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The British Virgin Islands Implements Substance Requirements

The Government of the British Virgin Islands announced on 2 January 2018 that legislation for the implementation of economic substance requirements was passed on 19 December 2018. The Economic Substance (Companies and Limited Partnerships) Act 2018, which was published in the Official Gazette on 28 December, addresses the European Union’s (EU) concerns over "economic substance" and came into force from 1 January 2019. The requirements include that a legal entity that carries on a relevant activity during any financial period must comply with the economic substance requirements in relation to that activity. Relevant activities include:

  • Banking business;
  • Insurance business;
  • Fund management business;
  • Finance and leasing business;
  • Headquarters business;
  • Shipping business;
  • Holding business;
  • Intellectual property business; and
  • Distribution and service centre business.

Specific substance requirements apply for certain activity types, but in general, a legal entity is considered to comply with economic substance requirements if:

  • The relevant activity is directed and managed in the Virgin Islands;
  • Having regard to the nature and scale of the relevant activity:
    • there are an adequate number of suitably qualified employees in relation to that activity who are physically present in the Virgin Islands (whether or not employed by the relevant legal entity or by another entity and whether on temporary or long-term contracts);
    • there is adequate expenditure incurred in the Virgin Islands;
    • there are physical offices or premises as may be appropriate for the core income-generating activities; and
    • where the relevant activity is intellectual property business and requires the use of specific equipment, that equipment is located in the Virgin Islands;
  • The legal entity conducts core income-generating activity; and
  • In the case of income-generating activity carried out for the relevant legal entity by another entity:
    • no core income generating activity is carried on outside the Virgin Islands;
    • only that part of the activities of that other entity which are solely attributable to generating income for the relevant legal entity and not for any other legal entity shall be taken into account when considering if the relevant legal entity meets the economic substance requirements; and
    • the relevant legal entity is able to monitor and control the carrying out of that activity by the other entity.

Where a legal entity fails to provide information or provides false information to determine if the substance requirements are met, a fine up to USD 40,000 and/or imprisonment up to two years will apply on summary conviction, which is increased to USD 75,000 and/or imprisonment up to five years for conviction on indictment.

Where a determination is made that the substance requirements are not met, a penalty of USD 5,000 up to 20,000 will be imposed (USD 50,000 for high risk IP company). If a legal entity fails to act to comply and a second determination is made, an additional penalty of USD 10,000 up to 200,000 will be imposed (USD 400,000 for high risk IP company).

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