On October 9, 2019, the British Virgin Islands International Tax Authority has finalized rules governing the application of the territory’s new economic substance requirements, which became effective from January 1, 2019.
The new regime is included in the Economic Substance (Companies and Limited Partnership) Act, 2018.
Under new requirements dictated in large part by the EU, that have received support from OECD BEPS Inclusive Framework members, companies that are tax resident in a low or no tax jurisdiction, and are engaged in key activities identified by the EU, must demonstrate that they meet minimum substance requirements as part of their annual tax return to access the territories’ tax regimes.
The standard requires that for certain highly mobile sectors of business activity, the core income generating activities must be conducted with qualified employees and operating expenditure in the jurisdiction.
The key activities identified by the European Commission Code of Conduct Group are: banking, insurance, fund management, financing and leasing, shipping, intellectual property, collective investment vehicles, and holding companies that generate income from any of these key activities.
The substance requirements vary for each key activity to reflect the different needs of the companies involved and are designed to be fair and proportionate while ensuring that there are sufficient activities undertaken in the relevant jurisdiction to reflect the amount of profits accounted there. The substance requirements will include being able to demonstrate that the company is directed and managed from the relevant territory, that the company has adequate levels of employees as well as annual expenditure, and physical offices.