The British Virgin Islands International Tax Authority (ITA) has published a draft code covering its economic substance rules, and said investment funds will not be subject to the legislation.
Economic substance rules are designed to ensure that companies operating in a jurisdiction must have both a substantial purpose aside from reduction of tax and an economic effect aside from the tax effect in order to be considered valid.
The ITA’s draft states: “No legal entity may carry on a relevant activity in the Virgin Islands during any financial period ending on or after 31 December 2019 unless it complies with the economic substance requirements in relation to that activity.
“A legal entity which carries on more than one relevant activity shall comply with the economic substance requirements in respect of each activity.”
Investment fund exemption
However, as far as investment funds were concerned the ITA draft states: “Although not specifically carved out of the definition of relevant activity, it will be noted that the business of being an investment fund is not a relevant activity.
“It is outside the scope of the economic substance requirements in the same way as all other forms of business activity which are not specifically mentioned. Of course, if a legal entity carries on other activities besides being an investment fund, and those activities do constitute a relevant activity, the economic substance requirements will have to be fulfilled in respect of those other activities.”
Despite this though, the European Union Code of Conduct Group is set to release additional technical guidelines regarding economic substance rules relating to funds in mid-2019, which might affect the way the British Virgin Islands’ legislation is drafted.
Defining ‘relevant activities’
Determining when an entity is subject to the new economic substance rules, will require firms to answer three questions:
“(a) is the entity of a type which falls within the economic substance legislation?
(b) if it is, is it carrying on a relevant activity?
(c) if it is carrying on a relevant activity, is it resident for tax purposes in a jurisdiction outside the BVI (and which is not on the EU list of non-cooperative jurisdictions for tax purposes)?
The ITA said: “Only if the answers to (a) and (b) are affirmative and the answer to (c) is negative will the economic substance requirements apply to the entity.”
Additionally, if economic substance applies, different entities will have to meet different requirements.
The ITA has drafted three entity categories: holding business; intellectual property business and “any other type of relevant activity”, which will have different rules to abide by.
