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Español The philosophy behind the successful Economic Substance Regime of the BVI
Following the introduction in the British Virgin Islands (BVI) of the Economic Substance (Companies and Limited Partnerships) Act, 2018 (ESA), which became effective on January 1st, 2019, some questioned the sustainability of BVI’s position as a leading international financial centre.
While we cannot underestimate those concerns, we believe that there is also evidence that ESA will not have a negative impact on the BVI. In fact, it will help to curb any irrational fears that may have been detrimental to businesses, families, investors, and professionals using BVI vehicles in the recent times.
Although the economic substance reporting period has not concluded, my recent research supports the premise that despite introduction of this new legislation, BVI’s legal system and corporate services platform will remain stronger than other jurisdictions for international business activity.
You may be asking how can we be so positive? It is because for years we have witnessed the BVI maintain the crucial “philosophy” of a financial centre that is necessary for its success.
This philosophy is composed of human capital, technology, and the ability of regulators to make effective new laws with the support of highly sophisticated service providers. This means that any issues arising from rapidly evolving financial markets or instructions given by the European Union and the OECD in their efforts to enhance tax transparency can be dealt more efficiently. Expertise, talent, and technology are the key driving forces for the world’s leading financial centres.
Over the last decade BVI has had various changes in its legislation that have impacted the financial industry positively such as:(1) maintaining beneficial owner’s due diligence in its territory, (2) the private registry of beneficial owners (BOSS), (3) mandatory filing of company’s register of directors (ROD), (4) maintaining accounting records and underlying documentation and, (5) reporting obligations on ESA just to name a few in no particular order. Some of these changes have been more challenging than others but they all have one thing in common: BVI´s successful “philosophy”.
By reading the ESA and the Rules issued by the International Tax Authority you can tell that the regulator consulted professionals from law firms, trust companies and corporate service providers of the highest caliber with presence in the BVI when drafting the legislation. Whereas, in other jurisdictions it seems that they just decided to play safe and please the requests of the European Union overlooking what their financial industry needs to, not only survive, but grow.
We have reviewed the law and guidance notes on the economic substance of various jurisdictions and concluded that the ESA has provisions that makes it practical and convenient. We will give you three important and clear examples. The first, is the treatment of the companies that serve as holding businesses under the ESA. BVI took a straightforward approach by only placing its interest on the pure equity holding companies which are subject to a reduced substance test that can be met through the company´s registered agent; instead of having different categories of holding businesses as it is in other jurisdictions. This has allowed us at Morgan & Morgan to develop suitable solutions for our clients.
The second example is the treatment of the financial periods. ESA has two financial periods depending if the company was incorporated before or after the implementation date of the ESA. Therefore, just by looking at the incorporation date of the company you can tell its financial period. This method is valuable for a corporate service provider because it may have positive impact in their workload when reporting and advising clients. Furthermore, this approach makes simpler the management of a portfolio of companies for a corporate service provider rather than having the financial period defined by the company´s fiscal year, as it is very likely that will be different for all the companies they represent.
The third example is the reporting period. In some jurisdictions the reporting period is 6 months and in others 9 months; but all jurisdictions have in common that the reporting period is counted from the end of the financial period or fiscal year. Unlike other jurisdictions, in the BVI all companies incorporated before the ESA effective date have the same financial period and therefore the same reporting period. This makes easy to manage the annual reporting obligations for a high volume of companies.
Now, let´s talk about the technical side of ESA. BVI tied the ESA with their Beneficial Ownership Secure Search System Act, 2017 (the “BOSS Act”). Same as in other jurisdictions, annual reporting is mandatory, but it is so easy to do that this should not scare clients away. The BVI government partnered with the same auditing firm that developed the BOSS system to create the system for ESA, called BOSSes. At Morgan & Morgan we developed a similar system that facilitates clients providing us with the information on their companies and also makes it easier for us to report to the competent authority because we both are up to the same level of technology. It is difficult for corporate services providers to convince clients to comply with economic substance legislation in jurisdictions where the reports are to be submitted manually. BVI knows that its stability and future prosperity is inextricably tied to the efficient and safe use of digital technologies.
In June 2020, the BVI Financial Services Commission published its Statistical Bulletin. We were pleased to read that at said date the Registry of Corporate Affairs has the impressive total of 375,832 companies that have placed their confidence in the BVI philosophy. This figure and the past decade show us BVI is very aware that it has a financial sector that is becoming increasingly complex. With a more discerning and savvier clientele, and the competition among financial centres is heating up, the BVI is ready to prevail as one of the world´s premier jurisdictions.
