Morgan & Morgan relies on a skilled team of attorneys, business executives and accountants with over 20 years of experience in the offshore industry.
The firm is prepared to offer the incorporation, management and administration of companies with expertise in all major jurisdictions such as Panama, BVI, Belize, among others; helping our clients appropriately and effectively, regardless of the market conditions.
We have a solid Compliance Department with professional and skillful staff who mitigate the risks associated with the offshore industry.
Furthermore, we we are qualified to help our clients in Corporate Secretarial matters related to their companies. We offer post incorporation services such as directors nominee, custody books/records, custody books/corporate documents, issuance of shares, corporate resolutions, bank account opening , invoicing, accounting services (outsourced), among others.
Continuing its ongoing commitment to the development and maintenance of the very highest standards of economic and financial propriety, the British Virgin Islands (BVI) Government has enacted the legislation that embraces a global initiative to combat base erosion and profit shifting (BEPS).
The legislation, which came into force on 1st January, 2019 is entitled Economic Substance (Companies and Limited Partnership) Act, 2018 (the “Act”). The Act provides a statutory framework for determining the extent to which it will be necessary for a company and limited partnership conducting relevant activities to maintain economic substance in the BVI.
What is the effect?
The effect is that the economic substance requirements are to be imposed on all legal entities carrying on “relevant activities” unless they can evidence that they are tax-resident elsewhere. BVI companies and limited partnerships, foreign companies and foreign limited partnerships registered in the BVI under the BVI Business Companies Act, 2004 or the Limited Partnerships Act, 2017 are considered legal entities.
A legal entity is subject to the economic substance requirements if it conducts any of the following “relevant activities”:
- banking business
- insurance business
- fund management business
- finance and leasing business
- headquarters business
- shipping business
- holding business
- intellectual property business
- distribution and service centre business
Each of the above activities is defined in the Act, and we look forward to further guidance by the government to assist in determining if a particular entity is carrying on a relevant activity.
Each legal entity which is not tax resident outside the BVI (other than a pure equity holding entity which carries on no relevant activity other than holding equity participations in other entities and earning dividends and capital gains) must, in relation to any relevant activity, carry out defined core income-generating activities in the BVI and demonstrate economic substance by reference to the following criteria, having regard to the nature and scale of the relevant activity:
- The relevant activity being directed and managed in the BVI;
- Adequate numbers of suitably qualified employees who are physically present in the BVI (whether or not employed by the relevant legal entity or by another entity and whether on temporary or long-term contracts);
- Adequate expenditure incurred in the BVI;
- Appropriate physical offices or premises in the BVI; and
- Where the relevant activity is intellectual property business and requires the use of specific equipment, the equipment is located in the BVI.
Holding companies are required to meet a reduced test for economic substance. However, we look forward to further guidance by the government to assist in determining if a holding entity is carrying on a relevant activity.
An entity cannot however, claim to be non-resident in the British Virgin Islands by reason of being a tax resident in a jurisdiction which is included on the EU list of non-cooperative jurisdictions.
The measures in the Act apply as from 1 January 2019 (with a six-month transitional period for existing legal entities).
Information to be maintained by the Registered Agent
The Act requires legal entities to submit information in relation to any relevant activities on an annual basis which can be analyzed by competent authorities and used as a basis for a risk based investigation and enforcement of economic substance requirements.
The BVI International Tax Authority may send automatic notification to the “relevant overseas competent authority” in respect of a relevant legal entity which:
(1) Is found to be in breach of the economic substance requirements;
(2) Carries on “IP relevant activity” in certain circumstances; or
(3) Claims to be tax resident in a jurisdiction outside the BVI.
Penalties are imposed both for failure to provide required information, and for operating a legal entity in breach of the economic substance requirements. Failure to provide information or providing false or misleading information can lead to a fine of up to US$75,000 or imprisonment for 5 years; or both. The penalties for operating a legal entity in breach of the economic substance requirements are a fine from US$20,000 up to US$400,000 if the risk is not remedied. Moreover, the legal entity may be struck off the register.
What is next?
All legal entities 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.
Belize, like other Caribbean jurisdictions, has enacted a series of laws seeking to comply with international Economic Substance requirements. Please note that the issuance of the final Guidelines on the matter of Economic Substance in Belize is expected sometime before the end of this year. Therefore, this document may not be considered as the final interpretation as it may still vary in certain aspects.
What is the effect?
Accordingly, International Business Companies (IBC) engaged on what is defined as “relevant activities” will need to meet adequate economic substance in Belize. Take note that an IBC carrying on any relevant activity is thus classified as an Included Entity.
Included Entities are therefore:
1) IBCs licensed by the Belize International Financial Services Commission;
2) IBCs that carry out any of the following relevant activities, namely
(a) banking business;
(b) insurance business;
(c) fund management business;
(d) financing and leasing business;
(e) headquarters business;
(f) distribution and service centre business;
(g) shipping business;
(h) as a holding company, engaged, or where one or more of its subsidiaries is engaged in one of the activities listed under paragraphs (a) to (g)
IBCs that are not Included Entities (Non-Included Entities) do not require substantial economic presence in Belize.
Pure Equity Holding Companies (PEHC) – Reduced Substance Requirements
IBCs that are Pure Equity Holding Companies (only holds equity participations and earn only dividends and capital gains or related incidental income) are subject to reduced substance requirements, as follows– (a) it shall comply with all applicable laws and regulations of Belize; and (b) it shall have adequate human resources and premises in Belize for holding equity participation in other entities and where it manages those equity participations in other entities, have adequate human resources and premises in Belize for carrying out the management.
PEHC IBCs are allowed reduced substance requirements. This requires clarification which should come in the form of Regulatory Guidelines issued by the International Financial Services Commission (IFSC).
Companies are not subject to the economic substance legislation when such company only owns tangible assets (i.e. real estate, vessel, etc.) or perhaps only has a bank account and is not involved in a relevant activity.
IBCs Carrying on Relevant Activity with Outside Control, Management & Tax Residence - Exemption from Economic Presence
Substantial economic presence will not apply to any IBC that is controlled and managed outside of Belize and is tax resident in a jurisdiction other than Belize. This is shown where the IBC is able to provide the IFSC with a letter or certificate stating that the IBC is considered to be resident for tax purposes in that jurisdiction;
Further clarification on what constitutes substantial economic presence in Belize should come in the form of Regulatory Guidelines issued by the International Financial Services Commission (IFSC).
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.