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Substance on Substance
13 minutes | Mar 18, 2021
ITA investigations and enforcement powers and new legislative developments
In the fourth episode of Substance on Substance season two, Philip Graham, our global head of Investment Funds and Regulatory, and Counsel Joshua Mangeot, our BVI economic substance specialist, consider the ITA’s investigation and enforcement powers under the Economic Substance (Companies and Limited Partnerships) Act 2018 and discuss some expected changes to the legislation, including limited partnerships registered in the BVI without legal personality being brought within the regime.Key takeawaysCompanies and other legal entities which have not yet classified themselves or which have missed their first reporting deadline (which was 30 December 2020 for the majority of BVI companies incorporated before 2019) should take urgent action.“Nil returns” are required for each financial period even where an entity did not carry on any “relevant activity”.Deadlines have not been extended despite the Covid-19 pandemic.Failure to identify relevant activity or report without reasonable cause is an offence (and offences committed by a body corporate may lead to personal liability for directors and other individuals in limited circumstances).If an entity is determined to be non-compliant with economic substance requirements, it will be liable to civil penalties and this may trigger a spontaneous exchange of its beneficial ownership and economic substance information held on the registered agent “BOSS” database with overseas competent authorities.The ITA’s investigation powers are broad and may extend to other persons associated with the entity (for example, directors, officers or the registered agent).Failure to provide information to the ITA without reasonable excuse (or the intentional provision of false information) is an offence, so we recommend that entities and their operators use this as an opportunity to ensure that books and records are up-to-date and comply with BVI law requirements.If you receive an ITA notice or information request, we recommend taking advice if you are at all uncertain.Draft legislative changes were published on Friday 12 March – we expect the drafts will be amended but it appears likely that limited partnerships registered in the BVI without legal personality will be brought within the regime (in line with EU requirements) and that there may be changes to some of the fines and penalties. Previously only limited partnerships with legal personality were affected.Our full guide regarding the ITA’s investigations and enforcement powers can be found here. This and our other client guides may need to be updated as appropriate if the legislative amendments are brought into force.
19 minutes | Nov 27, 2020
Reporting criteria and tax non-residence claims
In a bumper episode for the holiday season, Phil and Josh venture into the weeds of the ES reporting requirements, giving a "deep-dive" into the reporting criteria and their long-awaited discussion of tax non-residence claims and Part 4 of the International Tax Authority (ITA) Rules.Key takeawaysReports must be filed by every "corporate and legal entity" (which includes all BVI companies) under the Beneficial Ownership Secure Search System Act 2017 via the registered agent within six months of the end of the financial period.The format of reporting via the BOSS(ES) database is prescribed by the ITA and reflects EU and OECD requirements.Every entity must file a report within the deadline - even if this just a "nil return".There are special regimes for "pure equity holding entities" (which only need to report on their "employees" and premises) and for "intellectual property business" - the latter is extremely complex and persons considering IP business are recommended to seek legal advice.Entities with other relevant activities, which are not tax "non-resident", are subject to the "general economic substance requirements" and must broadly report on:Turnover (or revenue/gross income) from the relevant activity.The person(s) responsible for direction and management of the relevant activity.Expenditure incurred on the operation of the relevant activity (both total and within the BVI)."Employees" (which includes individuals managed as employees, if employed by someone else) engaged in the relevant activity (both total and physically present within the BVI).Premises used in the relevant activity in the BVI.Details of "core income generating activity" (CIGA) carried on in the BVI.Further prescriptive details if any CIGA have been outsourced to any entity in the BVI.The ITA has encouraged entities to make use of professional services and other providers in the BVI to provide substance - particularly given the Covid-19 pandemic.Entities which carry on relevant activities may be treated as tax "non-resident" and exempted from ES requirements if, during the financial period:they are tax resident in another jurisdiction;they are "transparent", meaning all of the profits and gains are attributable to and taxable all some or all of the participators or partners in the entity; orthey are not a "pure equity holding entity" and all of their income from relevant activities is subject to tax in another jurisdiction,provided in each case the relevant jurisdiction does not appear on the EU's tax "blacklist".These rules can be complex to apply in the case of territorial, sectoral or source-based tax regimes and persons considering such regimes or making such claims are recommended to seek legal advice.Entities making such a claim must report on any "parent" and provide evidence of their tax status with their report - there is a mechanism to be treated as provisionally non-resident by the ITA in certain circumstances where evidence cannot be provided within the six-month reporting window.Making a non-residence claim will trigger spontaneous information exchange with the relevant overseas tax authorities (and any EU member state within which a beneficial owner or legal owner of the entity resides) to ensure the claim is valid.BVI entities which do not carry on any ES relevant activity do not need to report on (but should still ensure they have considered) any foreign tax status or obligations.
