Enforcement action under the BVI Economic Substance regime - ITA determinations of non-compliance

A core requirement of the BVI economic substance regime is that companies and limited partnerships (entities) should, where they conduct “relevant activities”, have necessary economic substance in place according to the requirements of the legislation. Where an entity fails to put the necessary substance in place the BVI International Tax Authority (ITA) may make a determination that an entity is non-compliant with the economic substance requirements during a given financial period. Where a determination is made it is anticipated that the ITA will issue a notice (a Non-Compliance Notice or NCN) served on the entity’s registered agent at its registered office.

As mentioned above, a Non-Compliance Notice is issued when the ITA has determined that an entity has not complied with its economic substance obligations during a given financial period.

The notice must contain:

• The reasons for the determination for non-compliance
• The amount of the penalty imposed
• When the penalty must be paid; and
• What action the ITA considers must be taken by the entity to meet the economic substance requirements and the date by which such action must be taken.

The minimum penalty for a first determination of non-compliance is US$5,000 and the maximum is US$20,000 (or US$50,000 in the case of a high risk IP legal entity).

The entity should urgently consider whether it wishes to appeal any aspect of the notice.

Subject to the appeal process (see below), the entity must:

• Pay the financial penalty within the period stated; and
• Take action to meet the economic substance requirements or become compliant before the date stated.

The determination of non-compliance, if not successfully appealed, may result in spontaneous exchange of beneficial ownership information with overseas tax authorities (see below).

If an entity fails to comply with the remediation requirements within the time required, the ITA may make a second determination of non-compliance and serve a further notice imposing an additional penalty. The minimum penalty for a second determination of non-compliance is US$10,000 and the maximum is US$200,000 (or US$400,000 in the case of a high risk IP legal entity).

Following the issue of a second notice or if following a first notice it decides that there is no realistic possibility of the entity meeting the economic substance requirements, the ITA may also submit a report to the Financial Services Commission (FSC) recommending or requiring that the entity be struck-off or could also apply to court for the liquidation of the entity. The ITA has indicated that striking-off or liquidation are extreme remedies, which will generally be reserved for instances where there have been clear, deliberate or egregious breaches of the requirements.

Yes. A notice of appeal setting out the ground of appeal must be filed no later than 30 days after the date of the Non-Compliance Notice. An entity may appeal the determination of non- compliance and/or the amount of the penalty, even if the minimum penalty was imposed.

The notice of appeal must be filed at the BVI High Court and served on the ITA using the correct form (available on request).

The Court has power to confirm, vary or revoke the determination of non-compliance and confirm, vary or cancel the penalty. It is currently unclear how the Court will handle appeals and therefore little guidance can be given on how long an appeal may take or how much it will cost.

Filing a notice of appeal suspends the requirements specified in the notice until the appeal has been finally determined or withdrawn.

There are various potential grounds for appeal where an entity contests that a Non-Compliance Notice should not have been issued or else issued on different terms. Some examples of potential grounds for appeal may include:

• Deficiency of the NCN – the notice did not contain the information required under legislation.
• Mistake or error of fact – the ITA made a factual error in concluding that the entity was non-compliant.
• Error of law – the ITA has incorrectly interpreted the law in reaching its determination.

The existence of a potential ground of appeal does not mean that the appeal will be successful. It is currently unclear what approach the Court will take on various points and we recommend that any entity considering an appeal seek legal advice as soon as practicable. Please contact our team of economic substance specialist lawyers immediately if you wish to appeal any part of the notice at BVIeconomicsubstance@harneysfiduciary.com.

A non-compliant determination may trigger spontaneous exchange of information between the ITA and the overseas tax authorities of each state:

• Where a "beneficial owner" resides
• Where a "registrable" legal entity is registered
• Where the entity is registered
• Where a "parent" of the entity is registered; and/or
• Where the entity claims to be tax resident

The highlighted terms have specific meanings under the Beneficial Ownership Secure Search System Act 2017.

The ITA has six years to make a determination of non-compliance from the end of the financial period to which the determination relates, unless it cannot make a determination due to deliberate misrepresentation or fraudulent action.