Economic Substance Q4 2021

Changes to BVI Economic Substance Regime

Prior to the amendments introduced by the Economic Substance (Companies and Limited Partnerships) (Amendment) Act, 2021, the type of entities falling within scope of the BVI’s economic substance regime under the Economic Substance (Companies and Limited Partnerships) Act, 2018 (BVI ES Act) included, among others, limited partnerships with legal personality.  With effect from 30 June 2021, the scope of the regime was broadened to include limited partnerships without legal personality.  In short, the BVI’s economic substance regime now applies to all companies and limited partnerships registered in the BVI (unless they are resident for tax purposes in other jurisdictions that are not on the EU list of non-cooperative jurisdictions).

The relevant date from which a limited partnership without legal personality which carries on a relevant activity must satisfy the applicable economic substance test is:

• 1 January 2022 if the limited partnership was in existence prior to 1 July 2021; or
• the date on which such partnership commences carrying on a relevant activity if the partnership was formed on or after 1 July 2021.

Under the BVI ES Act, a legal entity which carries on a relevant activity during any financial period must company with the economic substance requirements in relation to that activity.  The definition of “financial period” was expanded to accommodate limited partnerships and means:

• for a limited partnership with legal personality formed on or after 1 January 2019, such period of not more than one year from the date of formation as the limited partnership shall notify to the BVI’s International Tax Authority (ITA) and thereafter each successive period of one year running from the end of that period;
• for a limited partnership without legal personality formed prior to 1 July 2021, such period of one year commencing on a date no later than 1 January 2022 as the limited partnership shall notify to the ITA and thereafter each successive period of one year running from the end of that period; and
• for a limited partnership without legal personality formed on or after 1 July 2021, such period of not more than one year from the date of formation as the limited partnership shall notify to the ITA and thereafter each successive period of one year running from the end of that period.

The definition of “relevant activities” was amended to expressly exclude “investment fund business”, so that investment funds such as mutual funds and private investment funds fall outside the scope of the BVI’s economic substance regime.  Note that any investment fund carrying on relevant activity other than investment fund business would still need to satisfy economic substance requirements in respect of such other activity and would need to show that such activity is separate and distinct from its investment fund business.  Definitions of “investment fund” and “investment fund business” were added to the BVI ES Act.

The definition of the “distribution and service centre business” relevant activity was amended to clarify that the provision of services to affiliated entities does not necessarily need to relate to the business of purchasing and reselling by a relevant entity as these are considered separate activities.  A new component of providing ‘consulting or administrative services’ to foreign affiliates was added to the definition.

The definition of “core-income generating activities” was amended to clarify that such activities are those of central importance to a relevant entity in terms of generating relevant income and must be carried on in the BVI.

The amendments further empowered the ITA to recommend or require (where there is no realistic possibility of meeting the economic substance requirements) the winding up of any legal entity for non-compliance, instead of recommending or requiring that the entity simply be struck off the register of companies or the register of limited partnerships, as applicable.

The ITA is expected to update its Rules on Economic Substance to reflect the above amendments to the BVI ES Act and to provide further guidance and clarifications.

On 23 November 2021, the BVI Government published the Economic Substance (Companies and Limited Partnerships) Act (Revised Edition).  As it consolidates the original Act with amendments made prior to 1 January 2020, the Revised Edition does not reflect the amendments made by the Economic Substance (Companies and Limited Partnerships) (Amendment) Act, 2021.

Changes to Cayman Economic Substance Regime

Effective 30 June 2021, the scope of the economic substance regime in the Cayman Islands under the International Tax Co-operation (Economic Substance) Act (as revised) (Cayman ES Act) was broadened pursuant to the International Tax Co-operation (Economic Substance) (Amendment of Schedule) Regulations, 2021 to include general partnerships, limited partnerships, exempted limited partnerships and foreign limited partnerships, but excluding local partnership, (In-scope Partnerships).

An In-scope Partnership which carries on a relevant activity is required to submit to the Department for International Tax Cooperation (DITC), via the DITC portal, an economic substance notification (ESN) form and an economic substance return on an annual basis.

All partnerships, including local partnerships, must file an ESN form, declaring whether or not they are carrying on a relevant activity and whether or not they are a relevant entity for the purposes of the Cayman ES Act or if they are claiming an exemption.  Each entity will have to verify the continued accuracy of its declaration each year.  Any partnership in existence prior to 30 June 2021 must submit its first ESN form for the ESN year 2022, which means the form must be filed by 31 March 2023.  Any partnership coming into existence on or after 30 June 2021 must submit its first ESN form by a deadline determined by the date on which its first financial year commences.  If, for instance, its financial year commenced on 1 July 2021 and ends on 30 June 2022, the form must be filed for the ESN year 2021, which means it musts be filed by 31 March 2022.

On 29 June 2021, the Cayman Government also published the International Tax Co-operation (Economic Substance) (Prescribed Dates) (Amendment) Regulations, 2021 which amended the principal regulations so that the relevant date from which an In-scope Partnership which carries on a relevant activity must satisfy the economic substance test in respect of that activity is:

• 1 January 2022 if the In-scope Partnership was in existence prior to 30 June 2021; or
• the date on which the In-scope Partnership commences carrying on a relevant activity if that partnership was formed on or after 30 June 2021,

and an In-scope Partnership must file its first economic substance return no later than 12 months after the last day of the end of each financial year of that partnership commencing on or after 1 July 2021.  The form of economic substance return is in the process of being updated to accommodate reporting by In-scope Partnerships.  The DITC expects the updated form will be added to the DITC portal by year end.

On 30 June 2021, the DITC published the Tax Information Authority’s Economic Substance Guidance for Geographically Mobile Activities – version 3.1 (Guidance) which primarily reflects changes in respect of partnerships.

A copy of the Guidance can be accessed here.