Economic Substance Requirements - British Virgin Islands & Cayman Islands. Recent Developments

In April 2019, the British Virgin Islands International Tax Authority (ITA) published a draft Economic Substance Code (Code), which is supplementary to the Economic Substance (Companies and Limited Partnerships) Act, 2018 and contains rules on how the economic substance requirements may be met and guidance on the interpretation of the legislation and the manner in which the ITA will carry out its obligations. The final BVI Code will be issued this month and will incorporate any amendments deemed necessary by the BVI Government.

At the same time, the Cayman Tax Information Authority released a guidance for the International Tax Cooperation (Economic Substance) Law, 2018 (ES Law) which replaced the guidance issued on 22 February 2019 (Guidance).

Key points to note from the draft Code and Guidance are the following:

1. An entity will be treated as carrying on a relevant activity in the relevant jurisdiction during any financial period in which it receives income from that activity.

2. Guidance is given on the meaning of “holding business” and “pure equity holding entity”. Ownership by an entity of any investment other than equity participations, dividends or capital gains will mean that it is not a pure equity holding entity. Pure equity holding entities are subject to less rigorous substance regime.

3. The business of being an investment fund is not a relevant activity. An investment fund is outside of scope of the economic substance requirements, unless it carries on relevant activities besides being an investment fund.

4. The BVI Code sets the framework for the initial financial periods for both entities formed on or after 1 January 2019 (new entities) and entities formed prior to 1 January 2019 (existing entities). The initial financial period for new entities is deemed to be 12 months from the date of formation. For existing entities, the initial financial period is deemed to be 12 months from 30 June 2019.

5. BVI entities which hold debt or debt instruments for the purposes of investment will not be regarded as being in the business of providing credit facilities.

6. A BVI entity which provides credit as an incidental part of a different sort of business will not be treated as carrying on finance and leasing business. Only where the provision of credit can be seen to be a business activity in its own right will the entity be treated as conducting financing and leasing business.

Our earlier newsletter summarises which entities have to demonstrate economic substance in the BVI and Cayman Islands and the reporting obligations that apply.


Royal Pine & Associates Limited can assist you in determining the classification for your entity to ensure compliance.


The author of the article is Leonora Chagianni.

Leonora is the Head of the Legal Department in the firm. She achieved an LLB from the Democritus University in Thrace in 2010 and upon completion also got an LLM in International Business and Commercial Law from the University of Manchester. As from 2012 Leonora is admitted to 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.

Posted on May 08, 2019

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