The British Virgin Islands (BVI) is considered one of the most prominent offshore jurisdictions due to its tax efficiency and confidential business practices. However, in recent times, tax efficiency has come under a matter of question. The concern regarding the practices of harmful tax needs to be addressed seriously.
The BVI government has taken this concern and adopted some measures to eradicate the subject. They’ve introduced economic substance regulations for the BVI offshore company formation to combat the situation.
So what is this ECR, and how does it work?
In this blog, we explore the concept of economic substance and its implications for sustainable BVI offshore company formation.
Understanding Economic Substance
Economic substance refers to the operational activities that a company have to undertake in the jurisdiction where it’s incorporated. In this way, the company will be connected with the jurisdiction under some compliances to eradicate the base erosion and profit shifting.
Economic Substance Regulations for the BVI Offshore Company Incorporation
The EU (European Union) and OECD (The Organisation for Economic Co-operation and Development) listed some countries in 2018, mentioning “no or only nominal tax” for offshore jurisdictions. The BVI was one of them, including other countries. The jurisdiction issued for the economic substance regulations (ESR) in 2018 for companies and limited partnerships. The scheme came into effect on 1st Jan 2019. This means all the BVI offshore company registration has to undertake some relevant business activities.
BVI Economic Substance Filing Deadline 2023
In-scope companies and all the partnership companies have to submit an annual report of economic substance within 6 months from the date of the financial year-end. For example, if the date of the financial year end is 31st Dec 2022, then your report filing deadline will be 30th June 2023.
Key Requirements for Economic Substance in the BVI
Different types of company structures require particular aspects to be functional. Check out all these company aspects here:
Legal Entity (Except for the Pure Equity Holding Company)
There are some requirements that you must follow for the BVI offshore company formation. Check out these aspects:
Direct and Managed
If you are starting an offshore company in the BVI, then the company must be directed and managed inside the jurisdiction. Board meetings should be held locally with the required number of board members present there. Also, the existence of a token director will be dissolved, and the director must be aware of the company and have all the required knowledge about business activities.
Core Income Generating Activity (CIGA)
Under this scheme, you have to show the income generation aspects for the British Virgin Islands offshore company registration. Follow a proper set of activities, including banking, financing, insurance, fund management and holding intellectual property for your BVI offshore company incorporation.
This section of the ESR highlights the aspects of people in the company. You should employ a quality number of employees who have an adequate amount of knowledge. You also have to build a physical presence in the BVI to carry on the business activities. Now, this sense of ‘adequate’ may change from one company to another companies. For example, a big company will need a larger office space with a large amount of people.
Pure Equity Holding Company
The pure equity holding company is responsible for holding equity participation in other entities and earns dividends and capital gains tax. It is said that this type of company reduced economic substance tests in the BVI.
Intellectual Property Holding Company
An IP holding company can be presumed if it’s found that income-generated activities are carried out within the BVI as specified in section 7 of the Economic Substance Act. You have to prove the activities, such as how you handle the development and exploitation of the intangible products, the handling procedure of acquisition of third parties and all of the underlying trading activities in your company in the BVI.
High-Risk IP Legal Company
The presumption can be contested if it is found that the company in the BVI is handled by qualified employees on contracts and has a physical presence in the country. The development and maintenance of the company need to be well handled by the employees according to the laws.
Entities under the ESR for BVI Offshore Company Formation
The BVI carries out different legalities under the Economic Substance Regulations. There are various scopes, which are mentioned below:
A ‘legal entity’ can be defined in two aspects. As mentioned in the Amendment Act 2021, all the BVI business companies and foreign companies are considered legal entities. On the other hand, a ‘legal entity’ is a non-resident company where the company is registered in the BVI but has to be a tax-registered company in some other country listed from the EU non-cooperative list.
The EU and OECD have listed nine mobile ‘relevant activities’ in different business industries. The list includes the following:
- Fund management
- Finance and leasing,
- Holding company
- Intellectual property
- Distribution and service centers
With all being said, it is advisable that you take the hand of any professional or business consultancy for the BVI offshore company formation. Business Setup Worldwide is a reputable business consultancy with business consultants onboard. We can provide you with any company formation services regarding the offshore business. Contact us to learn more and start your own offshore business today.
Which entities are subject to Economic Substance requirements in the BVI?
Entities engaged in specified relevant activities, such as banking, insurance, fund management, financing and leasing, shipping, distribution and service centres, headquarters, and holding company activities, are subject to economic substance requirements.
What are the key components of Economic Substance requirements for BVI offshore companies?
Key components typically include conducting core income-generating activities within the BVI, having an adequate number of qualified employees, incurring sufficient operating expenditures, and maintaining physical presence and management in the jurisdiction.
How can a BVI offshore company demonstrate economic substance?
The company must maintain comprehensive records of its activities, financial information, and personnel. It should also ensure that key decisions are made within the BVI, and it must have an adequate number of qualified employees and physical assets in the jurisdiction.