New substance legislation for the British Virgin Islands

On January 1, 2019, the Economic substance (companies and limited partnerships) Act 2018 came into force in the British Virgin Islands (BVI).

The British Virgin Islands passed the Act on December 19, 2018. On that particular day the EU set a deadline for the BVI to adopt anti-offshore legislation.

What are the requirements of the Economic substance Act?

The Act introduces a number of new requirements for legal entities applying for registration in the BVI. Companies will be required to conduct real activity in the Islands. Doing business via the BVI without the so-called ‘economic presence’ (director, office, proper expenses) will become impossible. It is noted that under the new Act, the British Virgin Islands lose the benefits attracting all those who want to have a low-cost offshore company.

In essence, the requirements of the Act are as follows:

1. The activities of companies must be managed in the BVI (i.e. a company’s meetings of the board must be held regularly (there must be a quorum); all documents must be kept in the BVI).

2. A company must employ a sufficient number of well-trained and qualified personnel who are physically present in the BVI (the Act does not specify the exact number of employees; this depends on the scale of the company’s activities).

3. The expenditures shall take place in the BVI (adequate for the scale of a particular business).

4. There is a requirement of rented office in the BVI (according to the scale of a particular business).

On the transition period of existing and new companies

The new Act applies to all companies, except those which can prove the tax residence in another jurisdiction. So far, there are no specific requirements for such a proof.

Companies already registered in the BVI have a short transition period to bring their activities in line with the new Act. These requirements must be met before June 1, 2019. In case of non-fulfillment of this condition, a company will fail to be further registered in the BVI.

Moreover, there is a fine established for violating the Act. The minimum amount of such fine is set at the level of 5,000 dollars. In the event of failure to pay the fine, the cascade system of increasing fines is applied.

Registration of new companies in the BVI, starting from January 1, 2019, is possible only under condition of full compliance with the requirements of the Economic substance (companies and limited partnerships) Act.

In addition to the introduction of the ‘economic presence’ requirement, companies registered in the BVI must provide financial authorities with any information ‘reasonably required’ to verify compliance with the Act.