While the Code is not legally binding, it is intended to be relied upon by BVI entities and the ITA does not intend to depart from its guidance except in exceptional circumstances.
The Code provides clarification for entities which may be subject to economic substance requirements to assist with compliance under the Act.
Key points to note from the draft Code are as follows:
1. Investment funds are not subject to economic substance requirements unless they carry on any relevant activities which are in scope of the Act.
2. Where the substance requirements impose an obligation that the relevant activity is managed and directed from the BVI, it should be noted that this relates to the activity rather than the entity as a whole. However, if the entity’s only business is a relevant activity or activities, then the entity itself must be managed or directed from the BVI. The Code does not impose any requirement that directors are BVI resident, but it does state that there must be an adequate number of board meetings held in the BVI (which in turn would require a quorum of directors to be present at such meetings in the BVI).
3. The lists of Core Income Generating Activities (CIGAs) set out in the Act will not be treated as exhaustive. The ITA will look to ensure that the core elements of the relevant activity that the entity does carry out are carried out in the BVI. Accordingly, an entity carrying out a relevant activity but which does not carry out one of the CIGAs listed in the Act will not have to perform additional activities in order to comply.
4. The draft Code provides further clarification in relation to:
(a) the meaning of “pure equity holding entity” and “holding business” including where entities hold assets other than equity participations;
(b) “distribution and service centre business” and provides a list of activities which do not fall under this heading;
(c) “financing and leasing business” with an exception for entities providing credit as an incidental part of a different business;
(d) outsourcing including where an entity outsources part of its relevant activity; and
(e) reporting requirements and relevant financial periods.
The final Code is expected to be issued in early May following a brief education campaign.
The ITA have stressed that the economic substance regime may evolve further and the EU have yet to issue “technical guidance” which may involve changes to the Act or the Code.
The draft Code provides BVI entities with helpful guidance on the Act and its implementation. We consider that the Code will provide reassurance in terms of identifying which entities are in or out of scope of the economic substance requirements and what measures should be taken to comply with those requirements.
If you have any questions, please reach out to your usual Appleby contact or a member of the team below.
[Click here to read our previous eAlert relating to economic substance in the BVI on 2 Jan 2019.]