From 1 January 2019, new legislation came into effect requiring certain entities to establish sufficient economic substance in the British Virgin Islands (BVI) and Cayman Islands, respectively, and imposing reporting obligations on such entities at the end of each financial year.
RELEVANT ENTITIES & RELEVANT ACTIVITIES
The new rules apply to any relevant entity that engages in certain relevant activities.
Relevant entities include any (i) limited liability company, (ii) limited liability partnership, and (iii) foreign company registered in the BVI or the Cayman Islands as foreign company. Cayman Islands investment funds as well as BVI limited partnerships that do not have legal personality are not considered relevant entities. Entities that are tax residents outside BVI or the Cayman Islands are also excluded from the definition of the relevant law.
The relevant activities include at least one of any of the following businesses:
(a) banking
(b) insurance
(c) shipping
(d) fund management
(e) finance and leasing
(f) headquarters
(g) holding
(h) intellectual property
(i) distribution and service center
ECONOMIC SUBSTANCE REQUIREMENTS
Relevant entities that conduct relevant activities must establish adequate substantive activities in their local jurisdiction.
A company deems to have satisfied the economic substance test if:
(a) it conducts core income generating activity in relation to that relevant activity in its jurisdiction;
(b) it is directed and managed in an appropriate manner in or from within its jurisdiction in relation to that activity;
(c) having regard to the nature and scale of the relevant activity, it has an adequate number of suitably qualified employees who are physically present in its jurisdiction, has adequate expenditure incurred in such jurisdiction and has adequate physical offices or premises as may be appropriate for the core income generating activities in its jurisdiction.
Pure equity holding entities will be deemed to have adequate substance if they comply with their statutory obligations under the applicable companies law and have adequate employees and premises to manage those equity interests.
Outsourcing of core income generating activities is permitted in certain circumstances, provided that the relevant entity is able to monitor and control the carrying out of the core income generating activities by the other entity.
REPORTING OBLIGATIONS
In the BVI, relevant entities that fall within the economic substance rules are required to report certain information to their BVI registered agent. These rules have further amended the BVI Beneficial Ownership Secure Search System Act, 2017, which will require relevant entities to provide information concerning the tax residency status and activities to be integrated into the BVI’s existing search database accessible by its competent authorities, effective as of 30 June 2020. This information may ultimately be provided to the BVI International Tax Authority (ITA), which may disclose such information to overseas authorities under certain circumstances, including where there is a breach of economic substance requirements or where the entity claims to be an EU tax resident. Penalties are imposed both for failure to provide required information, and for operating a legal entity in breach of the economic substance requirements, which may include fines, up to 5 years’ imprisonment and/or strike-off of the relevant entity from the register.
In the Cayman Islands, relevant entities will be required to file an annual notice with the Cayman Islands Tax Information Authority (TIA) stating whether or not they are carrying out relevant activities. Those carrying out relevant activities will be required to file on an annual basis return setting out particulars as to their income, expenses, assets, management, employees, physical presence and other matters. These filings will be examined by the TIA to ensure that such entities have adequate economic substance in the Cayman Islands. Where an entity has breached the economic substance requirements, certain information may be disclosed by the TIA to overseas tax authorities. Those relevant entities lacking adequate substance will be given direction on how to meet the test and may face a fine of up to $10,000. Continued failure to meet the test in the following year may result in higher fines and could lead to the entity being struck off the register. Penalties including imprisonment for up to 5 years may be imposed to persons that fail to provide the relevant information to the authorities.
HOW CAN RPA ASSIST
Relevant entities incorporated before 1 January 2019 which conduct relevant activities must comply with the economic substance requirements from 1 July 2019, while relevant entities incorporated after 1 January 2019 must comply with the requirements from the date they commence the relevant activity.
An internal review will need to be carried out to assess whether a relevant entity is conducting any relevant activity. Any affected entities shall consider what measures, if any, they should take in order to meet compliance.
RPA is happy to assist with analyzing specific circumstances of any entities that may fall under the new requirements and discuss strategic mitigating actions to ensure compliance.
The author of the article is Anastasia Sarkisian.
Anastasia is a legal consultant at Royal Pine & Associates. She is qualified lawyer with experience in the corporate field and admitted member at the Cyprus Bar Association.
* This publication has been prepared as a general guide and for information purposes only. It does not purport to be comprehensive or to render legal advice.
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