12 minutes | Nov 19, 2020
Key points for directors as economic substance reporting deadlines approach
In the second episode of our Substance on Substance Season two, Philip Graham, our global head of Investment Funds and Regulatory, and Joshua Mangeot, our BVI Economic Substance specialist, give an update on points directors and operators of BVI entities should be aware of regarding the economic substance reporting deadlines. Key takeawaysDirectors need to first assess where they are in the compliance reporting cycle - most BVI companies incorporated before 2019 will have to file their first report by early December 2020Obligations depend on the classification and greatly vary in what is requiredAllowing a company to incur fines or penalties for non-compliance may be a breach of directors’ duties, which can expose the director to personal liabilityThere are also specific offences under the Beneficial Ownership Secure Search System Act 2017 that can occur when a company has failed without “reasonable cause” to: Identify any “relevant activity” it carries onIdentify prescribed information regarding any such activities and its beneficial ownershipReport the prescribed information to its BVI registered agent within the relevant deadlinePenalties include significant criminal fines and penalties (and even personal liability where intent or failure to exercise all reasonable diligence can be shown), subject to a limited defence of “reasonable cause”We can help manage the classification, compliance and reporting process by: Performing a scoping exercise and working through the initial classificationsEstablishing whether or not there is relevant activity and advising next stepsAdvising the directors and the company to show they have discharged their dutiesWorking with directors and companies to establish and carry out the next steps that need to be takenWe are able to offer a suite of online tools to make this process easier.Harneys’ Economic Substance Classification Solution which provides real time formal legal advice to any BVI company or limited partnership for a low fixed fee can be found here. This solution offers users access to high quality legal advice on their entity’s status and obligations within minutes.More information about Harneys' Economic Substance reporting tools we have developed to assist registered agents and service providers coordinate reporting can be found here.
12 minutes | Oct 15, 2020
BVI economic substance reporting FAQs
Our BVI economic substance specialists Counsel Joshua Mangeot and Director of Client Services Amy Roost address some FAQs regarding the reporting process, which are relevant to all BVI companies.Key Takeaways:The reporting deadlines for most BVI companies and other relevant entities are imminent - and in some cases have already passed. Most BVI entities must ensure reports are submitted by their registered agent (RA) before 30 December 2020 or face significant fines and penalties - and even personal liability.Deadlines have not been allowed to be extended by the EU despite COVID-19 but the regulator has issued practical guidance in this area. Please click here for our alert on this topic.Compliance is assessed by “financial period”. Entities incorporated before 1 January 2019 have a default first financial period of 30 June 2019 to 29 June 2020. Companies incorporated from 1 January 2019 onwards have a first financial period of 12 months from incorporation. After the end of the financial period, entities have six months in which to arrange reporting into the BOSS(ES) system via their RA.The ES financial period may not be the same as the entity’s tax or accounting financial year. The entity needs to review its individual non-consolidated accounts to determine its assets and sources of gross income over the financial period - this may require discussion with the entity’s accountants.Since most BVI companies were incorporated before 2019 (and may not have changed their default financial period), their first report will have to be filed by their RA before 30 December 2020. Where any relevant activity was carried on during the financial period, entities either need to claim and evidence exemption due to their tax status under the “non-resident” exemption or submit reporting information demonstrating how they had adequate BVI substance over the period.There are special regimes for pure equity holding entities (holding business) and intellectual property business - the latter regime is extremely onerous and entities with any potential IP business should seek BVI legal advice. For entirely passive holding businesses or entities without any relevant activity, compliance and reporting should be quite straightforward. Nil returns are required even where there is no relevant activity.The tax non-resident exemption can also apply to transparent/disregarded entities and certain entities subject to tax on their income from relevant activities. Care needs to be taken when dealing with territorial or sectoral tax regimes and objective evidence will need to be provided to back up a claim. There is a mechanism to apply for provisional non-resident treatment, where such evidence cannot be obtained within the 6-month reporting window. This can be complex and may need tax advice. Josh and Amy’s practical guide to BVI ES reporting is available by clicking here.
