British Virgin Islands (BVI)
Legal entities must comply with the reporting requirements prescribed in the Beneficial Ownership (Secure Search System) Act 2017, as amended (BOSS Act) and must proceed with their assessment in accordance with the 2018 Economic Substance (Companies and Limited Partnership) Act, as amended (ESA). Other than the reporting requirements under the BOSS Act, annual reporting obligations under ESA remain in full force and effect whilst the substance code remains in draft as a guide to the introduced legislation. If identified to fall under the scope of ESA, an entity must annually report and disclose additional information to its registered agent for substance purposes, including but not limited to its total expenditure, number of employees and address of its premises in the BVI in connection with the relevant activity, unless it is resident for tax purposes in a jurisdiction outside the BVI for which it will need to declare and provide supporting evidence. If, however, an entity considers itself exempt from the reporting obligations of ESA, it will need to provide robust documentary evidence to support such exemption.
Existing BVI legal entities incorporated before 1 January 2019:
30 June 2019 | Financial period commences no later than this date.
29 June 2020 | Financial period ends 12 months later unless the entity elects for shorter period e.g. to align with tax accounting period.
29 December 2020 | Complete information must be entered in registered agent’s database no later than 6 months after end of the financial period.
The financial period of entities incorporated on or after 1 January 2019 and their obligation to comply with the economic substance requirements will be one year from the date of their incorporation.
Cayman Islands (Cayman)
Relevant entities that are required to satisfy the economic substance test (ES Test) must submit an annual return setting out particulars as to the type of their activity, income, expenses, assets, management, employees, physical presence, property, equipment and other matters.
a) Entities incorporated before 1 January 2019 must satisfy the ES Test in relation to the relevant activity from 1 July 2019;
b) Entities incorporated on or after 1 January 2019 must satisfy the ES Test from the date on which they commence the relevant activity;
c) Entities performing discretionary investment management registered as excluded persons must satisfy the ES Test in relation to fund management business from the date of their registration or re-registration under the Securities Investment Business Law 2019 as amended, the deadline for which is 15 January 2020.
As of 2020, all entities must notify the TIA whether or not they fall under the scope of substance requirements and relevant entities must provide certain additional details including their tax residence and date of their financial year.
Within 12 months of the end of their financial year, affected entities must submit a report setting forth prescribed details as to their compliance with the ES Test.
Penalties for Non-Compliance
- Where there has been a failure to provide information, or information provided is inaccurate; and
- Where there has been a failure to comply with the economic substance requirements.
Where an entity fails to comply:
- Strike 1: the BVI International Tax Authority (ITA) will issue a notice explaining the reasons for the determination, the amount of penalty and due date for settlement being not less than 28 days after the issue of the notice, as well as the actions to be taken by the entity and the date by which such actions must be taken. The minimum penalty that may be imposed is US$ 5,000 and maximum is US$ 20,000 which is increased to US$ 50,000 for high risk IP legal entities.
- Strike 2: if the entity fails to take the action demanded of it in the first determination within the prescribed time, the ITA will issue a second determination on similar grounds and requirements as the first determination. An additional penalty ranging from US$ 10,000 to US$ 200,000 may be imposed. The penalty is increased to US$ 400,000 for high risk IP legal entities.
- Strike 3: following the issue of notice on a second determination of non-compliance, the ITA may request the entity to be struck off the register.
A person who fails to provide information without reasonable excuse or who intentionally provides false information is liable: (i) on summary conviction to a fine not exceeding US$ 40,000 or to imprisonment not exceeding 2 years or both; or (ii) on conviction on indictment to a fine not exceeding US$ 75,000 or to imprisonment not exceeding 5 years or both.
If the Cayman Tax Information Authority (TIA) determines that an entity that is required to satisfy the ES Test has failed to do so for a financial year, it shall issue a notice notifying the entity of such determination, giving the reasons, details regarding any penalty and directing any action to be taken. The TIA shall impose a penalty of US$ 10,000 on an entity for failing to satisfy the ES Test or US$ 100,000 if it is not satisfied in the subsequent financial year.
The TIA is entitled to notify the registrar of companies of any such failure after two consecutive years, which in turn shall apply to the Grand Court which may:
- order the relevant entity to take a specified action for the purpose of satisfying the ES Test; or
- order to strike off the entity.
Any person who knowingly or willfully supplies false or misleading information to the TIA is liable on summary conviction to a fine of US$ 10,000 or to imprisonment for 5 years or both.
Automatic Exchange of Information
Authorities will systematically and spontaneously exchange information in accordance with the relevant international standards. Breach of the economic substance laws may result in disclosure of information from ITA or TIA to the relevant overseas competent authority in which (i) a beneficial owner resides; (ii) within which the entity is registered; (iii) within which a parent of the entity is registered; or (iv) within which the entity claims to be tax resident.
How RPA Can Assist
Our earlier newsletter summarizes which entities fall under the scope of the economic substance laws and are required to demonstrate economic substance in the jurisdiction of their existence.
Royal Pine & Associates Limited can assist you in communicating with the relevant authorities of both jurisdictions to determine the classification of your entity and provide them with the necessary reporting information to ensure compliance.
The author of the article is Anastasia Sarkisian.
Anastasia is a legal consultant at Royal Pine & Associates. She is qualified lawyer with experience in the corporate field and admitted member at the Cyprus Bar Association.
* This publication has been prepared as a general guide and for information purposes only. It does not purport to be comprehensive or to render legal advice.