For more information on these topics, please contact:
Senior Associate
Morgan & Morgan
- Published in 2020, Fanny Evans, Publications
The importance of having a data-protection compliance program
Fanny Evans, Senior Associate, Morgan & Morgan
In 2013, Virginia Ginni Rometty – CEO of IBM, said “I would like you to think of big data as the next natural resource that can be to our era what steam, electricity and oil were for the Industrial Age.”
Probably, you have read or heard: Data is the new oil! Data is the new bacon! Data is the new currency! These analogies have become very popular because data is now considered one of the most important commodities.
This is the result of the emergence of many successful Social Networks that, although they are not payment platforms, have turned the data into a source of value.
The need for a data-protection compliance program in business is becoming increasingly important after several high-profile leaks of companies’ data. Some of the biggest data breaches over the last two years include T-Mobile, Marriot, British Airways, Quora, Google, Orbitz and just recently, Capital One bank in the United States. A successful data breach may occur in less than one minute. Yet, businesses may take more than weeks to realize a breach has occurred.
When giving the first steps into complex waters like data protection, it is very common that companies get lost in the avalanche of legal requirements or in developing that product or service that might result attractive to its clients. However, for a business, changing the focus to issues that they may consider more interesting should never be an option because the results of data breaches include many types of damages: fromreputational to financial. Sometimes it can even affect an entire country as happened with, in my opinion, the wrongfully or unjustifiably called “Panama Papers”.
In the European Union, data protection is a fundamental right, and the General Data Protection Regulation (GDPR) which came into force on May 25th, 2018, is the new framework for protecting that right. Other countries are looking to the GDPR as they develop or implement their own laws to protect data.
Even if companies have an “it will not happen to me” approach to data breaches, in many countries, legislation is forcing them to rethink their reasoning. Here is where compliance plays an important role to help to plan a data-protection compliance program.
Here are five steps that can help as guidance when drafting or reviewing your data-protection compliance program:
- Understand your risks and legal and ethical obligations
One of the most important elements when building a data-protection compliance program is considering your risks and what is most important and mandatory to the business, instead of jumping into the requirements of a legislation without fully understanding your needs because not all risks or obligations are managed in the same manner or to the same extent. This program needs to set out the appropriate guidance in key areas.
Having said the above, the first step should always be to understand the business necessity to comply. This involves a careful analysis of what your obligations are, what the risk of breaching those obligations might be and what risks your company is willing to take.
- Document and review your policies
Your data-protection compliance program should be properly documented. Once the obligations and risks are understood, it is vital to document them. It is not just enough to know you are data privacy compliant. Your data-protection compliance program should be clearly verifiable and readily accessible through accurate reports and documentation for internal or external examinations.
The compliance officer shall perform a formal review on a regular basis to ensure that the data-protection compliance program is progressing as planned and that it is adjusted to meet any changes in legislation or the business.
- Allocate ownership
The responsibilities and tasks related to confidentiality and data-protection may overlap with other business policies, such as information technology security, recordkeeping, risks and audit, human resources, management of confidential information and others as it requires various skills to succeed. Therefore, the most advanced and elaborated data-protection compliance program will fail if there is no clear ownership of the tasks. Each business will structure the ownership differently, but it is vital that who is the owner of each task of the program is clearly understood and that the owners have the necessary resources, including training, so that they are competent to fulfil their role in a manner that is consistent with the business’ compliance culture.
- Provide training and the necessary resources
Always train your staff. If you have an informed team it will reduce your risk. Raise staff awareness.
Not only does training staff reduce the risk of breaches, it also demonstrates compliance before internal and external inquiries. For example, if an organization was to experience a data breach and they had documented their staff training on data protection, this would be used as evidence to prove that they had taken the appropriate steps to prevent a data breach and were taking the legislation seriously, if any.
Training should aim to ensure that all members of the team have an understanding of the data that they will have access to and the risks entailed. Training should be provided on a regular basis, and it ought to be performed again whenever there are significant changes to positions, structures, risks or obligations, or when actual issues arise. Also, the business shall incorporate data protection training into its process for onboarding new employees.
Businesses shall embed data-protection compliance program into it culture so that protecting information becomes second nature. This aspect, training and continuing education, should always include senior management.
- Review the Financial Action Task Force (FATF) Guidance on the Risk-Based Approach
A risk-based approach to compliance involves identifying the areas of high risk within the business’s compliance universe and building and prioritizing its compliance programs around these risks.
In order to assist both public authorities and the private sector in applying a risk-based approach, the FATF has adopted a series of guidance in co-operation with relevant sectors. Businesses shall review the guidance applicable to its industry to make sure that the appropriate mitigation measures in accordance with the level of risk are taken.
