14 January 2021

BVI economic substance: takeaways from the first economic substance reporting period 英属维尔京群岛经济实质:第一个经济实质报告期的概述

For many companies incorporated in the British Virgin Islands (BVI), the first deadline for reporting on economic substance (ES) compliance was 29 December 2020.¹

Carey Olsen  has advised numerous businesses in APAC on compliance with the BVI ES requirements and assisted them with reporting to the BVI International Tax Authority (ITA).  

We set out below some key takeaways from the first reporting period. 

Classification

The classification exercise determines whether a BVI legal entity (e.g. a company) is ‘in scope’ for the purposes of the relevant ES requirements and needs to be made with a detailed understanding of all the activities carried out by the BVI company.

Where a BVI company is (as is often the case) part of a larger corporate group, the activities of the group and the role of the BVI company within the group need to be fully understood in order to correctly classify the BVI company for ES purposes.

The BVI ES regime has particular nuances that need to be understood to ensure that the entity is correctly classified and that only the ES requirements to which it is actually subject are complied with. 

A good example of this is the reduced ES test that will apply to a ‘pure equity holding entity’ (being a legal entity that only holds equity participations in other entities and only earns dividends and capital gains). In some cases the reduced ES test may be satisfied by retaining a registered agent and registered office in BVI. If an entity holds other assets (e.g. real estate) it will not be a ‘pure equity holding entity’ and will either fall outside the ES requirements entirely or within one of the other categories of business subject to ES requirements. 

Classification of a business is only the first step towards compliance. Once a business has been classified, it will either be ‘in scope’ or ‘out of scope’. If ‘out of scope’, nothing further needs to be done (other than to report as such to the ITA). If in-scope, the next step involves consideration of the ES requirements applicable to that type of business and how to comply with such requirements. 

Advice

Once a BVI company had been classified and determined to be in-scope, it was necessary to consider the level of ES required to be demonstrated in the BVI (in terms of employees, expenditure and premises) for that particular business over the financial period in question (which for companies subject to the reporting deadline of 29 December 2020, was 30 June 2019 to 29 June 2020). 

As the level of substance is different for every business (it will vary according to the type of business carried on and, in some cases, the level of income derived from that business) each business needs to be considered on a case by case basis.

BVI companies are extremely popular in APAC and are widely used for commercial purposes as diverse as real estate holding, personal investment, asset finance and leasing and as funding vehicles for onshore businesses. We found that clients saw significant value in having a reasoned legal opinion from BVI lawyers outlining the applicable requirements for their individual business and, where relevant, providing a risk assessment of any compliance issues and offering solutions for remediation. 

Having advice on file also provides comfort for directors and other stakeholders who are required to certify an ES reporting form to the ITA. It also positions those businesses to demonstrate that they have considered and taken advice on their applicable ES requirements.

Structuring and restructuring 

The deadline has firmly focused the market on compliance with ES requirements and the implications of non-compliance (for in-scope businesses and also parties contracting with them).

In our corporate transactional practice, we have noticed that parties are increasingly considering the implications of ES requirements on new and existing transaction structures.

Where a corporate or finance transaction involves a BVI entity, it is sensible to examine the proposed structure and funds flow to anticipate and address any ES considerations early on.

For some businesses, an orderly unwind of certain in-scope activities (for example, assigning loan receivables from a BVI entity to an onshore group member) while continuing with other activities (e.g. real property holding or capital raising, both of which are often out of scope) can be considered. For other businesses, outsourcing certain business activities within the BVI or putting local management in place may represent a path to compliance.

Risk and mitigation

Businesses are understandably concerned to understand the risk in the case of any potential non-compliance.

As enforcement of the BVI ES regime is untested, it remains to be seen the approach the ITA will take in practice. The Organisation for Economic Co-operation and Development (OECD), whose base erosion and profit shifting (BEPS) framework provided the impetus for ES rules in BVI and elsewhere will be keen to see robust enforcement. 

What is also clear is that the BVI authorities will be dealing with an unprecedented number of ES reports in early 2021. The fine for a first breach of ES requirements is a minimum US$5,000. A determination of non-compliance by the ITA is appealable and must explain the reasons for the determination.

ES compliance is an ongoing requirement (BVI companies subject to the 29 December 2020 deadline are currently midway through their second financial period of 30 June 2020 to 29 June 2021 and will be required to report for the second financial period on or before 29 December 2021). As the activities of a business change over the financial period, the applicable ES requirements also change.

Having regularly updated legal advice on file will assist businesses to manage risk and to show that they are considering and actively managing their ES compliance in BVI. For new transactions and business structures involving BVI entities, considering and addressing ES requirements early on should become a matter of course. 

1. In the case of a BVI business company incorporated before 1 January 2019 which has not elected for an earlier commencement for its first financial period.

