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Introduction of the requirement of a real place of business in The British Virgin Islands

From 01 January 2019 in the British Virgin Islands entered into force The Economic Substance (Companies and Limited Partnerships) Act, 2018, which applies to all companies and limited partnerships, registered in the British Virgin Islands, as well as companies and limited partnerships engaged in business in the BVI. This Act applies to the following activities:

  1. banking business;
  2. insurance business;
  3. fund management business;
  4. finance and leasing business;
  5. headquarters business;
  6. shipping business;
  7. holding business;
  8. intellectual property business;
  9. distribution and service centre business.

Thus, a legal entity carrying out the above-mentioned business activities during any reporting period must meet the criteria of economic substance. In order for a BVI company to have economic substance, it must meet several criteria simultaneously (i.e. pass a kind of "economic substance test"), listed below.

Economic substance test at BVI

1) Business activities shall be managed from the territory of The British Virgin Islands. 

2) Taking into account the nature and scope of activities it should meet the following criteria:

  • the company must have the necessary number of qualified personnel in respect of this type of activity, which is physically present in the territory of the British Virgin Islands (the staff can be hired by this company or another, both on a long-term and short-term basis);
  • the company must bear the necessary level of expenses in respect of this type of activity on the territory of The British Virgin Islands;
  • the offices and premises of the company suitable for the conduct of the main income-generating activities must be located in The British Virgin Islands;
  • if the company carries out business in the field of intellectual property, the necessary equipment must be located on the territory of The British Virgin Islands.

3) The company should implement a major bring her income activity on the territory of BVI. At the same time, this type of activity means the following:

Banking activity:

  • fund raising, credit, currency and interest rate risk management;
  • position insurance;
  • loans and borrowings or other financial services to customers;
  • equity management;
  • preparation of acts, reports and tax returns. 

Insurance:

  • identification and calculation of risks;
  • insurance or reinsurance of risks;
  • provision of other insurance business services to customers.

Management of funds:

  • decision-making on the ownership and implementation of investments;
  • calculation of risks and reserves;
  • making decisions on currency and interest rate fluctuations, as well as risk insurance decisions;
  • preparation of reports for public authorities and investors.

Financial activities and leasing:

  • agreement of financing conditions;
  • identification and acquisition of assets for leasing;
  • setting the terms and conditions of financing or leasing;
  • control and verification of transactions;
  • risk management.

Activities of the parent company:

  • making appropriate management decisions;
  • incurring costs for affiliates;
  • the management of the Affairs of the group.

Shipping:

  • management of the marine crew (including recruitment, remuneration and monitoring of performance of duties);
  • the movement of ships and their contents;
  • control and tracking of goods delivery;
  • definition of goods for delivery and destination of goods shipments;
  • organization and control of sea transportation. 

Business in the field of intellectual property:

  • intellectual property assets such as patents, research and development;
  • intangible non-trade related assets such as trademark, trademark and customer data, marketing, branding and distribution.

Distributorship:

  • transportation and storage of goods;
  • inventory management;
  • order acceptance;
  • provision of consulting and other administrative services.

Holding companies

Separately, the criteria of economic substance for pure equity holding entity, which are understood as legal entities that are only holders of shares in the share (authorized) capital of another person and receiving dividends and other income from the capital of the capital gains, which meet the criterion of economic substance, if:

  • such company fulfils its legal obligations under the BVI Business Companies Act, 2004 or the Limited Partnership Act, 2017;
  • has an adequate number of staff and facilities to carry out such activities. That is, as such, the actual substance on the territory of BVI for holding companies is not required. They must only comply with BVI Business Companies Act, 2004 or the Limited Partnership Act, 2017 and have sufficient employees to carry out their activities.

IT companies 

Special conditions apply to IT companies, according to which in order for IT companies to fall under the Law The Economic Substance, their activities must comply with the directions specified therein, as well as such companies should not be high-risk IP companies. These restrictions may not apply if the activities of IT companies are carried out from the territory of BVI, and at the same time management of strategic risks of the company associated with the development and subsequent operation of intangible assets that generate income is also made from the territory of BVI. The Economic Substance Act provides for other cases in which IT company can conduct activities other than those specified in it, and at the same time meet the criteria of economic presence.

Powers of state bodies in relation to economic substance

Now the competent state body can request through the registration agent any information regarding the economic substance of the company and determine whether the company meets the criteria for economic substance on BVI, and the company must provide such information.

Responsibility

If the company (the authorized person of the company) does not provide information regarding economic substance or provides false information, then the company (the authorized person of the company) commits an offence and may be subject to liability up to imprisonment for up to two years or a fine of up to $ 75,000. This penalty may be increased if the authorized state bodies send repeated notifications to the company. The minimum amount of the fine will be $ 5,000.

If a legal entity does not meet the criteria of economic substance for the first time, the state body sends a warning to the company.

If the competent authority considers that it is not possible for the company / partnership to meet the criteria of economic substance, it may send a notification to the Financial Commission with the requirement to delete the company / partnership from the register.

The company / partnership may appeal the decision on sentencing by the competent authority through the court.

Innovations in The Beneficial Ownership Secure Search system Act, 2017 in connection with the entry into force of The Economic Substance (Companies and Limited Partnerships) Act, 2018

In connection with the adoption of The Economic Substance (Companies and Limited Partnerships) Act, amendments are also made to The Beneficial Ownership Secure Search system Act in 2017 (hereinafter - the BOSS Law). Previously, the BOSS Act required that information relating to the beneficial owners of legal entities registered in The British Virgin Islands be transferred to the registered agents of these legal entities and was stored in a secure search engine. Following the entry into force of the amendments to the BOSS Act, companies are also required, in addition to the above information, to enter into the system information about their tax status and activities that will allow the British Virgin Islands Tax service to monitor the activities of the company, as well as whether the company must meet the criteria of economic presence. Already registered companies and partnerships should bring their activities in line with the criteria of economic substance by June 30, 2019. At the same time, the companies / partnerships are obliged to fulfill the obligations imposed on the companies and partnerships in connection with the amendments to the BOSS Act by June 30, 2020. Companies registered from 01 January 2019 must meet all the above requirements starting from 01 January 2019.