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Economic Substance Requirements in BVI

The British Virgin Islands (BVI) has enforced the substantive economic substance requirements starting from 1^st January 2019 in order to avoid being black-listed by the European Union (EU). Such requirements are introduced in the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the "Act"). A brief summary is set out below, and further guidance on key details is expected to be published by the BVI government in the forthcoming weeks and/or months.

Under the Act, a legal entity which carries on one or more than one relevant activity must comply with the economic substance requirements.

Legal entities required to demonstrate economic substance in BVI

A relevant entity includes:

All BVI companies and limited partnerships with legal personality (LPs) that are tax residents of BVI. Companies that are tax resident elsewhere outside of the BVI are not in scope.
All foreign companies and limited partnerships with LPs doing business in the BVI.

Relevant Activities

In the Act, Relevant Activities mean any of the following activities:-

Banking business
Insurance business
Fund management business
Finance and leasing business
Headquarter business
Shipping business
Holding business
Intellectual property business
Distribution and service centre business

Economic Substance Requirements

Including but not limited to:

Relevant activity directed and managed in the BVI;
Adequate number of suitably qualified employees physically present in the BVI;
Adequate Expenditure incurred in the BVI;
Appropriate Physical Offices or premises;
Core income-generating activity; and
Etc.

How your BVI companies may be affected

Generally speaking, if BVI companies are BVI tax residents and carrying on any of the above-mentioned relevant activities, then such existing companies are required to fulfil the economic substance requirements in BVI no later than 30 June 2019 and shall notify to the BVI government within one year of 30 June 2019 and thereafter each successive period of one year. If a non-tax resident BVI company or a company not carrying on any relevant activity, an annual return or other supporting documents stating/demonstrating the fact may be required to be filed to the BVI government in due course. Further detailed guidance is expected to be issued.

In the case of companies incorporated or formed on or after 1 January 2019, the economic substance requirements are immediately imposed and the reporting obligation must be performed within one year of the date of incorporation or formation.

Consequence of non-compliance with economic substance requirements

In the case that a relevant entity fails to meet the economic substance requirements within specified period, the amount of penalty will be imposed by the competent authority subject to a minimum penalty of USD5,000 and up to USD200,000 or more, or even being struck off the Register of Companies.

Please note that the contents of this notice are for your reference only and do not constitute any legal opinion, financial advice and tax advice. If the decision is made based on any and/or any part of the above, we shall not bear any legal and/or financial responsibility for any of and/or all consequences, damages, costs and expenses arising therefrom. If you wish to have a legal opinion or tax advice on the above matter(s) in this notice, please feel free to contact us and we would like to refer you to an appropriate legal practitioner and/or tax advisor practising in Hong Kong.

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