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DRAFT Economic Substance Code Released : Overview & Highlights on key guidelines in the Code

Important Highlights & Overview provided on the Guidelines and key clarifications provided in the Economic Substance Code which has been released in draft form by the BVI International Tax Authority (“the ITA”) – the competent authority under the Economic Substance (Companies and Limited Partnerships) Act, 2018 (“the ES Act”)

On 23 April 2019, the ITA released much needed guidance in respect of the ES Act in the form of a draft of the Economic Substance Code (“the ES Code”). This code provides rules and guidelines to assist with understanding and interpreting the ES Act. It is intended to be relied upon by BVI legal entities, their advisers and agents as a guide to how the ITA proposes to discharge its functions; as well as the circumstances in which it will and will not normally take enforcement action under the ES Act.

Important clarification has also been provided by the ES Code on key concepts within the ES Act for instance: (a) the economic substance requirements and how these should be applied in particular situations; (b) determining and also demonstrating that a BVI legal entity is resident for tax purposes outside the BVI i.e. a non-resident entity; (c) reporting requirements which have expanded the self reporting regime for BVI legal entities; as well as (d) relevant timelines within which to fulfill obligations under the ES Act.

Furthermore, the ITA has confirmed that the ES Code, and the guidance which it contains, can only be a general guide to the operation of the economic substance legislation. It is not intended to be a substitute for legal advice on the particular circumstances of individual cases.

It is also useful to note that the general approach which the ITA will take to the construction and application of the economic substance legislation is a pragmatic and commercially realistic one. In addition, in the event a legal entity carrying on a relevant activity outside the BVI notifies the ITA of its intention to re-locate that activity to the BVI, it may agree with that legal entity a compliance plan in this regard.

The following is a brief overview of some key points and clarifications from the ES Code which provide a better understanding as to what is contained therein:

§ Guidance on determining whether an entity must comply with economic substance: the ES Code has provided the following key questions to be addressed in order to determine whether a BVI Legal Entity must comply with the ES Act:

1. is the entity of a type which falls within the scope of the ES Act?

2. if it is, is it carrying on a relevant activity?

3. if it is carrying on a relevant activity, is it resident for tax purposes in a jurisdiction outside the BVI (and which is not on the EU list of non-cooperative jurisdictions for tax purposes).

§ Non resident entities (as defined under the ES Act): These entities are not subject to economic substance requirements. Any entity that falls within this definition and that carries on a relevant activity, must declare this to the ITA and along with this declaration provide evidence in support of its claim. Where an entity is unable to provide evidence of the sort required within the period fixed for submission of such information, the ES Code provides for it to apply to the ITA in order for it to be treated as provisionally resident in a jurisdiction outside the BVI pending submission of the evidence required to establish that fact. There are clear conditions set out in the ES Code which an entity must meet in order for the ITA to agree to such an application. The ES Code also introduces the concept of a “Transparent Entity” which allows for tax residence in another jurisdiction to be demonstrated by reference to each of the participators or partners on whom the entity’s profits are taxable.

§ Holding business: The ES Code provides important clarification as it relates to the nature of holding business which is defined as the business of being a pure equity holding company. It highlights that this type of business activity which is one of the nine categories of ‘relevant activity’ under the ES Act, is deliberately framed in narrow terms. Accordingly, a legal entity will only fall within this definition if it holds nothing but equity participations. Where a legal entity owns any other form of investment or asset it will not fall within this definition; and will not be treated as carrying on holding business.

§ Investment funds: The ES Code specifically states that the business of being an investment fund is not a relevant activity. Consequently, it is outside the scope of the economic substance requirements in the same way as all other forms of business activity which are not specifically mentioned in the ES Act. It is further noted in the ES Code that it is expected that further guidance would be provided on economic substance requirements as it relates to collective investment funds by the EU. No such guidance has yet been issued.

§ Application of economic substance requirements: Clarification is provided in the ES Code as to how the economic substance requirements set out in the ES Act are to be applied. It confirms that there are three general aspects to economic substance (1. Direction and management in the BVI; 2. Adequate expenditure and employees; and 3. Core Income Generating Activity being carried out in the BVI). Useful considerations are given as to how an entity would comply with each requirement as well as confirmation that compliance with the economic substance requirements will require a judgment that takes account of the degree of compliance under the various aspects of these requirements. The ES Code does not provide specific definitions for the key terms: “adequate”, “suitable” and “appropriate”. It confirms that these are to be given their ordinary English meaning. Accordingly, a proper assessment would need to be taken on a case by case basis as to how these terms should be interpreted and applied to various entities within the context of the general guidelines provided.

The ES Code also confirms that entities which engage in holding business i.e. pure equity holding entities are subject to a less rigorous substance regime than other forms of relevant activity. Furthermore, those entities which engage in Intellectual Property business are subject to a more rigorous economic substance regime than other forms of relevant activity.

§ Timeline for Self Reporting Regime: The self reporting regime in respect of BVI Legal entities has been introduced by the ES Act and builds upon the pre-existing regime for the collection of information relating to beneficial ownership under the Beneficial Ownership Secure Search System Act, 2017 (“the BOSS Act”). The ES Code states that the information to be reported (as set out in the ES Act) and referred to as “the prescribed information”) must be provided in respect of a financial period within 6 months of the end of that period.

