BVI: Economic substance guidance for entities claiming tax residence in Jersey, Guernsey, or Isle of Man

The tax authority of the British Virgin Islands (BVI) on 24 February 2023 issued an updated version (v3) of the rules on economic substance, providing specific procedures 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. 

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

The BVI economic substance law excludes from the scope of application of the BVI’s economic substance rules “non-resident companies” and “non-resident partnerships,” meaning companies and limited partnerships tax resident in a jurisdiction outside the BVI which is not on the EU “black list” (i.e., Annex 1 of the EU list of non-cooperative jurisdictions for tax purposes).

Under rule 2 of the BVI economic substance 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 tax authority.

The recent update to the BVI economic substance guidance introduced rule 5A, which targets specifically those entities claiming to be tax resident in 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 such requirement, rule 2 confirms that a legal entity cannot claim to be tax resident in a jurisdiction such as Guernsey, Jersey, or the Isle of Man if they are a transparent entity. This could cause issues for BVI limited partnerships that have their place of effective management (POEM) in Jersey, Guernsey, or the Isle of Man.

Sufficient proof of the entity being subject to the relevant corporate income tax law must be provided to the tax authority in support of the claim under rule 5A, which includes the following:

• 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
• Tax returns submitted to the competent tax authority of the relevant island of which the entity claims to be tax resident
• 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 following list provided in rule 3 for entities claiming to be resident for tax purposes in jurisdictions other than those with no corporate income tax regimes or Guernsey, Jersey, and the Isle of Man:

• Certificates or letters issued by the competent tax authority of the other jurisdiction
• Tax assessments, demands, or evidence of payment issued by the competent tax authority of the other jurisdiction
• Tax returns submitted to the competent tax authority of the other jurisdiction
• Rulings issued by the competent authority of the other jurisdiction

If 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 economic substance 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 economic substance guidance amended rule 5 to provide 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 the UAE.
 

Read a May 2023 report prepared by the KPMG member firm in the Crown Dependencies