Data is one of the most important assets a business has. For that reason alone, data protection compliance program should be a top priority for any business.
The Bahamas: Economic Substance Legislation
Fanny Evans, associate at Morgan & Morgan
The Bahamas has passed legislation requiring that certain legal entities carrying on relevant activities have to demonstrate adequate economic substance in said jurisdiction. The beneficial owners of any company or limited partnership incorporated, registered or continued in The Bahamas should be aware of this legislation and consider how they may be affected.
The Commercial Entities (Substance Requirements) Act, 2018 (“CESRA”) came into force on December 31st, 2018. It addresses the concerns of the European Union’s (“EU”) Inter-governmental Code of Conduct Group (Business Taxation) guidance for determining substance when considering whether a tax measure is harmful or ‘fair’ and the Organization for Economic Cooperation and Development’s (OECD) Base Erosion Profit Shifting (BEPS) Project.
What is the effect?
CESRA imposes economic substance requirements on all legal entities carrying on “relevant activities”.
The relevant activities are:
1) banking business
2) insurance business
3) fund management business
4) finance and leasing business
5) headquarters business
6) shipping business
7) distribution and service centre business
8) intellectual property business
9) any holding company engaged or where one or more of its subsidiaries is engaged in one of the activities listed above (1) to (8).
A company engaged in a relevant activity is, henceforth, called an “included entity”.
How can an included entity demonstrate substantial economic presence?
It must carry on core income generating activities (CIGA) in The Bahamas and the entity must be directed and managed within The Bahamas.
Firstly, it is the primary responsibility of an included entity to demonstrate that it conducts CIGA in The Bahamas proportionate to its business activities. This can be proven by having, for example, the following:
- an adequate amount of annual operating expenditure;
- an adequate level of qualified full-time employees;
- an adequate number of physical offices.
An included entity is prohibited from outsourcing any of its core income generating activities to an entity or person outside of The Bahamas; but it may outsource such activities to a service provider within The Bahamas. The included entity shall be able to demonstrate adequate supervision of the outsourced activity.
Second, an included entity will be deemed to demonstrate management and control in The Bahamas if it satisfies the following criteria:
- an adequate number of meetings of the board of directors are conducted in The Bahamas given the level of decision making required;
- there is a quorum of the board of directors physically present within The Bahamas during the meetings of the board of directors;
- strategic decisions of the included entity made at the meetings of the board of directors must be recorded in the minutes of the meetings;
- all included entity records and minutes are be kept in The Bahamas; and
- the board of directors, as a whole, has the necessary knowledge and expertise to discharge its duties.
Here we must highlight some of the permissions granted by CESRA with respect to the directors and the employees that may be positive for an included entity. One is that despite the fact that employees must be residents in The Bahamas, there is no residency requirement for board members, who only need to be physically in The Bahamas whenever a board meeting is required. No number of board meetings that must be held in The Bahamas is prescribed in CESRA. Also, CESRA is not prescriptive in stipulating which employees should attend the board meetings, this will be at the determination of the company.
What is a non-included entity?
A non-included entity is one that is:
- a tax resident in another jurisdiction and centrally managed outside of The Bahamas, even if it conducts a relevant activity;
- not engaged in a relevant activity itself or by any of its subsidiaries;
- owned by residents and centrally managed in The Bahamas, even if it conducts a relevant activity.
What are the obligations for a non-included entity?
Companies which do not carry on a relevant activity are not subject to the economic substance requirements but are subject to annual reporting obligations and will be required to register as such. An example is a holding company that is not an included entity. This passive holding company is not required to have substantial economic presence in The Bahamas but will have to comply with the annual reporting obligations.
How an entity claims to be tax resident in another jurisdiction?
As per the Guidelines, the tax residency test may be satisfied by the entity providing the following documents to the Ministry of Finance of The Bahamas:
- tax identification number issued by a foreign jurisdiction;
- tax resident certificate issued by a foreign jurisdiction;
- official receipt or statement issued by a foreign tax authority;
- certification by the entity that the majority of meetings of the Board of Directors or controlling persons took place in a foreign jurisdiction;
- the ordinary residence of the majority of the Board of Directors or controlling persons.
This certification of foreign tax residence must be filed by the entity as part of its annual filing requirements.
What are the penalties?
An administrative penalty of $150,000 for failing to comply with the requirements of CESRA with a possible further administrative penalty of $300,000 and in certain circumstances the entity concerned being struck off of the Registrar of Companies.
What is next?
All companies will need to undertake an internal review to confirm whether they conduct a relevant activity. With our guidance, they can determine what measures, if any, they should take in order to achieve compliance. In most cases, we believe that compliance will not be a convoluted matter.
