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Economic substance in the BVI

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.
The Act imposes economic substance requirements on relevant legal entities, other than non-resident entities, which carry on a relevant activity. The requirements potentially apply to any BVI company or BVI limited partnership as well as any foreign company or limited partnership which is registered in the BVI as a foreign entity. Entities which do not carry on a relevant activity are not subject to the economic substance requirements but may be subject to certain reporting obligations.
The relevant activities are:
  • Banking business
  • Insurance business
  • Shipping business
  • Fund management business
  • Finance and leasing business
  • Headquarters business
  • Holding business
  • Intellectual property business
  • Distribution and service centre business
Under the Act, economic substance will be measured by reference to reporting periods which are not longer than one year, recognising that compliance can only be evaluated over a period of time. Companies and limited partnerships which are incorporated or formed from 1 January 2019 (New Entities) and which need to demonstrate economic substance will have to comply for any reporting  period ending on or after 31 December 2019. New Entities must elect to have a first financial period of not more than one year from the date of incorporation or formation, as applicable. Companies and limited partnerships in existence on 1 January 2019 and which need to demonstrate economic substance will have to comply for each reporting period starting no later than 30 June 2019.
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.
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.
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