Belize is a well-known offshore jurisdiction that gained recognition back in the 1990s due to its flexible policy towards international companies and tax incentives granted to businesses incorporated locally.
Today, perhaps the most discussed topic in Belize is the introduction of new Economic Substance requirements.
At the end of 2018, as a result of pressure from the EU and the OECD, Belize introduced legislation changes regarding the business entities’ physical presence and operation, tax residency, and tax regimes in Belize.
The main idea was to oblige every company to prove that it was not a dummy corporation. Following this requirement, many formerly passive shell companies were replaced by real businesses in 2020.
Let’s discuss the details of the current rules. Which IBCs need to report substance in Belize? How should the financial statements and tax returns be filed?
If this article prompts further questions or your decision to apply for our professional expert assistance in business structuring, international tax planning, IBC registration, and legal operation in Belize, please write to our e-address given at the top of this page.
Economic Substance Act, ‘Relevant’ Activities, ‘Included’ Entities in Belize
Over recent years, the global offshore industry has undergone major changes due to pressure from international organizations fighting against tax base erosion and profit shifting. The key requirements included the complete elimination of unfair tax practices that used to have access to exemptions and allowances if they complied with quite minimal rules set for international companies in some jurisdictions, including Belize.
Belize has undertaken several reforms to update tax and corporate legislation to meet international standards. International Financial Services Commission of Belize (IFSC) is the main body responsible for the observation of international requirements, so it has developed some new report forms for international commercial companies.
The Economic Substance Act (ESA) in Belize is the main legal document regulating the main economic presence stipulations. It was approved in late 2018 and took effect on January 1, 2019.
The list of other regulations amended according to the new requirements for economic development in Belize includes the following acts:
- International Business Companies (Amendment) Act of 2018;
- The Guidance Notes for the Economic Substance Act explaining its provisions (3.03.2020).
Additions and amendments to existing corporate and tax laws have dramatically changed the rights and obligations of business entities registered in Belize. For example:
- IBCs have the right to prove the offshore tax residency in Belize or in another jurisdiction (the economic presence is proved by documents);
- International business companies are allowed to offer their services/products in the local market;
- legal entities have the right to acquire land and real estate property, shares in local companies.
Please note that previously the main law – the International Business Companies Act (IBCA) – did not give the rights to non-resident companies to conduct business, buy real estate, use local human resources, etc.
As for the current Belizean substance requirements, the following current main provisions of the ESA should be taken into account to understand the change:
- The law obliging economic substance is relevant only to the companies engaged in the so-called ‘relevant activities’ (see their list given below).
- IBCs can operate in Belize in one of three ways:
- do business in the Belize jurisdiction and be a tax resident of Belize;
- prove an economic presence and tax residence abroad;
- change or discontinue the relevant business activities so that not to be subject to the economic substance rules.
- Belize-incorporated companies engaged locally in ‘relevant activities’ are on the list of “included entities”. This includes locally incorporated commercial companies regulated under the IBC Act, as well as IFSC-regulated firms operating under an issued license.
- Belize IBCs are defined as “non-included entities’ if they can prove their tax residency in another jurisdiction, or if they do not conduct the ‘relevant activity’. In this case, the business has the right not to comply with the requirements for economic substance in Belize.
Given the innovations of the local legislation, we will consider only included businesses (because other IBCs – with tax residence abroad – must comply with the foreign requirements and regulations).
The ‘relevant activities’ for regulated and business companies in Belize include the following ones
- financing, leasing business;
- insurance, reinsurance business;
- banking business;
- shipping business;
- distribution and service center business;
- headquarters business;
- fund management business;
- holding company (which is either engaged or where at least one of its subsidiaries is engaged in one of the relevant activities).*
*If holdings registered as IBCs hold and purchase shares/interests in other companies, receive dividends and capital gains, and do not engage in any other activities, they do not have to prove Economic Substance/presence. In this case, they need to comply with the IFSC rules for filing, reporting, and use of qualified experienced staff. The holding company must have an administrative office and staff in the jurisdiction of tax residency, submit tax returns without payment of taxes in Belize.
Primary Income Requirements for International Business Companies in Belize
The key requirement for the Belizean IBCs is the physical presence of in the jurisdiction, and the primary income must be derived from operations in the local market.
Let’s look at the concept of the “primary income” and profit generation in Belize:
- The main criterion for determining the local income as primary is the company’s major amount of annual administrative and maintenance expenses incurred locally;
- Another criterion is the availability of a full-fledged local administrative office with adequate staff;
- The local staff is actively involved in business operations of the IBC in the Belize jurisdiction.
To prove a real economic presence in an offshore state, an International Business Company needs to perform the following regular activities:
- hold the directors’ meetings only in Belize;
- take decisions at the top level of the company’s organization structure only in Belize;
- record the decisions in the Minutes that need to be written and filed only in Belize;
- file and store the corporate documents, accounting records, Minutes, and reports at Belize registered office;
- besides, it is preferable to have at least one director with legal and lawful Belizean residency and appropriate qualifications.
Please note that all previously registered IBCs must comply with the economic presence requirements if they are on the list of included companies as defined in the ESA Act.
