensate a person in respect of loss or damage, including the liability to pay damages or compensation contingent upon the happening of a specified event, and includes life insurance business and reinsurance business. A BVI business company is deemed to be carrying on business in the BVI even if its insurance business is in fact located outside the BVI.

Core Income Generating Activity – Insurance business³

• Predicting and calculating risk.
• Insuring or re-insuring against risk.
• Providing insurance business services to clients.

The definition of core income generating activity is non-exclusive. Core income generating activity “includes” the activities listed but is not confined to them. What constitutes the CIGA of a particular activity is a fact sensitive issue which can vary from business to business. In some cases it may be possible to carry on a relevant activity without also conducting all the related core income generating activities listed in the statute.

¹s.2 Economic Substance (Companies and Limited Partnerships) Act (as revised)
²s.3(1) Insurance Act (2020 Revision)
³s.7(c) Economic Substance (Companies and Limited Partnerships) Act (as revised)

Relevant Activity – Fund management business¹

Fund management business – means the conduct of an activity that requires the legal entity to hold an investment business license pursuant to section 4 and category 3 of Schedule 3 of the Securities and Investment Business Act (2020 Revision), which requires a license for:

Sub-category A: Managing Segregated Portfolios (excluding Mutual Funds);

Sub-category B: Managing Mutual Funds;

Sub-category C: Managing Pension Schemes;

Sub category D: Managing Insurance Products; or

Sub-category E: Managing Other Types of Investment,

But, notably, being a custodian of investments is not included.

Core Income Generating Activity (CIGA) – Fund management business²

• Taking decisions on the holding and selling of investments.
• Calculating risks and reserves.
• Taking decisions on currency or interest fluctuations and hedging positions.
• Preparing relevant regulatory or other reports for government authorities and investors.

The definition of core income generating activity is non-exclusive. Core income generating activity “includes” the activities listed but is not confined to them. What constitutes the CIGA of a particular activity is a fact sensitive issue which can vary from business to business. In some cases it may be possible to carry on a relevant activity without also conducting all the related core income generating activities listed in the statute.

¹s.2 Economic Substance (Companies and Limited Partnerships) Act (as revised)
²s.7(d) Economic Substance (Companies and Limited Partnerships) Act (as revised)

Relevant Activity – Finance and leasing business¹

Finance and Leasing Business – means the business of providing credit facilities of any kind for consideration.

Where

(i) consideration may include consideration by way of interest;
(ii) the provision of credit may be by way of instalments for which a separate charge is made and disclosed to the customer in connection with

A. the supply of goods by hire purchase,
B. leasing other than any lease granting an exclusive right to occupy land, or
C. conditional sale or credit sale.

(iii) Where an advance or credit repayable by a customer to a person is assigned to another person, that other person is deemed to be providing the credit facility for the purposes of the Act.
(iv) Any activity falling within the definition of “banking business”, “fund management business” or “insurance business” is excluded from the definition of Financing and Leasing Business.
(v) An entity which provides credit as an incidental part of a different sort of business will not thereby be treated as carrying on a finance and leasing business. In this context, “incidental” means occasional or minor activity. Thus, for example, a 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 legal entity be treated as if its business, or part of its business, is a finance and leasing business. Legal entities which carry on a factoring activity, by which they purchase and then collect another business’s book debts, will be treated as carrying on a finance and leasing business by virtue of (c) above. The ITA will regard “goods” for the purposes of the ESA as including all kinds of property, excluding immovable property, securities, money or choses in action².
(vi) Legal entities which hold debt or debt instruments for the purpose of investment will not be regarded as being in the business of providing credit facilities.
(vii) Although the activity is described as finance and leasing, the essence of the activity, as the definition makes clear, is the provision of credit facilities for consideration. The scope does not extend to cases where credit is offered and there is no expectation of receiving consideration from the credit when providing it (e.g., the grant of security). So, the mere fact that a legal entity leases items does not mean it is carrying on a finance and leasing business. So, short-term hiring out of vehicles, boats or equipment is not caught provided that there is no separate credit charge made and disclosed to the customer. Consideration clearly includes interest but also includes any other form of consideration which may generate income for the legal entity (e.g., arrangement or commitment fees or other separate charges for the credit being provided). Where the provision of credit is separated from the consideration received, this may also be in scope (i.e., where a loan advanced for consideration by one company, which is within the scope of this relevant activity, is transferred to a different company which then receives the loan capital payments and consideration)³.

