In this episode, Partner Joshua Mangeot and Director of Fiduciary and Custodial Kerry Graziola discuss the various amendments in 2021 to the Economic Substance (Companies and Limited Partnerships) Act (the ESA) and the Beneficial Ownership Secure Search System Act (the BOSS Act) and provide an update regarding steps being taken by the International Tax Authority (ITA) to monitor entities’ compliance.

By way of background, the BOSS Act was amended twice in 2021 – first, with effect from 1 July 2021 via the Beneficial Ownership Secure Search System (Amendment) (No. 1) Act, 2021 (the First Amendment) and the Beneficial Ownership Secure Search System (Amendment) (No. 2) Act, 2021 (the Second Amendment and together with the First Amendment the 2021 Amendments). Many of the key changes made via the First Amendment were summarised in our client update of 19 July 2021.

Key takeaways:

• We expect the third version of the ITA economic substance (ES) rules and explanatory notes (the Rules) to be published later this year. We understand that publication has been delayed by the EU Commission and, as a result, the Rules do not yet reflect the 2021 Amendments.
• The main changes made by the Second Amendment relate to limited partnerships without legal personality (which includes foreign limited partnerships without legal personality registered in the BVI) (Relevant LPs) being added to the ES and beneficial ownership (BO) reporting regimes and expand the ES prescribed information to be reported by a “corporate and legal entity” (an Entity) for each ES financial period (FP) beginning on or after 1 January 2022.
• Many Relevant LPs are investment funds – and amendments to the ES Act in 2021 confirmed the industry view that “investment fund business” is not a relevant activity.
• Broadly, the 2021 Amendments:
• significantly expanded the scope of the ES reporting regime for FPs beginning on after 1 January 2022;
• provided that Relevant LPs must report their BO information within 15 days of identifying those matters following 1 January 2022, other than where the Relevant LP is an “exempt person” which does not carry on any ES “relevant activity” (an Exempt Person);
• introduced an obligation to identify, and report certain prescribed information in respect of, any “immediate parent” and “ultimate parent” (as defined) of every Entity, other than an Exempt Person; and
• expanded the scope of jurisdictions which may receive information under the spontaneous information exchange mechanism in Schedule 4 to include the overseas competent authority for each state in which an immediate parent or ultimate parent of the Entity is registered.
• Although the first reports under the new reporting regime for most Entities incorporated or formed prior to 1 January 2019 will be filed in 2023, Entities should ensure they are aware of the new requirements now and may need to discuss the changes with their accountants and legal advisors.
• We are already seeing the ITA take steps to investigate entities to determine compliance. The ITA has broad investigation powers to request any information it reasonably requires from any person to determine compliance and generally has up to six years from the end of an FP to make a determination, subject to some limited exceptions.

The Harneys ES Classification Solution

Our Classification...

In the fourth episode of Substance on Substance season two, Philip Graham, our global head of Investment Funds and Regulatory, and Counsel Joshua Mangeot, our BVI economic substance specialist, consider the ITA’s investigation and enforcement powers under the Economic Substance (Companies and Limited Partnerships) Act 2018 and discuss some expected changes to the legislation, including limited partnerships registered in the BVI without legal personality being brought within the regime.

Key takeaways

• Companies and other legal entities which have not yet classified themselves or which have missed their first reporting deadline (which was 30 December 2020 for the majority of BVI companies incorporated before 2019) should take urgent action.
• “Nil returns” are required for each financial period even where an entity did not carry on any “relevant activity”.
• Deadlines have not been extended despite the Covid-19 pandemic.
• Failure to identify relevant activity or report without reasonable cause is an offence (and offences committed by a body corporate may lead to personal liability for directors and other individuals in limited circumstances).
• If an entity is determined to be non-compliant with economic substance requirements, it will be liable to civil penalties and this may trigger a spontaneous exchange of its beneficial ownership and economic substance information held on the registered agent “BOSS” database with overseas competent authorities.
• The ITA’s investigation powers are broad and may extend to other persons associated with the entity (for example, directors, officers or the registered agent).
• Failure to provide information to the ITA without reasonable excuse (or the intentional provision of false information) is an offence, so we recommend that entities and their operators use this as an opportunity to ensure that books and records are up-to-date and comply with BVI law requirements.
• If you receive an ITA notice or information request, we recommend taking advice if you are at all uncertain.
• Draft legislative changes were published on Friday 12 March – we expect the drafts will be amended but it appears likely that limited partnerships registered in the BVI without legal personality will be brought within the regime (in line with EU requirements) and that there may be changes to some of the fines and penalties. Previously only limited partnerships with legal personality were affected.

Our full guide regarding the ITA’s investigations and enforcement powers can be found here. This and our other client guides may need to be updated as appropriate if the legislative amendments are brought into force.

In a bumper episode for the holiday season, Phil and Josh venture into the weeds of the ES reporting requirements, giving a "deep-dive" into the reporting criteria and their long-awaited discussion of tax non-residence claims and Part 4 of the International Tax Authority (ITA) Rules.

Key takeaways

• Reports must be filed by every "corporate and legal entity" (which includes all BVI companies) under the Beneficial Ownership Secure Search System Act 2017 via the registered agent within six months of the end of the financial period.
• The format of reporting via the BOSS(ES) database is prescribed by the ITA and reflects EU and OECD requirements.
• Every entity must file a report within the deadline - even if this just a "nil return".
• There are special regimes for "pure equity holding entities" (which only need to report on their "employees" and premises) and for "intellectual property business" - the latter is extremely complex and persons considering IP business are recommended to seek legal advice.
• Entities with other relevant activities, which are not tax "non-resident", are subject to the "general economic substance requirements" and must broadly report on:

1. Turnover (or revenue/gross income) from the relevant activity.
2. The person(s) responsible for direction and management of the relevant activity.
3. Expenditure incurred on the operation of the relevant activity (both total and within the BVI).
4. "Employees" (which includes individuals managed as employees, if employed by someone else) engaged in the relevant activity (both total and physically present within the BVI).
5. Premises used in the relevant activity in the BVI.
6. Details of "core income generating activity" (CIGA) carried on in the BVI.
7. Further prescriptive details if any CIGA have been outsourced to any entity in the BVI.

• The ITA has encouraged entities to make use of professional services and other providers in the BVI to provide substance - particularly given the Covid-19 pandemic.
• Entities which carry on relevant activities may be treated as tax "non-resident" and exempted from ES requirements if, during the financial period:

1. they are tax resident in another jurisdiction;
2. they are "transparent", meaning all of the profits and gains are attributable to and taxable all some or all of the participators or partners in the entity; or
3. they are not a "pure equity holding entity" and all of their income from relevant activities is subject to tax in another jurisdiction,

provided in each case the relevant jurisdiction does not appear on the EU's tax "blacklist".

• These rules can be complex to apply in the case of territorial, sectoral or source-based tax regimes and persons considering such regimes or making such claims are recommended to seek legal advice.
• Entities making such a claim must report on any "parent" and provide evidence of their tax status with their report - there is a mechanism to be treated as provisionally non-resident by the ITA in certain circumstances where evidence cannot be provided within the six-month reporting window.
• Making a non-residence claim will trigger spontaneous information exchange with the relevant overseas tax authorities (and any EU member state within which a beneficial owner or legal owner of the entity resides) to ensure the claim is valid.
• BVI entities which do not carry on any ES relevant activity do not need to report on (but should still ensure they have considered) any foreign tax status or obligations.