§ Effective date for compliance with Economic Substance: The ES Code expressly confirms that a relevant BVI Legal entity (one caught within the scope of the ES Act) must comply with the economic substance requirements from the commencement of their first financial period. This is notwithstanding the fact that the new self reporting regime is not yet in force.

The financial period of a BVI Legal Entity is specifically defined in the ES Act and is based on the date it was incorporated or formed. Such period is determined as follows:

The first financial period of a BVI legal entity incorporated or formed before 1 January 2019 will begin on 30 June 2019 (unless the legal entity gave notice to the ITA that it wishes to elect for an earlier commencement date) and generally will be one year in length.

The first financial period of a legal entity incorporated or formed on or after 1 January 2019 will commence on the date of incorporation or formation and generally will terminate one year from that date.

In light of the above, which is expressed in the ES Act and re-emphasised in the ES Code, all relevant BVI Legal Entities are expected to be in compliance with the economic substance requirements of the BVI from 30 June 2019 onwards.

§ Sanctions Regime: The ES Code provides clarification and key highlights as to the assessment and enforcement of compliance with the requirements imposed by the ES Act, which is done by the ITA that is responsible for the same.

The sanctions regime which applies where a BVI Legal entity fails to comply with the economic substance requirements is intended to serve, at least in the first instance, the twin purposes of (1) penalising both the entity and those responsible for the breach; and (2) compelling the entity to take corrective action. The ES Code expressly states that where this latter purpose cannot be achieved, then the entity’s operations in the BVI must come to an end, if necessary by way of compulsory striking off.

The ES Code also highlights the importance which the BVI lawmakers attaches to compliance with economic substance requirements. A specific example given of this is the fact that once it has determined that an entity is in breach of the economic substance requirements, the ITA has no discretion to impose a financial penalty, but must impose a minimum penalty of $5,000 on a first determination of non-compliance and $10,000 on a second determination of non-compliance.

§ Obligation to disclose information to relevant overseas competent authority: The ES Act defines “relevant overseas competent authority” as, in relation to any corporate or legal entity, the competent authority for each state in which:

(a) a beneficial owner resides; or

(b) within which a registrable legal entity is registered; or

(c) within which the corporate or legal entity is registered; or

(d) within which a parent of the corporate or legal entity is registered; or

(e) within which the corporate or legal entity claims to be tax resident

The ITA as the competent authority under the ES Act is under an obligation to disclose to a relevant overseas competent authority of a given jurisdiction in all instances where a BVI legal entity claims to be tax resident in that jurisdiction. The ITA is also under an obligation to disclose or procure the disclosure of the information stored in the RA database in respect of a BVI legal entity with a “relevant overseas competent authority” where (1) there has been a breach of the economic substance requirements; or (2) the relevant entity carries on an intellectual property business and falls within the presumption that it does not conduct core-income generating activity in the BVI as set out in the ES Act.

The ES Code confirms that the purpose of the disclosure of information by the ITA in line with their obligation as highlighted above is so as to bolster the policing of non-residence claims by the ITA.



We appreciate the critical importance and impact of the economic substance regime as well as the urgent need for owners, directors or managers of BVI legal entities to determine whether and the extent to which this new regime applies to them. Beyond this determination, we appreciate that there is a critical need for BVI Legal Entities to understand what they must do to ensure compliance in the event they are caught within the scope of the ES Act and are conducting relevant activity. Bearing in mind the critical dates and timelines, action steps must be identified and put into place on an urgent basis to ensure that relevant BVI Legal Entities comply with economic substance.

In light of the above, we have developed our services so as to provide expert guidance to BVI Legal entities, in a cost effective and efficient manner. Our services also take into consideration the various needs and areas of concern that an entity may have at any given time so as to encourage a step by step or phased approach to navigating the economic substance regime effectively.

The following is an outline of the services we offer in relation to economic substance:

1. Economic Substance online Assessment & Legal Advice on classification of BVI Legal Entities: We have developed an online assessment which helps clients identify how the new economic substance law impacts their entity/ entities. Kindly contact us for a free demo and access to this tool. In addition, we provide Legal Advice to review and provide confirmation in relation to the findings of any assessment which a BVI legal entity has already undertaken.

2. Legal Advice on Compliance with Economic Substance: This is geared towards a client that wishes to obtain a service that is more tailored and focused on how they will ensure compliance with the ES Act based on the particulars of their business. In most cases this client would have already undertaken an economic substance assessment or review regarding their BVI legal entity; AND confirmed that their BVI Legal Entity is conducting relevant activity.

3. Economic Substance Implementation: This service is focused on providing the legal advice, commercial guidance and tailored support that a BVI legal entity would need to execute the steps which it must take to establish economic substance in compliance with BVI law.

Please visit our website: or contact us at for further details as well as to obtain information on how we can help you.

DISCLAIMER: This brief is intended to provide an overview and is for information purposes only. It is not intended to be a comprehensive study or legal advice. It is also not a substitute for specific advice concerning individual situations.


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