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BVI Restructuring Considerations in the Era of Economic Substance

18 Aug 2020

In response to global OECD base erosion and profit shifting standards regarding geographically mobile activities, the British Virgin Islands (the "BVI") introduced economic substance legislation in the form of the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the "ES Act"), which became effective on 1 January 2019 and was further amended on 30 January 2019.  Similar legislation has also been introduced in other overseas territories (of the United Kingdom), including the Cayman Islands.

The BVI International Tax Authority ("ITA") released the Rules on Economic Substance in the Virgin Islands (the "Rules") on 9 October 2019 (which were revised and re-issued on 10 February 2020) to provide guidance for implementing the ES Act.  

This article analyses (i) the potential impact of the ES Act on corporate groups that include BVI entities; (ii) how relevant BVI entities can comply with the new requirements and reporting obligations under the ES Act; and (iii) the factors that should be taken into consideration by corporate groups when undertaking restructuring in light of these changes.

Legal Entities and Relevant Activities

The ES Act applies to 'legal entities' which are carrying on a business that falls within any of the nine specified categories of 'relevant activities', namely banking, shipping, distribution and service centres, finance and leasing, fund management, headquarters, holding company, insurance and intellectual property.  

The definition of 'legal entity' is defined under the ES Act to mean: (i) a company; or (ii) a limited partnership with legal personality.  

Where a legal entity carries out more than one type of relevant activity, the economic substance test will need to be satisfied in respect of each relevant activity. 


An entity is not classified as a 'legal entity' (and therefore will not be subject to the ES Act) if it falls within any one of the following exceptions:

(a) It is an entity (other than a pure equity holding entity (discussed below)) whose only sources of income from relevant activities are subject to tax in a jurisdiction outside of the BVI.  This is not purely a matter of tax residency, as it is accepted by the ITA that certain jurisdictions charge tax by reference to matters other than residence.  The key point is whether the tax authority in the jurisdiction in question has accepted that the relevant entity is chargeable to tax in that jurisdiction (by reference to the relevant local criteria).   

(b) It is an entity without separate legal personality.  For example, certain types of partnerships and trusts would not be classified as a 'legal entity'.

(c) It is an entity that is not carrying on any relevant activities.  Given that the term 'business' is not defined under the ES Act, it could be argued that, in order for the legal entity to be conducting a business (which is the threshold required for an activity to constitute a 'relevant activity'), it must be carrying out such business on a repeated basis and receiving an income / profit from doing so.  

(d) Although it is not specifically carved out from the definition of 'relevant activity', the Rules have confirmed that the business of being an investment fund is not a relevant activity and is therefore outside the scope of the economic substance requirements.

Establishing Economic Substance

A legal entity that does not benefit from one of the exceptions above will need to establish the relevant level of economic substance in accordance with the ES Act.  The degree of economic substance required will be assessed according to the scale and nature of business carried out by the relevant legal entity.

A legal entity conducting a relevant activity (other than a pure equity holding company) will have economic substance for the purposes of the ES Act if: 

  • the relevant activity is directed and managed in the BVI (this includes the making of any strategic decisions by the directors / managers relating to the relevant activity being taken in the BVI);
  • it can demonstrate that there is adequate expenditure incurred in the BVI in relation to the relevant activity;
  • it maintains adequate physical premises in the BVI;
  • it has adequate employees in the BVI with suitable qualifications; and
  • the core income-generating activities ("CIGA") from which its income derives are undertaken in the BVI, the CIGA which needs to be carried out in the BVI will depend on the type of relevant activity the legal entity is engaged in.

Pure Equity Holding Entity 

BVI entities are commonly used as holding companies in corporate groups and, while such holding companies do not have the benefit of an exemption from the requirements of the ES Act, they will be subject to a reduced economic substance test.  

A legal entity carrying out 'holding business', referred to in the ES Act as a 'pure equity holding entity', may rely on the reduced economic substance test if it only holds equity participations in other entities (including shares and the right to participate in the profits of the entity, such as the interest of a limited partner in a limited partnership) and earns only dividends or capital gains.  The definition of a 'pure equity holding entity' is to be narrowly construed and the ownership of any other types of investments, property, assets or liabilities will take the legal entity outside of the definition.