What is the time period for compliance with CESRA?
Included entities incorporated prior to the 31st December, 2018 have six (6) months from January 1st, 2019 to comply. Newly incorporated entities must comply immediately. Whilst this may be an alarmingly short period of time, we believe this period can be extended or will not be enforced immediately as many questions regarding the legislation still abound.
We will leave, in our opinion, the best news for the end because we assume that after having read the above, the most important question to answer is:
Are these efforts being welcomed by the EU?
The EU has confirmed that The Bahamas has not been included on the EU’s updated list of non-cooperative jurisdictions for tax purposes (known as the EU blacklist), which was published on 12th March, 2019.
The Bahamas presented the necessary structural changes that were required; another milestone in its tax transparency regime that sends a message to the international business community that The Bahamas is open for legitimate business. The Bahamas is a premier International Financial Centre conducting business with reputable jurisdictions and financial markets. Because they have demonstrated it consistently, it is safe to say that The Bahamas will continue doing what it takes to remain as a well-regulated compliant and competitive jurisdiction.
Disclaimer
The information contained herein is not intended to be read, accepted or used and is not provided as legal or tax advice and should not be treated as a substitute for legal and tax consultations with a professional. It is merely a summary of the latest regulations in The Bahamas that, as well as in many other jurisdictions, are being modified regularly in agreement with the OECD and the EU.
- Published in 2019, Fanny Evans, Press Room, Publications
BVI: Economic Substance Legislation
Fanny Evans, associate at Morgan & Morgan
The British Virgin Islands (BVI) has passed legislation requiring certain legal entities carrying on relevant activities to demonstrate adequate economic substance in the BVI. The owners of any company or limited partnership registered or incorporated in the BVI should be aware of this legislation and consider how they may be affected.
The Economic Substance (Companies and Limited Partnerships) Act, 2018 (the Act) came into force on January 1st, 2019. It addresses the concerns of the European Union (“EU”) Code of Conduct Group for Business Taxation and recent OECD guidance around the economic substance of entities in jurisdictions with low or zero corporation tax. The Act demonstrates the BVI’s continued commitment to international best practice including the BVI’s implementation of the OECD’s Base Erosion and Profit Shifting (BEPS) framework and related EU initiatives.
The Act follows closely the approach taken to address the same issue by the Crown Dependencies of the UK (Jersey, Guernsey and the Isle of Man) and the other UK Overseas Territories including the Cayman Islands and Bermuda.
What is the effect?
The Act imposes economic substance requirements on all legal entities carrying on “relevant activities” unless they can evidence that they are tax-resident elsewhere. Entities which do not carry on a relevant activity are not subject to the economic substance requirements but may be subject to certain reporting obligations.
The relevant activities are:
1) banking business
2) insurance business
3) fund management business
4) finance and leasing business
5) headquarters business
6) shipping business
7) holding business
8) intellectual property business
9) distribution and service centre business
We look forward to further guidance by the government to assist in determining if a particular entity is carrying on a relevant activity or if exemptions may apply.
What are the reporting obligations and who will have access to information?
The information will be provided to the BVI International Tax Authority (ITA) via the BOSS system. BVI and foreign registered companies and limited partnerships will be required to report certain information to their BVI registered agent for this information to be uploaded onto the Beneficial Ownership Secure Search System regime (BOSS) so that the BVI International Tax Authority (ITA) can have access to it.
The ITA may use the information to discharge its duty to supervise and enforce the economic substance requirements. Information may be disclosed by the ITA to relevant overseas authorities in certain cases, including where there is breach of the economic substance requirements or where the entity claims to be tax resident in an EU member state.
What are the penalties?
Penalties are imposed for failure to provide required information or providing false or misleading information and for operating a legal entity in breach of the economic substance requirements + which may include fines, imprisonment and/or strike-off.
What is next?
The Regulations, Rules and formal Guidance Notes, will be issued within the following weeks. They will certainly provide further detail and a clearer picture so that all relevant entities will be able to undertake an internal review to determine what measures, if any, they should take in order to achieve compliance. We believe that, for many entities, the impact will be minimal and compliance will be straightforward.
We will leave, in our opinion, the best news for the end because we assume that after having read the above, the most important question to answer is:
Are these efforts being welcomed by the EU?
The EU has confirmed that the British Virgin Islands and Cayman Islands have not been included on the EU’s updated list of non-cooperative jurisdictions for tax purposes (known as the EU blacklist), which was published on March 12th, 2019. The EU’s decision confirms that both jurisdictions have implemented good tax governance principles which address the EU’s earlier concerns on the economic substance of certain entities in low or no tax jurisdictions.