Core income Generating Activity (CIGA) – Finance and leasing business⁴

• Agreeing funding terms.
• Identifying and acquiring assets to be leased (in the case of leasing).
• Setting the terms and duration of any financing or leasing.
• Monitoring and revising any agreements.
• Managing any risks.

The definition of core income generating activity is non-exclusive. Core income generating activity “includes” the activities listed but is not confined to them. What constitutes the CIGA of a particular activity is a fact sensitive issue which can vary from business to business. In some cases it may be possible to carry on a relevant activity without also conducting all the related core income generating activities listed in the statute.

¹s.3(1) Economic Substance (Companies and Limited Partnerships) Act (as revised)
²Rule 5.12 Rules on Economic Substance in the BVI (v3): 23 February 2023
³Rule 5.14 Rules on Economic Substance in the BVI (v3): 23 February 2023
⁴S.7(e) Economic Substance (Companies and Limited Partnerships) Act (as revised)

Relevant Activity – Shipping business¹

Shipping business – means any of the following activities involving the operation of a ship anywhere in the world other than solely within Virgin Islands waters.

(a) The business of transporting, by sea, persons, animals, goods or mail.
(b) The renting or chartering of ships for the purpose described in paragraph (a).
(c) The sale of travel tickets or equivalent, and ancillary services connected with the operation of a ship.
(d) The use, maintenance or rental of containers, including trailers and other vehicles or equipment for the transport of containers, used for the transport of anything by sea.
(e) The management of the crew of a ship.

Ship means every description of vessel used in navigation excluding a fishing vessel, a pleasure vessel or a small ship.

Note also that²:

• The above activities may not constitute a shipping business if they are merely incidental activities to what is properly regarded as a different sort of business.
• A entity which carries on the business of a general travel agent will not be treated as carrying on a shipping business merely because, amongst other things, it sells tickets for passenger cruises.
• A entity which manufactures goods for export will not be treated as carrying on a shipping business merely because it arranges for those goods to be dispatched by sea, in containers or otherwise.

Core Income Generating Activity (CIGA) – Shipping Business³

• Managing the crew (including hiring, paying and overseeing crewmembers).
• Hauling and maintaining ships.
• Overseeing and tracking deliveries.
• Determining what goods to order and when to deliver them.
• Organising and overseeing voyages.

The definition of core income generating activity is non-exclusive. Core income generating activity “includes” the activities listed but is not confined to them. What constitutes the CIGA of a particular activity is a fact sensitive issue which can vary from business to business. In some cases it may be possible to carry on a relevant activity without also conducting all the related core income generating activities listed in the statute.

¹s.2 Economic Substance (Companies and Limited Partnerships) Act (as revised)
²5.23 Rules on Economic Substance in the BVI (v3): 23 February 2023
³s.7(g) Economic Substance (Companies and Limited Partnerships) Act (as revised)

Relevant Activity – Distribution and service centre business

Distribution and Service Centre Business¹ – means the business of either or both of the following:

(a) Purchasing from foreign affiliates.

(i) Component parts or materials for goods; or
(ii) Goods ready for sale, and reselling such component parts, materials or goods;

(b) Providing consulting or administrative services to foreign affiliates,
but does not include any activity included in any other relevant activity except holding business.

Core Income Generating Activities (CIGA) – Distribution and service centre business²

• Transporting and storing goods.
• Managing stocks.
• Taking orders.
• Providing consulting or other administrative services.

The definition of core income generating activity is non-exclusive. Core income generating activity “includes” the activities listed but is not confined to them. What constitutes the CIGA of a particular activity is a fact sensitive issue which can vary from business to business. In some cases it may be possible to carry on a relevant activity without also conducting all the related core income generating activities listed in the statute.

¹s.2 Economic Substance (Companies and Limited Partnerships) Act (as revised)
²s.7(b) Economic Substance (Companies and Limited Partnerships) Act (as revised)

Relevant Activity – Headquarters Business¹

Headquarters Business – means the business of providing any of the following services to an entity in the same Group:

(a) The provision of senior management;
(b) The assumption or control of material risk for activities carried out by any of those entities in the same Group; or
(c) The provision of substantive advice in connection with the assumption or control of risk referred to in paragraph (b),

but does not include banking business, financing and leasing business, fund management business, intellectual property business, holding business or insurance business.

Core Income Generating Activity (CIGA) – Headquarters Business²

• Taking relevant management decisions.
• Incurring expenditures on behalf of affiliates.
• Co-ordinating group activities.