7 minutes | Dec 4, 2019
Our final thoughts
In the fifteenth and final episode of Harneys’ Substance on Substance series for 2019, Philip Graham and Joshua Mangeot (plus special guest George Weston) examine the journey of economic substance in the BVI to date, from the inception of the Act to the final ITA Rules and discuss how BVI entities are coming to terms with these developments. Key takeaways-We are seeing an increasing level of conversancy with the key concepts of economic substance, following the draft ITA Code being released in April and the final Rules being released in October-We are seeing an increasing amount of entities classifying in order to ensure they are compliant with the new requirements – many entities are finalising their classifications, finding out whether they are affected at all or whether they are exempt or are passive “pure equity holding entities”, in which case no or very few changes will be required-Based on user feedback, we have updated our BVI Economic Substance Classification Solution (which is available at https://economicsubstance.vg), building out the functionality and expanding Harneys’ legal advice given to users throughout the process and to provide board resolution template wording for more straightforward cases-A large number of entities have progressed passed the classification stage and it is encouraging to see how many people are putting substance solutions in place (such as holding board meetings, appointing local directors and developing their presence in the BVI)-Ultimately, it is companies’ and other legal entities’ obligation under BVI law to identify whether they have relevant activity and if so, to take steps to ensure compliance – if entities have not yet considered this and classified themselves, we strongly recommend that they do soWhilst this is the last episode of the Substance on Substance series, more updates and a new podcast series will be coming your way in the new year; stayed tuned and thanks for listening! If you would like to subscribe to our client alerts on economic substance, please visit https://www.harneys.com/newsletter/.
8 minutes | Nov 19, 2019
Timing of compliance and reporting obligations
SOS Substance on Substance: Episode fourteen – Timing of compliance and reporting obligations In the fourteenth instalment of Harneys’ Substance on Substance series, Philip Graham and Joshua Mangeot discuss timing for compliance and reporting and address the ongoing obligation on BVI companies and other legal entities to identify “relevant activities”. This obligation came into effect from 1 October 2019 but is distinct from the reporting obligations which will generally commence in 2020 (except in the case of previously “exempt persons”, who now need to be reporting beneficial ownership information if they carry on any relevant activities).Key Takeaways• The amendments to the Beneficial Ownership Secure Search System 2017 (the BOSS Act) enacted on 1 October 2019 included an ongoing obligation to identify relevant activities (and failure to do so without reasonable cause is technically an offence)• As of the 1 October amendments, previously “exempt persons” under the BOSS Act which carry on any relevant activity have ceased to be exempt from reporting beneficial ownership information – this must generally be reported within 15 days (so potentially from 16 October 2019 at the earliest)• This bolsters any compliance obligations under the main economic substance legislation which came into effect for BVI companies and legal entities earlier in the year• All entities should generally have identified any “relevant activities” by now, if they have not already done so – although many BVI legal entities will be exempt from requirements to demonstrate substance either (i) because they are not carrying on any relevant activity or (ii) due to their tax status under non-BVI law• Conversely, reporting of the prescribed economic substance will generally commence in 2020 and is expected to be done via an entity’s BVI registered agent• The ITA is generally expected to commence an audit and investigation of entities’ compliance with the economic substance requirements under its broad power following the first round of reporting in 2020 but this will be on a “backwards-looking” basis in respect of the first compliance “financial period” – so entities should be maintaining robust books and records for the first financial period to be ready to report and comply with any ITA information requests• Where entities have taken legal advice on their position under the economic substance legislation, we recommend that they consider taking steps to preserve legal advice privilege in the advice itself (particularly if this will be provided to their registered agent or other third-parties)• Generally, the ITA has six years from the end of the relevant financial period to make a determination of non-compliance (but this timeframe is unlimited in cases of deliberate misrepresentation or negligent or fraudulent action)
9 minutes | Nov 7, 2019
What should directors and fiduciary service providers be considering?
