Update to BVI Economic Substance rules

On 2 April 2024, the British Virgin Islands International Tax Authority unveiled the fourth version of their economic substance rules, complete with explanatory notes, on the heels of the United Arab Emirates (UAE) introducing a federal corporate income tax (CIT) system for financial years starting from June 1, 2023. But what does this mean for entities operating across these jurisdictions?

Here's a brief recap of the key points:

1. Non-Resident Status: Entities qualifying under Part 4 of the Rules as residents for tax purposes outside the BVI, provided they're not on Annex I to the EU list of non-cooperative jurisdictions for tax purposes, are treated as Non-Residents. Being Non-Resident exempts entities from economic substance requirements for the respective period, though they must furnish evidence of their tax status if engaged in any "relevant activity" and wish to claim Non-Resident status.
   
   
2. Expanded Concept of Residence: Part 4 of the Rules extends the traditional notion of residence to include certain "transparent" entities (see Rule 4) and entities whose sole income sources from relevant activity are taxable (Rule 5), under applicable tax laws. Withholding taxes are not considered in this context.
   
   
3. UAE CIT System: Previously, Rule 5 stated that an entity couldn't be considered tax resident in a jurisdiction lacking a CIT system, listing the UAE as one such jurisdiction. The updated Rules clarify that entities won't be deemed tax resident in the UAE for financial periods before 1 June 2023. Claims of tax residency in the UAE must pertain only to financial periods beginning on or after 1 June 2023. All UAE-related claims should be made under Rule 2, accompanied by proper evidence as outlined in Rule 3. This evidence must be in English or include a certified English translation.

Economic Substance Classification Solution

In collaboration with our associated law firm Harneys, you can use the Economic Substance Classification Solution as a primary resource for entity classification.

If you believe that you manage or own an entity that may be affected by substance rules based on the nature of its operations, please get in touch with one of our listed key contacts.