The definition of core income generating activity is non-exclusive. Core income generating activity “includes” the activities listed but is not confined to them. What constitutes the CIGA of a particular activity is a fact sensitive issue which can vary from business to business. In some cases it may be possible to carry on a relevant activity without also conducting all the related core income generating activities listed in the statute.

¹s.2 Economic Substance (Companies and Limited Partnerships) Act (as revised)
²s.7(f) Economic Substance (Companies and Limited Partnerships) Act(as revised)

Relevant Activity – Holding business¹

Holding Business – means the business of being a pure equity holding entity

Pure equity holding entity – means a legal entity that only holds equity participations in other entities and only earns dividends and capital gains.

Equity participation includes shares in a company and encompasses other forms of investment in an entity which give the investor the right to participate in the profits of the entity. The interest of a general partner in a limited partnership will usually be of this quality.

The definition of pure equity holding entity is deliberately framed in narrow terms. A legal entity will only fall within the definition if it holds nothing but equity participations, yielding dividends or capital gains. The ownership of any other forms of asset (such as bonds, government securities, legal or beneficial interests in real property) will take the legal entity outside the definition².

Legal entities which hold assets which consist of or include assets which are not equity participations will not be pure equity holding entities, but likewise may be found to carry on other relevant activities³.

¹s.2 Economic Substance (Companies and Limited Partnerships) Act (as revised)
²Rule 5.25 – 5.28 Rules on Economic Substance in the BVI (v3): 23 February 2023
³Rule 5.29 Rules on Economic Substance in the BVI (v3): 23 February 2023

Relevant Activity – Intellectual property business¹

Intellectual Property Business – means the business of holding intellectual property assets.

Intellectual property asset² – means any intellectual property right in intangible assets, including but not limited to copyright, patents, trademarks, brand, and technical know-how, from which identifiable income accrues to the business (such income being separately identifiable from any income generated from any tangible asset in which the right subsists).

Income³ in respect of an intellectual property asset includes (a) royalties; (b) capital gains and other income from the sale of an intellectual property asset; (c) income from a franchise agreement; and (d) income from licensing the intangible asset.

High risk IP legal entity⁴ is a legal entity which carries on an intellectual property business and which

(a) Acquired the intellectual property asset

(i) from an affiliate; or
(ii) in consideration for funding research and development by another person situated in a country or territory other than the Virgin Islands; and

(b) licences the intellectual property asset to one or more affiliates or otherwise generates income from the asset in consequence of activities (such as facilitating sale agreements) performed by foreign affiliates.

Presumptions of non-compliance for intellectual property business⁵ – There is a presumption that a legal entity does not conduct core income-generating activity if:

(a) the activities being carried on from within the BVI do not include:

(i) research and development (where the intellectual property business involves intellectual property assets such as patents); and
(ii) marketing, branding and distribution (where the intellectual property business involves non-trade intangible assets such as brand, trademark and customer data) (together ‘’Presumption A’’); or

(b) the legal entity is a high risk IP legal entity (‘’Presumption B’’).

High evidential threshold for rebutting presumption – Presumption A may be rebutted where the activities being carried on from within the Virgin Islands include (a) taking the strategic decisions and managing (as well as bearing) the principal risks relating to the development and subsequent exploitation of the intangible asset generating income; (b) taking the strategic decisions and managing (as well as bearing) the principal risks relating to the acquisition by third parties and subsequent exploitation of the intangible asset; and (c) carrying on the underlying trading activities through which the intangible assets are exploited and which lead to the generation of revenue from third parties.

Presumption B may be rebutted where a high degree of control over the development, exploitation, maintenance, enhancement and protection of the intellectual property asset is exercised by suitably qualified employees of the legal entity who are physically present and perform their functions from within the Virgin Islands and who are on long-term contracts⁶. The requirements imposed in this paragraph on a high risk IP legal entity in order for it to rebut Presumption B must be satisfied not only at the point in time at which the legal entity seeks to rebut the presumption but also during any historic periods when the legal entity was carrying on the intellectual property business in question.

In determining whether the presumption has been rebutted, the ITA will take into account the same factors which it takes into account when determining whether Presumption A has been rebutted. In addition, the ITA will need stronger evidence of the decision-making which is taking place in the BVI, and that there is (and historically has been) a high degree of control over the development, exploitation, maintenance, enhancement and protection of the intangible asset⁷.

Core Income Generating Activity (CIGA) – Intellectual Property Business⁸

• Where the business concerns intellectual property assets such as patents: research and development.
• Where the business concerns non-trade intangible assets such as brand, trademark and customer data: marketing, branding and distribution.