Deadlines for Proving the Economic Substance in Belize
If your business pays taxes in another jurisdiction and can provide its documented proof, there is no need to comply with the Economic Substance requirements. All other business entities need to take the following steps:
- make all necessary arrangements for the actual substance within 90 days from the date of registration of the legal entity;
- register an administrative office/legal address in the jurisdiction;
- have a documented proof that the GIGA (principal activity) is conducted in the jurisdiction;
- recruit/implant employees to properly conduct business in Belize;
- conduct audits and file annual financial statements following the established deadlines;
- register as a taxpayer and get a TIN tax number.
Please note: The economic substance requirements stipulate that the company must be audited within 60 days of incorporation. If this audit is not conducted, the IBC is subject to a fine of USD 75,000 (for ordinary companies) or USD 150,000 (for licensed entities).
Financial Reporting Requirements for Belizean IBCs
Under the Belize ESA Act, the annual reports are due within 9 months following the end of the reporting period. Let’s look at examples:
1. IBC is registered in Belize before January 1, 2020. The fiscal year lasts from April 30, 2020, to April 29, 2021. Reports are due between April 30, 2021, and January 31, 2022.
2. IBC is registered in Belize on January 1, 2020. Reports are due from January 1, 2021, to September 1, 2021.
3. IBC is registered in Belize after January 1, 2020. Reports are due from February 26, 2021, to November 26, 2021. (In this case, the tax year will be 25.02.2020-25.02.2021).
Belizean companies submit such documents according to the forms endorsed by the IFSC:
- B – for enterprises conducting ‘relevant’ activities (see the definition above);
- C – for holdings carrying out ‘relevant’ activities in the Belize jurisdiction;
- D – for entities that are not required to meet the economic presence requirements in Belize.
As you know, all Belizean international companies need a licensed agent. This is a special organization, which provides full legal support to companies during the period of registration and their opening of bank accounts. To such a registered agent, foreign entrepreneurs can send scanned financial statement forms for further submission to the Registrar.
Please note: all companies registered in Belize before October 16, 2017, are exempt from tax and substance requirements until June 30, 2021.
If you need legal assistance with the Economic Substance arrangements in Belize or in other offshore jurisdictions, you are welcome to write to our experts at the e-address given at the top of this page.
Penalties for the Non-Compliance with the Economic Substance Requirements
We have already mentioned above the penalties payable for missing the deadlines. However, more critical measures can be also imposed on the IBC in Belize: the revocation of the license and the complete removal of the legal entity from the register of Belizean companies.
The International Financial Services Commission (IFSC) is responsible for detecting such violations. This public authority obliges business entities to conduct an audit at their own expense, and in case of certain shortcomings, it prescribes a certain period for their elimination (not more than 30 days). Moreover, the Commission has the right to exchange the IBC’s financial statements and other financial data with the tax authorities of the country, which tax resident this company claims to be.
The list of cases of serious non-compliance with the ESA law is as follows:
- any obstacles caused to the IFSC representatives’ activities;
- storage of primary corporate documents outside of Belize;
- failure to prove the tax residency in another country (normally a tax certificate is sufficient);
- violation of reporting deadlines;
- intentional misrepresentation of data identifying the company as an entity liable to the Belizean requirements.
Registration of an IBC in Belize is quite favorable in terms of tax benefits. Given the recent changes, the range of opportunities for international commercial companies in the jurisdiction has substantially extended.
For extra details, please refer to our experts. Our representatives are ready to provide comprehensive legal support on matters related to the economic presence of your business in and beyond Belize.
What requirements do the Belizean IBCs have to meet?
The local IBCs in Belize are allowed to be incorporated by both residents and non-residents, do business locally, hire residents, own land, and hold shares in domestic companies. To be subject to the Belizean tax incentives (very low tax rates, and the absence of some corporate and individual taxes), they need to comply with the Economic Substance requirements. First, the primary source of income (derived through a ‘relevant’ business activity) needs to be located in Belize. Second, the administrative office with qualified staff needs to be located in Belize to ensure the proper operation of the company. Third, the annual financial reports with outcomes of the preliminary audit need to be submitted on time. Besides, the IBC must be an ‘included’ registered taxpayer in Belize (have a TIN), keep all corporate documents locally, and make decisions only in Belize. Finally, all shareholders’ meetings need to be held in Belize. Companies that wish to qualify for the Foreign Income Tax Exclusion and confirm a non-resident status may need to prove economic substance and tax residency in another jurisdiction.
Do Belizean companies need to obtain a tax number (TIN)?
Yes, if your business is not a holding company with primary operations outside Belize, your company needs a TIN. A state tax certificate will allow you to enjoy the tax privileges of Belize, have the documented proof of your tax residency in Belize – to provide it in other jurisdictions where your business may be present. Mostly IBCs use TIN numbers.
What are the deadlines for filing financial statements in Belize?
The reporting period depends on the date of incorporation of the company. In any case, Belizean IBCs must file financial statements within 9 months after the end of the fiscal/tax year. Companies registered before October 19, 2017, have the right not to comply with the substance requirement until June 30, 2021.