对于许多在英属维尔京群岛(BVI)成立的公司而言,有关经济实质(经济实质)合规申报的第一个截止日期是2020年12月29日。¹

我司香港办公室已为亚太地区众多企业就遵守BVI经济实质的要求提供专业的法律服务,并协助他们向BVI国际税务局(税务局)进行申报。

我们在下述列出从第一期报告中归纳的一些要点。

分类

通过分类可以确定BVI法律实体(例如公司)是否属于经济实质要求的“在内范围”,并且是否需要对BVI公司开展的所有活动进行详细分析。

在一般情况下,当一家BVI公司是较大规模的企业集团的一部分,我们则需要充分了解该集团的活动和该BVI公司在集团中的角色,以便将BVI公司按照经济实质规定作出正确分类。

BVI的经济实质制度是一套精细复杂的制度,需要充分了解其中的差别以确保该实体被正确分类,并确保该实体遵循相应的经济实质规定。

简化的经济实质测试就是一个很好的例子。该测试适用于“纯股权持有实体”,即仅持有其他实体的股权并仅获得股息和资本收益的法律实体。在某些情况下,可以通过在BVI保留注册代理和注册办事处来满足简化的经济实质测试的要求。 如果一家实体持有其他资产(例如房地产),则该实体不属于“纯股权持有实体”,其会超出经济实质的规定范围,或属于经济实质规定的其他业务活动类别。

正确地进行业务活动分类只是实现合规的第一步。当分类完成后,则可把实体分为“在内范围”或“范围以外”。如属于“范围以外”,则无需采取任何其他动作(除了向税务局报告)。 如属于“在内范围”,下一步则需要考虑适用于该类业务活动的经济实质要求以及如何遵守相应规定。 

建议

一旦对BVI公司进行分类并确定其属于“在内范围”后,需要从公司员工、开支和办公地址等方面考虑在该财务期间内,特定业务活动在BVI需要证明的经济实质级别(适用于需要在2020年12月29日前提交报告的公司-财务期间为2019年6月30日至2020年6月29日之间)。

由于每个业务活动的经济实质级别不同(它会根据所开展业务的类型而有所不同,在某些情况下,还取决于从该业务中获得的收入),因此需要进行个案分析。

BVI公司在亚太地区被广泛用于商业用途,例如房地产控股、个人投资、资产融资和租赁以及在岸企业的融资工具。我们发现,很多客户需要BVI律师为特定业务活动提供专业的法律意见,并为任何合规性问题提供风险评估和解决方案。

对于需要向税务局认证经济实质报表的董事和其他利益相关者来说,也需要寻求专业的法律意见。这些企业亦可以表明他们已经考虑了其适用的经济实质要求并已采纳相关建议。

建构和结构重组

对于处于“在内范围”的企业以及其他缔约方而言,此报告的截止日期主要针对是否符合经济实质的规定以及未合规所带来的影响。

在我司的公司交易业务中,我们注意到各方逐渐考虑到经济实质规定对新交易和现有交易结构的影响。

如公司或金融交易涉及BVI实体,适当的做法是审查拟议的交易结构和资金流,以尽早预测并解决经济实质规定的要求。

对某些企业来说,则可以考虑有序开展某些经济实质“在内范围”的业务(例如,将来自BVI实体的应收贷款分配给在岸公司),同时继续进行其他活动(例如,持有不动产或融资)。而对于另一些企业而言,将在BVI实现某些业务活动的外包或实施当地管理也可以满足合规要求。

风险和降低风险

企业需要了解任何潜在不合规的风险。

由于BVI经济实质制度的执行还未得到任何测试,因此税务局将在实践中具体采用何种方式还有待观察。经济合作与发展组织(OCED)的税基侵蚀和利润转移(BEPS)框架促使BVI及其他地区加速经济实质的立法,并希望得到强而有力的执行。

与此同时,BVI当局将在2021年初处理前所未有数量的经济实质报告,而首次违反经济实质规定的罚款至少为5,000美元。对于税务局作出的不合规裁定可进行上诉,并且税务局必须说明做出裁定的原因。

遵守经济实质规定是一项持续不断的要求(需要在2020年12月29日前提交报告的BVI公司目前正处于其第二个财务期- 2020年6月30日至2021年6月29日中期,并将在2021年12月29日或之前提交第二期报告)。随着企业的业务活动在整个财务期内的变化,适用的经济实质要求也会产生变化。

定期获取最新的法律意见将有助于企业管理风险并表明他们正积极管理并遵守BVI的经济实质合规要求。对于涉及BVI实体的新交易和新业务结构,则更需尽早考虑并满足经济实质要求。  

1. 适用在2019年1月1日之前注册成立而且没有选择较早开始第一个财务期间的BVI公司。

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