SOS Substance on Substance: Episode thirteen – What should directors and fiduciary service providers be considering?In the thirteenth instalment of Harneys’ Substance on Substance series, Joshua Mangeot and special guest George Weston discuss BVI directors’ duties in the context of the Economic Substance (Companies and Limited Partnerships) Act 2018 (the ES Act) and provide an update on amendments to the Beneficial Ownership Secure Search System Act 2017 (the BOSS Act).Key takeaways:• We have received numerous queries from directors and officers of BVI companies and fiduciary and corporate services providers (CSPs) regarding their responsibilities in this area – the majority of questions relate to BVI companies• Directors of BVI companies are subject to various common law and statutory duties – broadly, the main duties under the BVI Business Companies Act 2004 (the BC Act) are (i) to act bona fide in the best interests of the company; (ii) to exercise their powers for a proper purpose and in accordance with the BC Act; and (iii) to exercise reasonable care and skill• Where a director allows or permits a company to incur fines or penalties for non-compliance with the economic substance requirements, this may give rise to potential liability to the company for breach of their general duties•There are also some specific obligations to be aware of under the ES Act and the BOSS Act – broadly:o as of 1 October 2019, every BVI company and other corporate and legal entity must identify whether it carries on one or more “relevant activities” under the ES Act (and if so, which activities) – failure to do so without “reasonable cause” is an offence and, in the case of a company, may be committed by directors, officers and other persons in certain limited circumstances by virtue of the BVI’s Interpretation Act (Cap. 136)o the International Tax Authority (ITA) has broad investigation powers to service notice on any person requiring them to provide such documents and information as the ITA may reasonably require to exercise its functions under the ES Act – failure to provide information without “reasonable excuse” or intentionally providing false information is an offenceo conversely, the general financial penalties for non-compliance with the ES Act do not fall on directors or officers but on the company, subject to the point made regarding directors’ duties generally• We therefore recommend directors and CSPs providing fiduciary services take appropriate legal and/or tax advice where they are uncertain regarding their companies’ compliance and reporting obligations under the ES Act – legal advice may benefit from legal privilege and, broadly, reliance which has been reasonably placed on such advice may discharge a director’s duties by virtue of specific provisions in the BC Act and may provide “reasonable cause” if the ITA investigates or challenges the basis of the classification• Directors should ensure they have understood these new obligations and classified their company and may wish to pass resolutions or hold a meeting to record the basis of their determination of their company’s position under the ES Act and the BOSS Act and to record the fact that they took appropriate advice• Expected amendments to the BOSS Act were published on 31 October 2019 – broadly, these bring the BOSS Act into line with the position anticipated by the ITA Rules of 9 October 2019This episode was recorded on Monday 4 November 2019.Stay tuned for more Substance on Substance.
7 minutes | Oct 24, 2019
Economic substance legislation and liquidations
Economic substance legislation and its impact on liquidationsIn the twelfth instalment of Harneys’ Substance on Substance series, Philip Graham and Joshua Mangeot discuss how BVI entities currently in liquidation or considering this option should approach the BVI economic substance (ES) requirements. They also consider the position of liquidators and points they should be aware of in this regard.Key takeaways:• We are not seeing many clients move to liquidate BVI vehicles as, once they have classified themselves, many BVI entities find they are either (i) exempt from the ES requirements as they are not carrying on any “relevant activity” or are “non-resident” for tax purposes under the expanded definition in the ES legislation and Part 4 of the International Tax Authority (ITA) Rules, (ii) already compliant as an entirely passive “pure equity holding entity”, or (iii) able to achieve compliance through other simple reorganisational steps• The ITA will expect that any applicable ES requirements will be complied with during the time an entity is in liquidation – so this is an area of interest to persons undertaking or contemplating a BVI liquidation• However, if an entity has been dissolved prior to an ES reporting obligation falling due, it will not exist and therefore cannot make a filing (noting that it is conceivably possible for an entity to be restored by a court)• Accordingly, directors/general partners and liquidators should (i) classify the entity (or confirm its classification remains correct), (ii) determine it is still carrying on, or receiving income from, any relevant activity (or if the business and receipt of income has ceased), (iii) consider the anticipated timetable of the liquidation alongside the entity’s ES “financial period” and reporting obligations, (iv) where necessary, put in place a compliance and/or reporting plan, and (v) ensure that they have maintained appropriate written records – particularly if the entity may still be in existence when a reporting deadline falls due• Professional liquidators and insolvency practitioners may also wish to review their terms of engagement and ensure that they have sufficient contractual protections and access to information as they will assume primary responsibility for compliance or reporting obligations from the onset of liquidation• In some cases, it may be desirable to elect or apply to the ITA to amend a “financial period” so there is a clear period for which the liquidator will be responsible for monitoring and, if necessary, reporting on compliance• We anticipate further guidance and legislative amendments this year regarding the “striking-off” regime under the BVI companies and limited partnership legislation, so will address that topic in future updatesThis episode was recorded on 23 October 2019.Stay tuned for more Substance on Substance.
