In response to increasing scrutiny from the European Union (EU) regarding low-tax jurisdictions, the Cayman Islands and the British Virgin Islands (BVI) recently enacted similar economic substance regimes that went into effect on January 1, 2019. The new legislations require certain legal entities to establish sufficient economic substance locally in the Cayman Islands and BVI, respectively, and impose reporting obligations on such entities.
Affected Entities
These new rules potentially apply to any relevant entity that engages in certain defined relevant activities. Relevant entities include any (i) domestic company, limited partnership, or limited liability company, and (ii) any foreign company registered in the BVI or the Cayman Islands as a foreign entity. The relevant activities include the following businesses: (a) banking, (b) insurance, (c) shipping, (d) fund management, (e) finance and leasing, (f) headquarters, (g) holding, (h) intellectual property, and (i) distribution and service center.
Economic Substance Requirements
Relevant entities that are conducting relevant activities must establish that they perform adequate substantive activities in their local jurisdiction, including having employees, expenditures, and facilities that are sufficient to support the core income-generating activity. Outsourcing of certain functions to local service providers is generally permissible for this purpose.
In the BVI, a pure equity holding company will be deemed to have adequate substance if it complies with its statutory obligations under local corporate law and has sufficient resources to manage those equity interests.
Reporting Obligations
In the Cayman Islands, relevant entities must assert on their annual return whether they are engaging in a relevant activity and must disclose their financial year. Where an entity has breached the economic substance requirements, certain information may be disclosed by the Cayman Islands Tax Information Authority (TIA) to the tax authorities in the jurisdictions where the beneficial owner resides and the relevant entity is incorporated.
In the BVI, relevant entities that fall within the economic substance rules will generally be required to report certain information to their BVI registered agent to be uploaded onto the BVI Beneficial Ownership Secure Search (BOSS). This information may ultimately be provided to the BVI International Tax Authority (ITA), which may disclose such information to overseas authorities under certain circumstances, including where there is a breach of economic substance requirements or where the entity claims to be an EU tax resident.
Penalties
In both jurisdictions, penalties will be levied on non-compliant entities. In addition, the BVI may impose criminal penalties (i.e., up to five years imprisonment) and deregister the relevant entity.
How can Venable help?
Venable's international tax team can help global clients with Cayman Islands and BVI entities responsively navigate this new legislation in order to minimize operational and reporting obligations.