A pure equity holding entity will satisfy the reduced economic substance test if such legal entity:

  • complies with its statutory obligations under the BVI Companies Act (as amended) or the Limited Partnership Act, 2017, as the case may be; and
  • has adequate employees and premises for holding the relevant equity participation, or carrying out the management of such equity participation – this will be assessed based on factual circumstances and the nature of the activities being carried out.

Notification and Reporting Obligations

All legal entities are now required to provide prescribed information to the ITA on their activities on an annual basis.  The prescribed information will be uploaded by the entity's registered agent (in the BVI) onto an existing database which the agent maintains in accordance with the Beneficial Ownership Secure Search System Act, 2017 (as amended) (the "BOSS Act").  

For legal entities which are formed on or after 1 January 2019, the economic substance requirements apply from the date that legal entity commenced the 'relevant activities' and the prescribed information must be provided to the ITA within 12 months from the date of incorporation / formation of the legal entity.  For legal entities which were in existence prior to 1 January 2019, the economic substance requirements apply no later than 30 June 2019 and the prescribed information must be provided to the ITA within six months from the end of its financial period.   

ES Act Considerations when Undertaking Restructurings

When undertaking corporate restructuring transactions, corporate groups that include BVI legal entities need to ensure that such BVI legal entities will satisfy the economic substance requirements following the completion of the restructuring.  

Management should first undertake a review of each of their BVI entities and consider whether the relevant entities would fall within the definition of a 'legal entity', and if so, whether they will be carrying out one or more 'relevant activities' after the restructuring.  

Option 1 – Changes to 'Relevant Activities'

Management should analyse whether the restructuring can be undertaken in a manner that would result in the businesses of the relevant BVI entities falling outside the scope of the specified 'relevant activities'.  This might be achieved by moving certain activities from the BVI entities to other entities within the corporate group.  

Management should also consider whether it is possible to make changes to the scope of its activities that would result in such entities falling within the definition of a pure equity holding entity so that the reduced economic substance test applies. 

Option 2 – Qualifying for an Exception

If this is not possible, management should then consider whether any steps can be taken that would enable the relevant BVI entities to fall within an exception, such as establishing tax residency outside the BVI. 

Option 3 – Establishing Economic Substance

If the BVI legal entity is carrying out one or more 'relevant activities' and no exception will be applicable, management will need to take into consideration whether it is commercially and practically achievable to establish the required level of economic substance in the BVI.  The practical steps required to be taken will depend on the nature of the activity being carried out, which will be assessed on a case by case basis.  There is no 'one size fits all' solution.    

It is important to note that the ITA has expressed that it will "take a pragmatic and commercially realistic approach" to the interpretation of the ES Act and that it will "apply criteria such as the 'adequacy' of expenditure and employment, the 'suitability' of employee qualifications and the 'appropriateness' of premises having regard to the usual way in which businesses carrying on the relevant activity on a commercial basis are structured and operated". 

The Rules indicate that, where the nature of holding business conducted by a pure equity holding entity is entirely passive, the engagement of a registered office and the services of a registered agent in the BVI should be sufficient to satisfy the second limb of the reduced economic substance test (i.e. having adequate employees and appropriate premises for the purposes of the ES Act).  

The substance requirements in the BVI can be outsourced through the employment of local platforms and service providers.  Where any aspect of a relevant activity is carried out by a third party service provider on behalf of the legal entity, the legal entity will be required, as part of its reporting requirements under the BOSS Act, to identify the name of the service provider, the proportion of the relevant CIGA being carried out by the service provider, and state how it monitors and controls the activity carried out by the service provider.


As is the case in other jurisdictions, economic substance is an evolving area of law in the BVI.  The ES Act and / or the Rules are likely to be further amended and / or new regulations introduced, which may provide further clarity as to how the ES Act would affect and influence the restructuring of corporate groups with BVI entities.  

The ES Act is not intended to introduce additional hurdles to doing business in the BVI, but rather, it is intended to prevent base erosion and profit shifting activities by requiring that an 'adequate' proportion of the relevant activities are located in and being carried out in the BVI.  

Corporate groups should be mindful of the impact of the ES Act when undertaking restructuring transactions, because such restructurings may be a convenient opportunity to address the requirements under, and simplify compliance with, the ES Act.

BVI has been the jurisdiction of choice for many corporate groups and enterprises in Asia and around the world because of its reputation of being a stable, efficient and trusted jurisdiction with a financial services industry capable of handling complex transactions.  The introduction of the ES Act enhances transparency and further demonstrates BVI's commitment and adherence to global standards.

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