Another convenient tax haven is lost for business - the British Virgin Islands (BVI). Since January 1, 2019 criteria of economic presence for foreign companies has entered into force in BVI, which will become a powerful barrier for the registration of shell business.

British Virgin Islands, beloved all over the world for zero taxation of legal entities, in agreement with the European Union, enacted the Law on Economic Presence, which entered into force on January 1, 2019.

In 2017, the Code of conduct group on the observance of the Code on business taxation conducted an analysis of the requirements of 92 jurisdictions, the results of which revealed a list of countries that heavily abuse their exclusive position in the field of tax and corporate preferences.

What's changing?

The new law applies to all legal entities that are registered in the British Virgin Islands, claim to local residency, and belong to one of the following business activities: banking, insurance, fund management, finance and leasing, freight traffic activities, holding activities, intellectual property management, distribution and service activities.

Depending on the nature and level of business that provides the main income to such companies registered in BVI, a legal entity must demonstrate its economic presence in this jurisdiction. For this purpose, it must meet a number of criteria.

In the first instance, management of the respective activity should be carried out from the territory of BVI. In the second instance, the activities of a relevant legal entity shall be supported by an adequate number of qualified employees physically present on the islands. In the third instance, a legal entity must bear the proper costs of its core business. In the fourth instance, the company must have a suitable office or indoor space. In the case of intellectual property management, the necessary equipment must be located in BVI.

In this regard, the existing legal entities are obliged to fulfill their obligations in terms of economic presence by June 30, 2019, and by June 30, 2020, to report in accordance with the Beneficial Ownership Secure Search System Act, 2017. Incorporation of new companies in BVI without meeting the above-mentioned criteria starting from January 1, 2019, is not allowed.

In case of non-compliance with the new requirements, both administrative and criminal liability can be applied.

Who is next?

In coordination with EU, new requirements were introduced in all dependent territories of the United Kingdom (Bermuda, Cayman Islands, Isle of Man) and its crown possessions (Jersey, Guernsey). It is also known that other well-known offshores, such as the Bahamas, Belize, Hong Kong, Seychelles and so on, will not be left aside.