9 minutes | Oct 19, 2019
ITA guidance to BVI industry participants
In the eleventh instalment of Harneys’ Substance on Substance series, Philip Graham and Josh Mangeot summarise the presentation which representatives from the BVI Government, BVI Finance and the International Tax Authority (ITA) delivered to BVI industry participants on 16 October 2019.Key takeaways: • The ITA Rules were formally published on 9 October 2019. The rules with statutory effect under the BVI Beneficial Ownership (Secure Search System) Act 2017 (BOSS) will come into effect when a further amendment to BOSS is enacted. This is expected to be passed by the BVI House of Assembly in one sitting within the next few days, as the proposed changes are purely for clarification.• We expect a revised Rules “v2.0” later this year reflecting consequential legislative changes (for example, to the BVI Business Companies Act 2004 and the Limited Partnership Act 2017) referred to in earlier ITA guidance and to clarify the format and timing of reporting via the updated BOSS system.• We also expect industry communications regarding funds and collective investment vehicles and the revised BOSS IT system before the end of 2019. Regulated BVI funds are not expected to be within the scope of the economic substance legislation.• The ITA confirmed that every legal entity must identify whether it carries on any relevant activity and report this via its BVI registered agent (RA), even if wishes to claim it is “non-resident” under Part 4 of the Rules – “nil returns” will be required and there is expected to be an annual filing obligation.• The obligation to identify this and the other prescribed economic substance information under BOSS falls on the entity (rather than the RA). The ITA encourages BVI entities to seek appropriate legal advice if they are at all uncertain regarding their classification and expects they will have maintained a clear record of the basis for their classification (including by reference to advice, where required). This reflects an ongoing obligation under section 9 of BOSS (from 1 October 2019 onwards) to identify whether the entity carries on any “relevant activity”, unless the entity has a “reasonable cause” not to have done so. The ITA expressed the view that the primary legislation passed in January 2019 and the draft guidance available since April 2019 should have allowed entities to classify themselves in most cases but that, in circumstances where the final Rules have changed or clients have reasonably relied on legal advice with which the ITA disagrees, this should be taken into account.• It was confirmed that entities will have six months from the end of the relevant “financial period” to submit the prescribed economic substance information to their RA, to be uploaded to the BOSS system. The filing timings will be set out in Regulations.• Entities carrying on a relevant activity requiring substance in the BVI (other than “non-resident entities” and most passive “pure equity holding entities”) which are moving their business and employees to the BVI do need to consider any applicable obligations under the BVI’s trade or financial services business licensing requirements and employee-related obligations (such as work permits, payroll tax and other contributions). The Premier confirmed that the BVI Government is standing ready to assist BVI entities to make that process as efficient as possible. Where an entity wishes to outsource activity within the BVI (for example, via their RA), it was noted that such outsourcing providers will have appropriate licenses and permits for their business and employees already.• There is further clarification around the obligations of entities in liquidation, which we will address in a future recording.This episode was recorded on 16 October 2019.Stay tuned for more Substance on Substance.
7 minutes | Oct 10, 2019
Classify, Classify, Classify In the tenth instalment of Harneys’ Substance on Substance series, Philip Graham and Josh Mangeot discuss the release of the final version of the guidance formerly known as the “Code”, which was published by the ITA on 9 October 2019 as its newly-titled Rules and explanatory notes (the Rules). Key Takeaways• With the certainty provided by the final Rules, it is vital that all directors and operators of BVI entities classify their entities as a matter of priority, if they have not already done so. There is an ongoing legal obligation on BVI entities under the Beneficial Ownership (Secure Search System) Act 2017, as amended with effect from 1 October 2019, to determine whether they are carrying on a relevant activity and the first compliance periods have started for all companies and other relevant legal entities.•Harneys online economic substance classification solution remains available for use at https://economicsubstance.vg and provides formal legal advice for a fixed fee – the solution reflects the final Rules and classifications received by users who have previously classified their entities using the solution are unaffected, subject to some minor cross-references to the numbering used in the final Rules.• the ITA released a useful summary document of the relatively minor amendments made to the last public published by the ITA. The key changes include: o where an entity wishes to be treated as provisionally “non-resident” due to its tax status under foreign laws, the “reasonable period” in which to provide the ITA with evidence of such status will be two “financial periods”o BVI entities in liquidation are still generally expected to comply with the substance requirementso the presumptions of non-compliance for BVI entities that are carrying on IP business have been made more difficult to rebut (ie disprove) and are subject to expanded reporting and evidentiary requirements• Economic substance reporting for each BVI entity will generally begin in 2020 at the end of the current financial period, so all BVI entities should determine any economic substance compliance requirements for the current period.This episode was recorded on 10 October 2019.