BVI has overcome many pressures from various international organizations. This ability to respond demonstrates that is a highly regulated and stable jurisdiction willing to protect the wide array of services it offers. With the Economic Substance legislation BVI remarks its commitment to continue being the leading financial center.
- Published in 2019, Estate Planning_publi, Estate Planning-es_publi, Fanny Evans, News
BVI Private Trust Companies
By Fanny Evans, Executive Director and General Manager of MMG Trust (BVI) Corp.
Since the introduction of the Private Trust Company (PTC) in the BVI, this vehicle has become attractive to act as the Trustee, Protector or Administrator of a trust without the need to apply for an exemption or to apply for a trust license under the BVI Banks and Trust Companies Act.
In order to be qualified as a PTC, there are certain key requirements to comply with:
- The PTC must be a fully compliant BVI BC.
- The ending of the company must be “Private Trust Company” or “PTC”.
- The Memorandum of Association must state that it is PTC.
- Must have a Class I license holder as a Registered Agent, which Morgan & Morgan (MM) has.
- Must be engaged in “unremunerated trust business” to act as Trustee, Protector or Administrator of a trust, or for a group of trusts which are related (for example, “a family trust”).
“Unremunerated trust business” means that no payment is received in respect of services that would constitute trust business. Payment in respect of costs and expenses incurred by the PTC is not regarded as remuneration.
A single PTC may act as Trustee for several trusts as long as it qualifies as being part of a related group of trusts through persons who are connected by family relationships. Because one of the qualifying requirements of a PTC is that where multiple trusts are concerned, the trusts need to be related, it is therefore imperative that the Beneficiaries and the Settlor are identified within the Trust Deed in such a way as to make the determination of the relationships possible.
Is it possible to convert a IBC to a PTC?
Yes. IBC’s will be required to disapply the Transitional Provisions of the BC Act as a first step towards converting to a PTC. Where the IBC acted as Trustee under the previous exemptions, the resolutions authorizing the conversion to BC must also contain relevant information stating that the Company was appointed Trustee pursuant to the details of the relevant Trust Deed.
Is it possible to convert a BC to a PTC?
Yes. A BVI Business Company may convert to a PTC by filing a PTC Memorandum of Association. The resolution authorizing the conversion must also state the details of any Trust for which the PTC is to act. Any subsequent Trusts must also be authorized by the PTC by resolution.
We remain at your disposal for any further information you may need regarding this useful vehicle for wealth planning.By Fanny Evans, Executive Director and General Manager of MMG Trust (BVI) Corp.
Since the introduction of the Private Trust Company (PTC) in the BVI, this vehicle has become attractive to act as the Trustee, Protector or Administrator of a trust without the need to apply for an exemption or to apply for a trust license under the BVI Banks and Trust Companies Act.
In order to be qualified as a PTC, there are certain key requirements to comply with:
- The PTC must be a fully compliant BVI BC.
- The ending of the company must be “Private Trust Company” or “PTC”.
- The Memorandum of Association must state that it is PTC.
- Must have a Class I license holder as a Registered Agent, which Morgan & Morgan (MM) has.
- Must be engaged in “unremunerated trust business” to act as Trustee, Protector or Administrator of a trust, or for a group of trusts which are related (for example, “a family trust”).
“Unremunerated trust business” means that no payment is received in respect of services that would constitute trust business. Payment in respect of costs and expenses incurred by the PTC is not regarded as remuneration.
A single PTC may act as Trustee for several trusts as long as it qualifies as being part of a related group of trusts through persons who are connected by family relationships. Because one of the qualifying requirements of a PTC is that where multiple trusts are concerned, the trusts need to be related, it is therefore imperative that the Beneficiaries and the Settlor are identified within the Trust Deed in such a way as to make the determination of the relationships possible.
Is it possible to convert a IBC to a PTC?
Yes. IBC’s will be required to disapply the Transitional Provisions of the BC Act as a first step towards converting to a PTC. Where the IBC acted as Trustee under the previous exemptions, the resolutions authorizing the conversion to BC must also contain relevant information stating that the Company was appointed Trustee pursuant to the details of the relevant Trust Deed.
Is it possible to convert a BC to a PTC?
Yes. A BVI Business Company may convert to a PTC by filing a PTC Memorandum of Association. The resolution authorizing the conversion must also state the details of any Trust for which the PTC is to act. Any subsequent Trusts must also be authorized by the PTC by resolution.
We remain at your disposal for any further information you may need regarding this useful vehicle for wealth planning.
- Published in Fanny Evans, Publications