The definition of core income generating activity is non-exclusive. Core income generating activity “includes” the activities listed but is not confined to them. What constitutes the CIGA of a particular activity is a fact sensitive issue which can vary from business to business. In some cases it may be possible to carry on a relevant activity without also conducting all the related core income generating activities listed in the statute.

If you are engaged in Intellectual Property Business, contact your Campbells attorney.

¹s.2 Economic Substance (Companies and Limited Partnerships) Act (as revised)
²s.2 Economic Substance (Companies and Limited Partnerships) Act (as revised)
³s.2 Economic Substance (Companies and Limited Partnerships) Act (as revised)
⁴s.2 Economic Substance (Companies and Limited Partnerships) Act (as revised)
⁵s.9(2) Economic Substance (Companies and Limited Partnerships) Act (as revised)
⁶s.9(4) Economic Substance (Companies and Limited Partnerships) Act (as revised)
⁷9.10 Rules on Economic Substance in the BVI (v3): 23 February 2023
⁸s.7(h) Economic Substance (Companies and Limited Partnerships) Act (as revised)

Financial period

In this Act, unless the context otherwise requires, “financial period” means:
(a) in the case of a company incorporated on or after 1 January 2019, such period of not more than one year from the date of incorporation as the company shall notify to the competent authority and thereafter each successive period of one year running from the end of that period;
(b) in the case of a limited partnership with legal personality formed on or after 1 January 2019, such period of not more than one year from the date of formation as the limited partnership shall notify to the competent authority and thereafter each successive period of one year running from the end of that period;
(c) subject to paragraphs (d) and (e) in any other case such period of one year commencing on a date no later than 30 June 2019 as the legal entity shall notify to the competent authority and thereafter each successive period of one year running from the end of that period;
(d) in the case of a limited partnership without legal personality formed prior to 1 July 2021, such period of one year commencing on a date no later than 1 January, 2022 as the limited partnership without legal personality shall notify to the competent authority and thereafter each successive period of one year running from the end of that period;
(e) in the case of a limited partnership without legal personality formed on or after 1 July, 2021, such period of not more than one year from the date of formation as the limited partnership without legal personality shall notify to the competent authority and thereafter each successive period of one year running from the end of that period.

(2) On an application by the legal entity the competent authority may permit an alteration in the legal entity’s financial period by shortening or (where the legal entity’s existing financial period is less than 12 months) lengthening a financial period so as to alter the commencement date for successive financial periods but so that no such altered period shall exceed twelve months in length.

“competent authority” means the International Tax Authority established under the International Tax Authority Act

Financial year (fiscal year)²

A fiscal year is a one-year period that companies and governments use for financial reporting and budgeting. A fiscal year is most commonly used for accounting purposes to prepare financial statements. Although a fiscal year can start on January 1st and end on December 31st, not all fiscal years correspond with the calendar year. For example, universities often begin and end their fiscal years according to the school year.

¹s.4 Economic Substance (Companies and Limited Partnerships) Act (2020 Revision), as amended
² https://www.investopedia.com/terms/f/fiscalyear.asp

BVI Legal Entity

“legal entity” means a company and a limited partnership

“company” includes

(a) a company within the meaning of section 3¹ of the BVI Business Companies Act;
(b) a foreign company within the meaning of section 3² of the BVI Companies Act which is registered under Part XI of that Act

but does not include a non-resident company;

“limited partnership” includes

(a) an existing limited partnership within the meaning of section 2 of the Limited Partnership Act;
(b) a limited partnership within the meaning of section 2 of the Limited Partnership Act; and
(c) a foreign limited partnership within the meaning of section 2 of the Limited Partnership Act which is registered under Part VI of that Act,

but does not include a non-resident limited partnership.

each of the above terms as defined in the Economic Substance (Companies and Limited Partnerships) Act (as revised).

Tax resident outside BVI

A legal entity is tax resident outside the British Virgin Islands if it is a

“non-resident company” means a company which is resident for tax purposes in a jurisdiction outside of the Virgin Islands which is not on Annex 1 of the EU list of non-cooperative jurisdictions for tax purposes;

Or

“non-resident limited partnership” means a limited partnership which is resident for tax purposes in a jurisdiction outside of the Virgin Islands which is not on Annex 1 of the EU list of non-cooperative jurisdictions for tax purposes¹

as defined in the Economic Substance (Companies and Limited Partnerships) Act (2020 Revision), as amended
¹ https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/

Relevant Activity

“relevant activity” means –

(a) banking business;
(g) insurance business;
(d) fund management business;
(c) finance and leasing business;
(e) headquarters business;
(i) shipping business;
(f) holding business;
(h) intellectual property business;
(b) distribution and service centre business,

but does not include investment fund business.

