Notwithstanding the current de-offshorization efforts, tax havens still enjoy interest on the part of international entrepreneurs. The British Virgin Islands (BVI) has introduced new economic substance requirements, which has increased offshore company maintenance costs for some industries. So, is it still worthwhile to register an offshore company in the BVI and what type of business activities should you engage in if you want to set up a corporation in this jurisdiction? Let us discuss what the new requirements are and how you should proceed to register an offshore company in the BVI.
Economic substance requirements in the BVI
The economic substance legislation came into effect on January 1, 2019 in the BVI. As well as local companies, foreign offshore companies that are registered in the jurisdiction and that enjoy the tax benefits are subject to the new requirements. The economic substance requirements include the following ones: First, the offshore company shall be managed by a resident of the BVI. Second, the company shall have a sufficient number of personnel to conduct its business activities. Third, the company shall have adequate operational costs, which includes renting an office in the BVI.
The economic substance requirements have been introduced to combat sham companies. At the same time, the legislation does not contain any precise figures. The terms ‘sufficient’ and ‘adequate’ are interpretable in each particular case. If you are not sure if your BVI-registered offshore company falls under the new requirements, we will be happy to provide legal advice to you. Among other things, we help register offshore companies in the BVI and we keep track of all the changes in the local legislation related to the offshore industry.
Industries affected by the economic substance requirements in the BVI
The aforementioned requirements are not applicable of all spheres of business. Only some ‘relevant’ industries are affected. These include the following ones:
- Banking business – acceptance of deposits, issuance of loans, investment support;
- Insurance business – life insurance, reinsurance;
- Investment fund management;
- Finances and leasing operations;
- Shipment business – activities related to cargo transportation, technical services, marine vessel rent, ticket sale, ship crew management;
- Holding activities – participation in capitals and acquisition of income from such participation in the form of dividends and capital gains;
- Intellectual property ownership – acquisition of income from patents, trademarks, and other types of income from intellectual property: royalties, franchises, licenses for non-material assets, and so on;
- Provision of business headquarters to a company;
- Service distribution (only between affiliated entities).
The effects of the legislation on choosing the type of offshore company in the BVI
How are the new requirements going to affect the offshore companies in the BVI? Obviously, any restrictions introduced in an offshore jurisdiction make it less attractive for international entrepreneurs. You should bear in mind, however, that analogous measures are being taken in all tax havens today. The British Virgin Islands has always been among the leaders in the offshore world and the legislation processes that are currently going on there will set a mark for other offshore jurisdictions too.
Some of the industries listed as the affected ones require obtaining licenses, which means that offshore companies working in these spheres have faced restrictions before. We are talking about banks, insurance companies, fund management companies, and freight ship-related companies. Most of these corporations already have economic substance in the BVI so meeting the new requirements is not a problem for them at all.
For others, there are various methods of registering an offshore company in the BVI. First, a group of people can set up a holding company in the jurisdiction. Lax economic substance requirements are normally applied to this sort of business corporation in the BVI. Besides, the holding company can receive profits from the interests on the bank deposits. This will let it keep outside the group of ‘relevant’ industries.
Second, establishing economic substance is required if services are distributed to affiliated entities. If an offshore company registered in the BVI distributes the services to third parties, the economic substance requirements do not apply.
Can I change the type of business activities to avoid having to establish economic substance in the BVI?
If you change the description of your business activities in the corporate documents, you will have to notify the Company Register of it. And the Company Register is not going to like that! Thus, to avoid unnecessary attention to your company on the part of the regulator we recommend that you should not do so.
Do economic substance requirements apply to a consulting offshore company?
No, consulting companies are not on the list of ‘relevant’ industries.
What happens if I fail to meet the substance requirements?
If an offshore company registered in the BVI refuses to obey the new rules, it is going to face large fines and exclusion from the Company Register. Some sorts of violations may entail even more serious consequences such as a criminal penalty.