6 minutes | Sep 26, 2019
Intellectual Property Business
In the ninth instalment of Harneys’ Substance on Substance series, Philip Graham and Josh Mangeot discuss points to consider if your BVI entity may hold intellectual property (IP).Key takeaways: • A key focus of the EU and OECD has been on IP, as part of the base erosion and profit-shifting (BEPS) initiative.• The BVI definition of IP rights includes the typical types of IP (eg, copyrights, patents, trademarks, brand and technical know-how) although the list is non-exhaustive. If you are in doubt as to whether an asset may be IP, we recommend that you take legal advice.• It is important to note that the BVI “intellectual property business” definition requires an IP right in an intangible asset from which identifiable “income” accrues to the business (so if no identifiable income accrues there is no IP asset at all, for these purposes). Such income must also be separately identifiable from any income generated from any tangible asset in which the right subsists, if relevant. In practice, this probably requires consideration of the entity’s accounts or financial records in the first instance.• In practical terms, the primary focus of the economic substance legislation is on IP that has been artificially transferred to, or diverts income to, an offshore vehicle (eg, for tax planning purposes). That is really what the BEPS initiative is directed at – it is not aimed at IP that is held protectively or IP which is part of a separate business. “Income” is defined broadly but many entities will hold IP as part of an adjunct to their actual business and which does not generate any identifiable income itself but simply contributes to the general profitability of the business.• If you have some form of IP within your BVI entity we recommend that you speak to a Harneys lawyer. The penalties and fines around “high risk IP legal entities” in particular are potentially significant (and range up to US$400,000). There are also certain presumptions of non-compliance which may arise, where there is an “intellectual property business”.• The final version of the BVI International Tax Authority’s economic substance Code is scheduled for release on 30 September 2019.This episode was recorded on 26 September 2019.Stay tuned for more Substance on Substance.
8 minutes | Sep 19, 2019
Substance Solutions in the BVI
In the eighth instalment of the Harneys Substance on Substance series, Philip Graham and Ross Munro discuss Substance Solutions in the BVI.Episode EightPhil and Ross highlight the options available to BVI entities once they have classified themselves under the Economic Substance legislation and have determined that they need to put substance in place in the BVI.Key takeaways: • After the classification process is completed, BVI entities who have determined that they are conducting “holding business” will ask whether their current set up in the BVI is enough to meet their Economic Substance obligations.• There are a large number of entities in the BVI that would describe themselves as “holding companies” if asked, but will not actually be conducting “holding business” for the purposes of this legislation. We have touched on this in earlier podcasts.• Companies which are classified as conducting “holding business” are required to comply with their statutory obligations and have adequate premises and employees in the BVI. In most cases, adequate premises and employees will be satisfied by the registered office and registered agent function they already have in the BVI. However, this is not an absolute certainty. If a company conducting “holding business” is very active, then it might need to put additional substance in place.• Harneys are offering various degrees of health checks for BVI entities to ensure that all holding businesses are meeting their statutory obligations. This is something they should be doing anyway.• For the other relevant activities, BVI entities will need to establish the nature and scope of that relevant activity before determining what substance is required. Harneys Fiduciary can provide a number of different services including:o directorships to help with the direction and management requirement;o outsourcing services to perform the core income generating activity;o administration to provide accounting services and record keeping;o premises (shared and dedicated premises space); ando immigration, labour and work permit support, as well as the secondment of Harneys’ staff for certain activities.This episode was recorded on 10 September 2019.Stay tuned for more Substance on Substance.
9 minutes | Sep 11, 2019
In the seventh instalment of Harneys’ Substance on Substance series, Philip Graham and Joshua Mangeot give an update on timing of the ITA Code and consider some FAQs around the “holding business” and “finance and leasing business” definitions.Episode SevenPhil and Josh discuss the “holding business” and “finance and leasing business” definitions under the economic substance legislation and provide some practical examples of how Harneys considers the law will be applied in practice.Key takeaways: • We are waiting for the International Tax Authority (ITA) to publish its final Code. We understand the enabling legislation required for this to happen has been read in the BVI House of Assembly, and should appear in the official Gazette soon. The Code will then be released by the ITA.• We are receiving a number of queries regarding how to apply the narrow “pure equity holding entity” definition. Very broadly, Harneys’ view is that• Reading the definition purposively, a current account (whether or not it is interest-bearing) which is operated to receive dividends or capital gains and to pay the entity’s expenses should not be viewed as taking an entity outside the definition• Conversely, having a bank account which holds significant cash sums received from other sources of income, generates interest or holds sums of a significant value in proportion to the value of the equity participations held by the entity (for example, as part of a broader reinvestment or working capital strategy) may mean that the narrow definition is not met• The majority of brokerage accounts held by BVI entities that we have encountered are not of a type which would bring the entity within the narrow definition of “holding business”• Many people are also asking how to apply the “finance and leasing business” definition. This is a highly complex area and the definition is very broad on its face – if you are in doubt, please speak to a lawyer. It is worth noting though that it is the current Harneys’ view that many simple intercompany debt arrangements which are non-interest bearing are unlikely to constitute a “finance and leasing business”.This episode was recorded on 4 September 2019.Stay tuned for more Substance on Substance.
6 minutes | Aug 29, 2019
What should directors be doing now?
