International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Saturday, December 8, 2018

BVI Government Plans Legislation to Address EU Concerns on Economic Substance

The Premier announced that the BVI Government has responded constructively to the European Union’s listing exercise and will take all reasonable steps to address EU concerns relating to ‘economic substance’.  The Premier also announced that Cabinet has approved a Bill to meet this commitment. It is planned that the House of Assembly will be asked to consider the new legislation at the Sitting on Thursday 13 December, with the intention that the legislation will be in force by 31 December 2018 – the deadline set by the European Union.

The EU is compiling a list of non-cooperative jurisdictions on the basis of certain criteria it has set covering tax transparency, fair taxation and compliance with the OECD’s Base Erosion and Profit Shifting (BEPS) requirements. As part of this process the EU screened 92 countries in 2017 – including large nations such as the US and China. The BVI Government engaged positively with the EU throughout the screening process.

Due to the damage caused by the September 2017 hurricanes, a number of countries/jurisdictions, including the BVI, were given more time to commit to meeting the EU’s concerns. The Council of the EU accepted BVI’s commitment in March 2018.   The BVI meets the EU’s criteria when it comes to transparency, anti-BEPS measures and the general principles of ‘fair taxation’. However, the EU required further assurances from the BVI and other low or zero corporate income tax jurisdictions including Bermuda, the Cayman Islands and the Crown Dependencies on the issue of ‘economic substance’, set out in criterion 2.2 under the heading of ‘fair taxation’.

The new legislation will introduce economic substance requirements for all companies and limited partnerships which are registered and tax resident in the BVI. Every Corporate Service Provider registering a company that falls under the scope of the legislation will have to know where the company or limited partnership is tax resident and must be ready to relay that information to the BVI’s competent authorities.  If a company or limited partnership is tax resident in the BVI, it must demonstrate ‘economic substance’. Companies and limited partnerships that are tax resident in the BVI will have the opportunity to upskill those who work in the financial services sector through providing value-added services and increased sophistication of the sector. Companies and limited partnerships which are tax resident in BVI must, in relation to any relevant activity, carry out core income generating activities in BVI.

Relevant activities are: 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.

The BVI is not alone in facing these challenges. But in every challenge there is an opportunity and the Government will engage closely with the BVI’s international business and financial services sector to ensure that the jurisdiction continues to provide services that benefit the global economy. The BVI is resilient. And the BVI is united in ensuring that we continue to put in place the conditions to allow existing sectors, and new sectors, of our economy to prosper and grow.”

Background In December 1997, the Council of the European Union adopted a resolution on a Code of Conduct for business taxation with the objective of curbing harmful tax competition and established the Code of Conduct Group (COCG) to oversee its implementation. In 2016, the European Union adopted criteria covering tax transparency, fair taxation and anti-base erosion and profit shifting (BEPS) against which countries were assessed during a screening process conducted by the COCG during 2017. No concerns were raised by the COCG regarding the BVI’s standards of tax transparency and implementation of anti-BEPS measures. The BVI was also regarded by the EU as compliant with the general principles of fair taxation. Jurisdictions with low or zero rates of corporate income tax were also assessed against criterion 2.2 (under the “fair taxation heading) which states: “The jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction.” Following the screening process the COCG expressed concerns about BVI’s possible compliance with the criteria regarding a “legal substance requirement for entities doing business in or through the jurisdiction”. The COCG also expressed concern that the lack of legal substance requirements in BVI “increases the risk that profits registered in a jurisdiction are not commensurate with economic activities and substantial presence.”

In response, the Government made a commitment to implement reforms by the end of 2018 to ensure that BVI businesses have sufficient economic substance. Other jurisdictions (including the Crown Dependencies, Bermuda and the Cayman Islands) made similar commitments. The BVI was placed in “Annex II” of the list of jurisdictions produced by the COCG and endorsed by the EU Economic and Financial Affairs Council. Annex II lists jurisdictions that were identified as raising concerns but had made appropriate commitments to resolve them. The Government has entered into dialogue with the European Commission both in plenary sessions (with other jurisdictions) and bilateral meetings. Discussions have also taken place with individual EU Member States and with the OECD. The EU is expected to review legislation passed by BVI and other criterion 2.2 jurisdictions in early 2019. It is then the EU’s intention to announce an updated list of non-cooperative tax jurisdictions by March 2019. The OECD has recently adopted substantial activities requirements to be applied to jurisdictions that levy low or (like BVI) zero corporate income tax. This means that substance rules will no longer be a EU standard but will be a global standard. The BVI has always adhered to global standards and will continue to do so.

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