As defined in Section 6 of the Economic Substance (Companies and Limited Partnerships) Act (as revised).

Core Income Generating Activity (CIGA)¹

7. The expression “core income-generating activities” means activities that are of central importance to a relevant entity in terms of generating relevant income and must be carried on in the Virgin Islands and includes, in relation to relevant activities

(a) in respect of banking business

(i) raising funds, managing risk including credit, currency and interest risk;
(ii) taking hedging positions;
(iii) providing loans, credit or other financial services to customers;
(iv) managing regulatory capital;
(v) preparing regulatory reports and returns;

(b) in respect of distribution and service centre business:

(i) transporting and storing goods;
(ii) managing stocks;
(iii) taking orders;
(iv) providing consulting or other administrative services;

(c) in respect of insurance business

(i) predicting and calculating risk;
(ii) insuring or re-insuring against risk;
(iii) providing insurance business services to clients;

(d) in respect of fund management business

(i) taking decisions on the holding and selling of investments;
(ii) calculating risks and reserves;
(iii) taking decisions on currency or interest fluctuations and hedging positions;
(iv) preparing relevant regulatory or other reports for government authorities and investors;

(e) in respect of finance or leasing business:

(i) agreeing funding terms;
(ii) identifying and acquiring assets to be leased (in the case of leasing);
(iii) setting the terms and duration of any financing or leasing;
(iv) monitoring and revising any agreements;
(v) managing any risks;

(f) in respect of headquarters business

(i) taking relevant management decisions;
(ii) incurring expenditures on behalf of affiliates;
(iii) co-ordinating group activities;

(g) in respect of shipping business

(i) managing the crew (including hiring, paying and overseeing crew members);
(ii) hauling and maintaining ships;
(iii) overseeing and tracking deliveries;
(iv) determining what goods to order and when to deliver them;
(v) organising and overseeing voyages;

(h) in respect of intellectual property business

(i) where the business concerns intellectual property assets such as patents: research and development;
(ii) where the business concerns non-trade intangible assets such as brand, trademark and customer data: marketing, branding and distribution.

¹ s.7 Economic Substance (Companies and Limited Partnerships) Act (2020 Revision), as amended

In reviewing these FAQs please also see our client briefings here and here on Economic Substance Requirements in the British Virgin Islands.

1. What is the Economic Substance Law?

The legislation consists of the Economic Substance (Companies and Limited Partnerships) Act (2020 Revision), as amended (the “ES Act“).

The ES Act is supplemented by related Rules on Economic Substance in the Virgin Islands (the “Rules“)¹, issued by the BVI International Tax Authority on 23 February 2023.

Reporting made in connection with economic substance is governed by the Beneficial Ownership Secure Search System Act (2020 Revision), as amended (the “BOSS Act”).

2. Why was it enacted?

The ES Act is part of the Organization for Economic Cooperation and Development (the “OECD”) global Base Erosion and Profit Shifting initiative regarding geographically mobile activities. Requirements of this type are rapidly being implemented on a level playing field basis by all OECD-compliant ‘no or only nominal tax’ jurisdictions including Bermuda, the Channel Islands and Cayman Islands.

Global standards in this field continue to develop. Accordingly, it is to be expected that the ES Act itself and the body of related Rules will continue to evolve.

3. Who is impacted by the ES Act in the BVI?

All BVI “legal entities” (as defined at FAQ 4. below) must identify whether they are either:

1. conducting a relevant activity (as defined at FAQ 5. below) (or relevant activities) – in which case they are “in scope”; or
2. not conducting a relevant activity (or relevant activities) – in which case they are “out of scope”,

and notify their registered agent in the BVI accordingly.

Under the BOSS Act a legal entity which is in scope for must provide certain prescribed information to its registered agent. The registered agent must then enter this information on the RA database (a secure database accessible by the International Tax Authority) within six (6) months after the end of the legal entity’s relevant financial period.

“In scope” legal entities need to:

4. What is a legal entity?

The key concept for determining which entities fall within the economic substance legislation is therefore the concept of “legal entity”.