In the sixth episode of Harneys’ Substance on Substance series, Philip Graham and Joshua Mangeot examine good governance principles for BVI entities in the context of the classification process and what entities should be doing now in light of their statutory obligationsEpisode SixPhil and Josh discuss the release of the BVI Economic Substance Code (the Code) and the responsibilities of directors of BVI companies.Key takeaways:• The House of Assembly postponed the second and third reading of the Beneficial Ownership Secure Search System (Amendment) No 2 Act, 2019 due to Hurricane Dorian; they will meet next week to pass the law into effect• Following on from that, the International Tax Authority (ITA) will then finalise the Code• The day-to-day responsibility for managing the business and affairs of BVI companies falls on its directors, who are subject to various statutory and fiduciary duties – as such, they need to ensure they have classified their company and understood its obligations under the law as the first compliance periods have started and there are potentially onerous consequences for non-compliance• There are provisions in the BVI Business Companies Act 2004 (BCA) which broadly allow directors to rely upon expert advice when discharging their duties• The ITA has made it clear that it will expect to see robust documentary evidence of the basis of the classification, such as board resolutions (which will typically be provided to the registered agent in some form as part of instructing it to make the relevant filings under the BOSS system) – these can also be used to record that the board sought expert legal advice• There are existing statutory obligations under the BCA for BVI companies to keep records and underlying documents that enable the financial position to be determined at any point in time with reasonable accuracy – these include a statement of assets and liabilities and records of receipts and expenditure. If the ITA is unable to determine a clear basis for the classification, there is a risk that companies (or their registered agent, directors or other functionaries) may incur additional scrutiny in the event of an ITA investigation if they are unable to produce the required evidence promptly on requestThis episode was recorded on 28 August 2019.Stay tuned for more Substance on Substance.
5 minutes | Aug 22, 2019
Common misunderstandings regarding the ES timetable
In the fifth episode of Harneys’ Substance on Substance series, Philip Graham and Joshua Mangeot confirm that the first economic substance (ES) compliance “financial period” has commenced for all BVI companies and other relevant legal entities and also address some common misunderstandings regarding the ES timetable. Episode FivePhil and Josh discuss the release of the finalised International Tax Authority (ITA) ES Code, confusion on classification and compliance deadlines, and to which types of entity the ES requirements apply.Key takeaways: • The final form of the ITA Code is known and it should be available for formal release to the public by the end of August (as it requires enabling legislation) • The BVI ES legislation had immediate effect from 1 January 2019 for companies or limited partnerships with legal personality incorporated or registered in the BVI (legal entities) on or after that date• There was a grace period until 30 June 2019 for legal entities existing before 1 January 2019 – this has not been extended• As a result every legal entity is now in its first compliance “financial period” and needs to have classified its activities• There have been references to an October date but this point is of narrow application and relates to a delay to some new reporting obligations – it was not a change to the commencement dates for legal entities’ “financial period”• All BVI legal entities should be classified regardless of whether they are perceived to be out-of-scope – “nil returns” will be required in 2020• Based on statements by the ITA regarding the exercise of its investigation powers, entities should maintain a robust written record of the basis of their classification• Affected legal entities with relevant activities (which are not “non resident” for tax purposes) should be taking steps to become compliant or reorganise themselves if the ES requirements necessitate itThis episode was recorded on 21 August 2019.Stay tuned for more Substance on Substance.
7 minutes | Aug 14, 2019
In the fourth episode of Harneys’ Substance on Substance series, Philip Graham and Josh Mangeot discuss the option of continuing a BVI entity out of the jurisdiction (sometimes called a “re-domiciliation” or “migration”) as a response to the economic substance legislation.Episode FourPhil and Josh discuss (a) the global trend towards adopting economic substance (ES) requirements, (b) the need to classify individual entities’ activities and tax status to determine whether they are subject to the BVI ES requirements at all, and (c) the importance of that classification and properly weighing the costs of compliance against the transaction costs and ongoing operating costs resulting from the proposed re-domiciliation.Key takeaways:• Like any fundamental business decision, a re-domiciliation requires proper consideration of the transaction costs and other ongoing liabilities and obligations involved.• The key first step is to classify the BVI entity’s existing activities. Once entities are properly classified, in many cases they may discover that they:• do not have any “relevant activity” (and so are not subject to the ES requirements at all) • are an entirely passive “pure equity holding entity”, for whom the existing BVI registered agent and registered office arrangements may be adequate, or • can undertake simple reorganisational steps such that their business ceases to comprise any “relevant activity”, as defined.• Even where there is a “relevant activity”, many entities may be exempt from the ES requirements by virtue of their tax residence or tax status (ie, where the entity or the participators in the entity are chargeable to tax on the entity’s income under foreign tax laws).• Where proper classification has not been undertaken, we are seeing real-life examples of situations where entities may be incurring considerable expense and increases to their cost of business unnecessarily – in some cases based on a misunderstanding of the BVI requirements.• Compliance can be straightforward for many BVI entities. For some, their existing arrangements may be sufficient to comply with the legislation – in other cases, the changes required to achieve compliance are very simple and can be achieved without significant changes.All reputable international financial centres are adopting ES requirements as required by the EU and OECD, whose Forum on Harmful Tax Practice group has confirmed the BVI’s legislation meets the global standard.This episode was recorded on 13 August 2019.Stay tuned for more Substance on Substance.
