11 Jun 2021

BVI – Economic Substance: Enforcement and penalties for non-compliance

The penalties imposed by the Economic Substance (Companies and Limited Partnership) Act, 2018 (“ESA”) are intended to be rigorous, effective, and dissuasive, ranging from financial penalties to striking off from the registry. The BVI International Tax Authority (“ITA”) is responsible for assessing and enforcing compliance with the requirements of the ESA.

Assessment

Following the assessment of information on the activities filed by the entity’s registered agent on BOSS, the ITA may determine that the entity has not complied with the economic substance requirements during a financial period and issue a notice of non-compliance to an entity’s registered agent. By way of background, compliance with the requirements set by ESA is assessed by reference to financial periods, typically on an annual basis. Some entities have already been issued with first non-compliance notices by the ITA in relation to the first financial period.

The ITA may make a determination of non-compliance up to 6 years after the end of a financial period to which the determination relates and the deadline can be extended in case of extenuating circumstances. For entities incorporated before 1 January 2019 (which have not chosen to shorten their first financial period) this means that such determination of non-compliance notices relating to the first financial period can be issued until at least 29 June 2026.

Penalties

At present the minimum fine for the first determination of non-compliance is USD 5,000 with a maximum of USD 20,000 in all instances except high-risk high intellectual property entities, where the maximum rises to USD 50,000.

Once the first determination has been made an entity must pay the fine and take the remedial action within the timeframe indicated in the notice.

Following an initial first notice of a determination of non-compliance, where an entity has either (a) failed in its appeal, or (b) not completed the required remedial action within the required timeframe, a second determination may be made by the ITA. The penalty for the second determination is not less than USD 10,000 and the maximum is USD 200,000, rising to USD 400,000 for high-risk IP entities.

It should be further noted that any non-compliant determination may lead to the exchange of information between the ITA and the relevant tax authorities for amongst others, the entity, its parent, or the ultimate beneficial owners.

Where a Company fails to take the necessary remedial action set out the second notice of non-compliance the ITA may also make a filing with the Financial Services Commission (“FSC”) to recommend or require that the entity should be struck off.  Where the ITA views that there is no realistic prospect of the entity carrying out the remedial action following the first notice of non-compliance they may bypass the second notice and proceed straight to the strike off notice.  It is expected that the strike off option will only be used in the most extreme cases of non-compliance.

Appeal

An entity upon whom a notice of non-compliance has been served by the ITA may appeal against the determination made by the ITA and also against the amount of any penalty imposed.

If the entity wishes to appeal the determination of non-compliance an appeal must be filed with the BVI High Court and served on the ITA in the prescribed form no later than 30 days after the date of the notice of non-compliance. Until this appeal has been finally determined or withdrawn the entity will not be required to pay the fine or carry out the requisite remedial action.

The grounds for appeal are as follows:

  • a deficiency in the non-compliance notice (based on the statutory requirements);
  • the ITA has made a factual error in finding that the entity was not in compliance with the economic substance requirements; and
  • the law has been incorrectly interpreted by the ITA in determining that the entity was not in compliance with its economic substance requirements.

It should be noted that grounds for appeal will not be sufficient in and of itself to overturn the initial determination. At this early stage there is no further guidance or judicial authority on what grounds are required for a successful appeal. The court may confirm, vary, or revoke the ITA’s initial determination.

Proposed Amendments

Amendments to the ESA have been proposed by the Economic Substance (Companies and Limited Partnerships) (Amendment) Bill 2021. Once the amendments come into force, the minimum fine for a first notice of non-compliance will be reduced to USD 500 (five hundred).  It is also proposed that the report to the FSC will now recommend or request that the entity be wound up rather than struck off. It will also bring limited partnerships without personality within scope of the of the economic substance legislation for the first time.

Should you have any questions on the BVI economic substance requirements, please reach out to your usual contacts at Hatstone.

Philipp Neumann – Group Partner

Mark Harbison – Counsel