Economic Substance update for BVI entities resident in the Crown Dependencies

On 24 February 2023, the Virgin Islands International Tax Authority (‘ITA’) issued an updated version (v3) of the Rules on Economic Substance in the Virgin Islands (‘BVI ES Guidance’), which now includes a specific procedure for entities claiming to be outside of the scope of the BVI’s economic substance rules by virtue of being tax resident in either Jersey, Guernsey or the Isle of Man. A specific list of evidence documents to be provided by such entities in support of their claim has been provided.

Tax residence outside BVI

Like many other offshore jurisdictions, the BVI have introduced economic substance requirements for entities (companies and limited partnerships) carrying on a relevant activity in relation to which they receive income. These requirements came into effect on 1 January 2019 (for companies and limited partnerships with legal personality) or 1 July 2021 (for limited partnerships without legal personality).

The Economic Substance (Companies and Limited Liability Partnerships) Act Revised Edition 2020, as amended (the ‘BVI ES Act’) excludes from the scope of application of the BVI’s economic substance rules “non-resident companies” and “non-resident partnerships”, meaning, respectively, companies and limited partnerships tax resident in a jurisdiction outside the BVI which is not on the ‘EU Blacklist’ (i.e. Annex 1 of the EU list of non-cooperative jurisdictions for tax purposes).

Claim of non-residence and the related amendments to the BVI ES Guidance

Under Rule 2 of the BVI ES Guidance, those BVI-formed entities claiming to be outside of the scope of the BVI’s economic substance requirements by virtue of being tax resident in a jurisdiction outside of the BVI need to make a claim to that effect and must support that claim to the ITA.

The recent update to the BVI ES Guidance introduced Rule 5A, which targets specifically those entities claiming to be tax resident in one of the Crown Dependencies (i.e. Jersey, Guernsey or the Isle of Man).

Under Rule 5A, the claim to be tax resident in Jersey, Guernsey or the Isle of Man can only be made if the entity is resident for corporate income tax purposes in the relevant island and is subject to the relevant corporate income tax law of the relevant island.

Consistent with the requirement under Rule 5A for the entity to be subject to the relevant corporate income tax law, Rule 2 confirms: “A legal entity cannot claim to be tax resident in a jurisdiction such as Guernsey, Jersey or Isle of man (sic) where they are a transparent entity.”  This could cause issues for BVI limited partnerships which have their place of effective management (‘POEM’) in Jersey, Guernsey or the Isle of Man as they would prima facie be subject to economic substance requirements in the BVI and the Island in which the POEM is located.

Sufficient proof of the entity being subject to the relevant corporate income tax law must be provided to the ITA in support of the claim under Rule 5A, namely:

1. Tax assessments, demands, or evidence of payment issued by the competent tax authority of the relevant island of which the entity claims to be tax resident;
2. Tax returns submitted to the competent tax authority of the relevant island of which the entity claims to be tax resident;
3. Confirmation that the entity is required to submit a corporate income tax return to the competent tax authority of the relevant island of which the entity claims to be tax resident.

The list of documents to be provided differs slightly from the list provided for entities claiming to be resident for tax purposes in jurisdictions other than those with no corporate income tax regimes (see further below) and the Crown Dependencies. In this case, under Rule 3 the claim can instead be supported by the following evidence:

1. Certificates or letters issued by the competent tax authority of the other jurisdiction;
2. Tax assessments, demands, or evidence of payment issued by the competent tax authority of the other jurisdiction;
3. Tax returns submitted to the competent tax authority of the other jurisdiction; or
4. Rulings issued by the competent authority of the other jurisdiction.

Where an entity is temporarily unable to provide the prescribed evidence under Rule 3 or Rule 5A in respect of any financial period within the reporting period, it can apply to be treated as provisionally resident in a jurisdiction outside the BVI under Rule 6, pending submission of the evidence confirming the position. This procedure has remained unchanged from the previous version of the BVI ES Guidance.

Economic substance needs to be assessed yearly. As filing deadlines have much longer windows in Jersey, Guernsey and the Isle of Man than they have in the BVI, BVI service providers need to ensure they have a process in place to make the provisional claim under Rule 6 and to then collect/remit the required evidence when available.

Furthermore, the recent update to the BVI ES Guidance amended Rule 5 introducing that an entity whose only sources of income from relevant activities are subject to tax in a jurisdiction outside the BVI will be regarded as resident for tax purposes in that jurisdiction. As such, an entity cannot be regarded as resident for tax purposes in a jurisdiction that does not have a corporate income tax system. A non-exhaustive list of jurisdictions that fall into this category has been provided, and it includes: Anguilla, Bahamas, Bahrain, Barbados, Bermuda, Cayman Islands, Turks and Caicos Islands and UAE.

How can KPMG help?

BVI-formed companies that are centrally managed and controlled in Jersey, Guernsey or the Isle of Man will be considered resident for tax purposes in the respective relevant Crown Dependency. As such, they will need to register for tax purposes in the relevant jurisdiction and file annual corporate tax returns as appropriate. Where they carry on a relevant activity, the economic substance implications should also be carefully considered.

Our cross-border team of experts can assist with all aspects of these important changes, from the registration procedures and corporate tax return filing requirements in Jersey, Guernsey, or the Isle of Man as appropriate, to the claim of non-residence in the BVI and the collection of the necessary supporting documentation.

Please reach out to a member of our team if you have any questions.