6 minutes | Jul 30, 2019
Implications of The BOSS (Amendment) No 2 Act, 2019
In the third installment of Harneys’ SOS Series, Phil Graham and Josh Mangeot examine the implications of the first reading of the BOSS (Amendment) No 2 Act, 2019 in the House of Assembly, which is the enabling legislation for bringing into force the International Tax Authority (ITA)’s economic substance Code in the BVI. It is expected that the second and third reading will take place in the House as soon as possible, and will come into law shortly thereafter.Episode ThreePhil and Josh discuss the process involved in the Code being finalised in the BVI and what steps entities should be taking right now – particularly if they may be in breach of the Economic Substance (Companies and Limited Partnerships) Act, 2018, given that the first compliance period has now started.Key takeaways:• The first compliance period has commenced for all BVI registered companies and limited partnerships with legal personality.• Such entities are now in their first “financial period” for compliance purposes and need to classify their activities (and to consider their tax status, if they carry on any “relevant activity”) and take steps to ensure that they are compliant as soon as possible, if they have not done so already.• Nil returns” will be required for all BVI entities.• The ITA is expected to provide further clarification around what “evidence” will be accepted where an entity wishes to claim it is “non resident” for tax purposes.This episode was recorded on 19 July 2019.Harneys’ online classification solution Harneys’ Economic Substance online classification solution provides a cost effective way for BVI companies and limited partnerships with legal personality to demonstrate formally that they have considered their position under the economic substance legislation. The automated classification solution provides tailored real-time legal advice, provided by Harneys, for a flat fee of USD $250. For further information, please visit https://economicsubstance.vg Stay tuned for more Substance on Substance.
5 minutes | Jul 23, 2019
The SOS series was launched to provide our audience with the latest news on developments in the Economic Substance space, cutting through the confusion to deliver expert guidance from our Economic Substance Analysis team. Episode 2In the second episode, Phil Graham and Josh Mangeot discuss the key aspects of an industry update provided by BVI Finance on 12 July 2019. The update clarified that the commencement dates for entities’ first “financial period” remain unchanged and discussed the BVI International Tax Authority (ITA)’s stated approach to the use of its investigation powers as they relate to BVI entities, registered agents and other corporate service providers. Key takeaways: • The first compliance “financial period” has commenced for all BVI companies and limited partnerships with legal personality as set out in section 4(1) of the Economic Substance (Companies and Limited Partnerships) Act, 2018 – in particular, the 30 June 2019 commencement date for entities formed or registered before 2019 remains unaffected • All BVI companies and relevant entities should have conducted an entity classification to determine whether they carry on any relevant activities and, if so, to determine their compliance and reporting obligations• The ITA has stated that the manner in which a legal entity determines its classification should be formalised in such detail so as to allow the ITA to make a determination of compliance or non-compliance and, as part of its investigation and enforcement powers, it will be expected that registered agents will retain the relevant details and documentation to ensure the timely provision of that informationThis episode was recorded on 19 July 2019.Harneys’ online classification solutionHarneys’ Economic Substance online classification solution provides a cost effective way for BVI companies and limited partnerships with legal personality to demonstrate formally that they have considered their position under the economic substance legislation. The automated classification solution provides tailored real-time legal advice, provided by Harneys, for a flat fee of USD $250. For further information, please visit https://economicsubstance.vgStay tuned for more Substance on Substance.
9 minutes | Jul 15, 2019
Timing updates and classification requirements
Harneys launches its S.O.S. series, delivering hot takes on critical topics around the Economic Substance legislation. Each episode will give the very latest updates on this ever-changing environment, with an aim to provide consistency and certainty for our audience. First up, Phil Graham and Josh Mangeot discuss the immediate implications of the presentation Neil Smith, Director of International Business delivered to the BVI private sector on Wednesday 10th July.Key takeaways: • An update on the timing of the release of the Code and Guidance Notes• A steer from the ITA on what they will be expecting all BVI entities to do• Clarification around Tax Residence• The ITA’s view on the Harneys Economic Substance Classification Solution
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