L&M Finance Group


The global trend of de-offshorization and the active implementation of the BEPS plan have already fundamentally changed the business in the territory of the classic offshore - the British Virgin Islands (hereinafter - BVI), where on January 1, 2019, the Economic Substance (Companies and Limited Partnerships) Act, 2018 (hereinafter - the Law) entered into force.
The text of the regulatory legal act can be found by clicking on the following link: http://catcut.net/1daA.
Among the basics of the Law can be highlighted the following:
  • The requirement for an economic substance applies to all legal entities that conduct "relevant activities" if they are tax residents of the BVI. At the same time, "relevant activity" includes the following activities: banking and insurance business, fund management business, financial business and business related to leasing, headquarters business, shipping business, holding business, activities related to intellectual property, distribution and service centres. Each of the above activities is briefly described in the Law;
  • As a general rule, a legal entity has an economic substance in the BVI if it meets the following requirements: (1) management of the “relevant activity” is carried out in the BVI; (2) the availability of an adequate number of skilled employees in the BVI; (3) the company incurs adequate expenses at the BVI; (4) physical availability of the office; (5) if the activity is related to intellectual property and its implementation requires special equipment, it should be located in the BVI, and (6) the income-generating activity, as defined in the Law, is carried out in the BVI. An interesting fact is that the Law establishes separate, softer requirements for simple holding companies: (1) they must comply with the requirements of the Act on Business Companies or the Act on Limited Partnership of 2017 (depending on what is applicable), and (2) to have an adequate number of high skilled employees and premises for holding activities. At the same time, it is necessary to note that in the Law quite often the evaluative concept “adequate” is used, the definition of which the Law does not provide, and the practice of which has not yet been formed;
  • non-compliance by a legal entity of the above criteria is determined by the BVI International Tax Authority (hereinafter - the Authority) during any financial period applicable to a legal entity ending before or after December 31, 2019, provided that such determination will be made no later than 6 years after the termination of the financial period to which this definition applies. Such a term, however, does not apply if the Authority cannot make a determination within a 6-year period due to any deliberate misrepresentation or fraud on the part of the relevant legal entity or any other person;
  • The law imposes on a legal entity the obligation to provide any documents required by the Authority to determine the compliance of the legal entity with the criteria specified above. The person who refused to provide information is liable in the form of a fine in the amount of from 40 to 75 thousand dollars and / or imprisonment for a period of 2 to 5 years; and
The law provides for the following liability for failure to comply with the criteria of economic presence:
  1. for non-compliance with criteria for the first time: a fine defined by the Authority, which cannot be less than 5 thousand dollars and more than 20 thousand dollars (for high-risk companies - 50 thousand dollars);
  2. for non-compliance with the requirements of the Authority imposed in connection with the first non-compliance with the criteria: an additional penalty defined by the Authority, which can not be less than 10 thousand dollars and more than 200 thousand dollars (for high-risk companies - 400 thousand dollars). Moreover, in this case, the Authority has the right to apply to the Financial Services Commission (hereinafter - the Commission) with recommendations to exclude such a legal entity from the corresponding register of companies; and
  3. If the Authority considers after the first definition of discrepancy of the legal person to criteria of economic presence, that such legal person has no actual possibility to provide conformity to such criteria, it has the right to address to the Commission with the requirement about exception of such legal person of the appropriating registry of the companies.
Thus, the owners of companies in the BVI are faced with a choice - to bring the activities of their companies in line with the new requirements, or to transfer their business to the territory of another jurisdiction. However, the lack of clear criteria for the required number of employees and expenses leads to unequal implementation by businessmen of new rules, which will probably in the future be the subject of an emerging practice of applying the Law both by the state regulator and by the judiciary.
Transferring business to the territory of another jurisdiction also does not guarantee a full-fledged solution to the problem, since the de-offshorization process will entail the adoption of similar rules in other popular offshore countries.
In this regard, entrepreneurs now need to revise the structure of their business, and the feasibility of using offshore companies for this purpose.