Under the ES Law a legal entity means a company and a limited partnership (each as defined below):

“company” is defined as:

but does not include a non-resident company;

“limited partnership” is defined as:

but does not include a non-resident limited partnership.

“non-resident company” means a company which is resident for tax purposes in a jurisdiction outside the Virgin Islands which is not on Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes;

“non-resident limited partnership” means a limited partnership which is resident for tax purposes in a jurisdiction outside the Virgin Islands which is not on Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes.

Non-resident companies and limited partnerships will be required to file satisfactory evidence of their tax residence.

Accordingly, BVI companies, non-BVI companies registered under the BVI Business Companies Act, as well as limited partnerships, are all “legal entities” for the purposes of Economic Substance unless they are tax resident outside of the BVI.

5. What is a relevant activity?

The ES Act applies economic substance requirements to various categories of geographically mobile relevant activities identified by the OECD (and adopted by the EU). The relevant activities are:

The meaning of each of these terms is as follows.

Banking business – the business of accepting deposits of money which may be withdrawn or repaid on demand or after a fixed period or after notice, by cheque or otherwise and the employment of such deposits, either in whole or in part,

for the account and at the risk of the person accepting such deposits.

Insurance business – the business of undertaking liability under a contract of insurance to indemnify or compensate a person in respect of loss or damage, including the liability to pay damages or compensation contingent upon the happening of a specified event, and includes life insurance business and reinsurance business.

Fund management business – the conduct of an activity that requires the legal entity to hold an investment business license pursuant to section 4 and category 3 of Schedule 3 of the Securities and Investment Business Act (2020 Revision). This will include: managing segregated portfolios (excluding mutual funds); managing mutual funds; managing pension schemes; managing insurance products; and managing other types of investment, but not the business of being a custodian of investments.

Finance and leasing business – providing credit facilities of any kind for consideration. This includes taking assignment of an advance or credit repayable by a customer. This excludes provision of credit as an incidental part of a different sort of business, the holding of debt or debt instruments for the purpose of investment, and any activity falling within the definition of “banking business”, “fund management business” or “insurance business”.

Headquarters business – the business of providing any of the following services to an entity in the same group:

• the provision of senior management;
• the assumption of control or material risk for activities carried out by any of those entities in the same group; or
• the provision of substantive advice in connection with the assumption or control of risk referred to in the above point,

but does not include banking business, financing and leasing business, fund management business, intellectual property business, holding company business or insurance business.

Shipping business – any of the following activities involving the operation of a ship* anywhere in the world other than solely within BVI waters:

• the business of transporting, by sea, persons, animals, goods or mail;
• the renting or chartering of ships for the purpose of the previous point;
• the sale of travel tickets or equivalent, and ancillary services connected with the operation of a ship;
• the use, maintenance or rental of containers, including trailers and other vehicles or equipment for the transport of containers, used for the transport of anything by sea;
• the management of the crew of a ship.

*Ship – includes every description of vessel used in navigation but does not include a fishing vessel, a pleasure vessel or a small ship.

Holding business – the business of being a “pure equity holding entity” – i.e. being a company or limited partnership that only holds equity participations in other entities and only earns dividends and capital gains. According to the Rules, the ownership of any other form of investment (e.g. bonds, government securities, legal or beneficial interests in real property) will take the legal entity outside this definition. Equity participation includes shares in a company, but also encompasses other forms of investment which give the right to participate in profits, and the interest of a limited partner in a limited partnership will usually be of this quality.

Intellectual property business – this means the business of holding intellectual property assets (i.e. any intellectual property right in intangible assets, including but not limited to copyright, patents, trade marks, brand, and technical know-how, from which identifiable income accrues to the business (such income being separately identifiable from any income generated from any tangible asset in which the right subsists). “Income” includes (a) royalties; (b) capital gains and other income from the sale of an intellectual property asset; (c) income from a franchise agreement; and (d) income from licensing the intangible asset.

Distribution and service centre business – either or both of the following:

• purchasing from foreign affiliates
• component parts or materials for goods; or
• goods ready for sale,
  and reselling such component parts, materials or goods;
• providing consulting or administrative services to foreign affiliates,

but does not include any activity included in any other relevant activity except holding business.

Investment Fund Business means the business of operating an investment fund.

Investment Fund means an entity whose principal business is the issuing of investment interests to raise funds or pool investor funds with the aim of enabling a holder of such an investment interest to benefit from the profits or gains from the entity’s acquisition, holding, management or disposal of investments and includes any entity through which an investment fund directly or indirectly invests or operates (but not an entity that is itself the ultimate investment held), but does not include a person licenced under the Banks and Trust Companies Act, 1990 or the Insurance Act, 2008, or a person registered under the Cooperatives Societies Act 1979 or the Friendly Societies Act 1928.

6. Who is exempt from the requirement for economic substance and economic substance reporting?

The requirements for economic substance and reporting do not apply to:

a. Entities that are tax resident outside of the BVI.

An entity is generally tax resident outside of the BVI if it is subject to tax in another jurisdiction (not being a jurisdiction on the EU list of non-cooperative jurisdictions) by reason of its domicile, residence or any other criteria.

The most recent EU list of non-cooperative jurisdictions can be found at: https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/.

b. investment Funds.

The ES Act provides that investment fund business does not constitute a relevant activity.

7. I am caught by the economic substance requirements by virtue of being a legal entity carrying on a relevant activity – what are the applicable economic substance requirements?

A ‘legal entity’ that conducts one or more ‘relevant activity’, will need to satisfy the economic substance requirements in respect of each relevant activity conducted.

The economic substance requirements are that:

(a) The legal entity conducts ‘core income-generating activities’ in the BVI in relation to its relevant activity(ies);

The expression ‘core income-generating activities’ is defined in respect of each of the relevant activities as follows.

A legal entity may outsource at least part of its operations to a third party provided:

• no part of its CIGA may be outsourced outside the BVI;
• it is able, from within BVI, to monitor and control the carrying out of the core income generating activities by the third party (i.e. that monitoring must be undertaken in the BVI);
• only work genuinely being done on behalf of the relevant entity which has commissioned the outsourcing counts as CIGA;
• any entity conducting a regulated activity licensed by the FSC must comply with any relevant restrictions on outsourcing imposed by that licence or by the relevant financial services law.

The requirement to carry out core income generating activities does not apply to a holding business (i.e. the business of a pure equity holding entity) (see FAQ 8 “what about pure equity holding entities”).

(b) the relevant activity is directed and managed in the BVI;

The Rules provide at paragraph 7.5:

“For the relevant activity to be directed and managed from the BVI there must be an adequate number of board meetings held in the BVI, having regard to the actual frequency of meetings required for the relevant activity, the nature of the relevant activity, and its importance in the overall business of the legal entity (although it is not necessary for all meetings to be held in the BVI). For a board meeting to be held in the BVI there must be a quorum of directors physically present in the BVI. The directors of the legal entity attending such meetings must include among their number adequate expertise to direct the relevant activity. Decisions of the Board regarding the relevant activity must be minuted, and minutes of those decisions are expected to be kept in the BVI.”

Note that a pure equity holding entity does not need to be directed and managed in the BVI (see FAQ 8 “what about pure equity holding entities”).

(c) having regard to the nature and scale of the relevant activity (i) there are an adequate number of suitably qualified employees in relation to that activity who are physically present in the BVI (whether or not employed by the legal entity or by another entity and whether on temporary or long-term contracts); (ii) there is adequate expenditure incurred in the BVI; (iii) there are physical offices or premises as may be appropriate for the core income-generating activities; and (iv) where the relevant activity is intellectual property business and requires the use of specific equipment, that equipment is located in the BVI.

What is adequate, suitable or appropriate for each legal entity will depend on the particular facts of the legal entity and its business activity. A legal entity will have to ensure that it maintains and retains appropriate records to demonstrate the adequacy and appropriateness of the resources utilized and expenditures incurred.

Intellectual property business – Presumptions Against Compliance

Income derived from intellectual property assets can pose a higher risk of artificial profit shifting than non-IP assets. Therefore, it is presumed that intellectual property businesses do not comply with the economic substance requirements if (a) the activities being carried on in the BVI do not include research and development (where the business concerns intellectual property assets such as patents) or marketing, branding and distribution (where the business concerns non-trade intangible assets such as brand, trademark and customer data), or (b) the legal entity is a “high risk IP legal entity” (broadly, a high risk IP legal entity will be one which has income generating arrangements with affiliates outside the BVI. For a detailed definition of “high risk IP legal entity’’ see the ES Law section 2 or the Rules at Section 9.7).

The presumption in (a) may be rebutted where the activities being carried on in the BVI include:

(i) taking the strategic decisions and managing (as well as bearing) the principal risks relating to the development and subsequent exploitation of the intangible asset generating income;

(ii) taking the strategic decisions and managing (as well as bearing) the principal risks relating to acquisition by third parties and subsequent exploitation of the intangible asset;

(iii) carrying on the underlying trading activities through which the intangible assets are exploited and which lead to the generation of revenue from third parties.

The presumption in (b) above for a “high risk IP legal entity” may be rebutted where a high degree of control over the development, exploitation, maintenance, enhancement and protection of the intellectual property asset is exercised by suitably qualified employees of the legal entity who are physically present and perform their functions in the BVI and who are on long-term contracts.

In addition the Act provides as follows:

“The requirements imposed by section 9⁴ of the [ESA] on a high risk IP legal entity in order for it to rebut the presumption set out in section 9² of the [ESA] must be satisfied not only at the point in time at which the legal entity seeks to rebut the presumption but also during any historic periods when the legal entity was carrying on the intellectual property business in question.”

8. What about pure equity holding entities?

For a pure equity holding entity there is no requirement that the entity is directed or managed in the BVI. Nor is there a requirement that the entity carries on core income generating activity in the BVI (there is no core income generating activity relating to holding business). However, it remains necessary to have in the BVI adequate employees and premises for holding or managing its equity participations. Merely holding equity participations may require nothing further than engaging a registered agent in the usual way. Where the entity actively manages its equity participations, however, it may need to have adequate and suitably qualified employees, and appropriate premises, in the BVI to carry out this function.

9. What if I am a legal entity carrying on a relevant activity but I have no income?

A legal entity that carries on a relevant activity but which has no income³ is not obliged to meet the economic substance requirements. In this regard Rule 1 specifically states that a legal entity will be treated as carrying on a relevant activity during any financial period in which it receives income from that activity. The legal entity will still, however, be required to satisfy its reporting obligations under the BOSS Act (see FAQ 11 ‘What are the reporting requirements under the BOSS Act’?)

10. From what date do I need to comply with the economic substance requirements?

A legal entity which is tax resident in the BVI and carries on a relevant activity for which it receives income must satisfy the economic substance requirements from the date of incorporation or formation.

Legal entities that fall within the scope of the ES Act must notify their registered agent in the BVI of any relevant activities they carry on as well as certain other prescribed information. See FAQ 11 ‘What are the reporting requirements under the BOSS Act”?

11. What are the reporting requirements under the BOSS Act?

The BOSS Act imposes a reporting obligation on BVI “legal entities” (as defined at FAQ 4. above), which must identify whether they are either:

1. conducting a relevant activity (or relevant activities) – in which case they are “in scope”; or
2. not conducting a relevant activity (or relevant activities) – in which case they are “out of scope”

and notify their registered agent in the BVI. Under the BOSS Act a legal entity which is in scope must provide certain prescribed information to its registered agent. The registered agent must then enter this information on the RA database (a secure database which is accessible by the relevant BVI regulatory bodies) within six (6) months after the end of the legal entity’s relevant financial period.

12.What happens if I don’t do anything?

There are several penalties for failure to comply with the obligations set out under the ES Act.

It is an offence to provide false information to the ITA or to fail to provide information in response to an ITA request. A person who is found guilty of these offences may be liable to a term of imprisonment of up to five (5) years and a fine of up to $75,000.

If the ITA finds that an entity is non-compliant with the applicable substance requirements, it can impose an initial penalty ranging between $5,000 and $20,000 ($50,000 if the entity is a high-risk IP entity). The ITA will also notify the entity of the actions the entity must take to become compliant. If the entity fails to adhere to the ITA’s recommendations, a second notice of non-compliance may be issued and a non-compliant entity can be fined between $10,000 and $200,000 ($400,000 for high risk IP entities).

If the ITA considers it appropriate to do so, or if the ITA believes that the entity cannot realistically meet the economic substance requirements, it may also recommend to the FSC that the entity be wound up.

Campbells are able to provide further guidance and advice. Please contact your usual Campbells attorney or regulationbvi@campbellslegal.com if you need advice or assistance, which will be chargeable at usual hourly rates.

 

¹ A copy of the Rules can be found here: https://bviita.vg/wp-content/uploads/2023/02/UPDATED_ES_ITA-Rules-v3-23-FEB-2023-1.pdf
² “in scope” and “out of scope” are defined at FAQ 3 and FAQ 11 as meaning conducting a relevant activity or not conducting a relevant activity respectively.
³ For the purposes of the ES Act, there is no definition of ‘’income’’ in relation to a legal entity, however the better view is this means all of that entity’s gross income from its relevant activities and recorded in its books and records under applicable accounting standards.