SOS Substance on Substance - Re-domiciliation

Phil and Josh discuss (a) the global trend towards adopting economic substance (ES) requirements, (b) the need to classify individual entities’ activities and tax status to determine whether they are subject to the BVI ES requirements at all, and (c) the importance of that classification and properly weighing the costs of compliance against the transaction costs and ongoing operating costs resulting from the proposed re-domiciliation.

• Like any fundamental business decision, a re-domiciliation requires proper consideration of the transaction costs and other ongoing liabilities and obligations involved.
• The key first step is to classify the BVI entity’s existing activities. Once entities are properly classified, in many cases they may discover that they:
  • do not have any “relevant activity” (and so are not subject to the ES requirements at all)
  • are an entirely passive “pure equity holding entity”, for whom the existing BVI registered agent and registered office arrangements may be adequate, or
  • can undertake simple reorganisational steps such that their business ceases to comprise any “relevant activity”, as defined.
• Even where there is a “relevant activity”, many entities may be exempt from the ES requirements by virtue of their tax residence or tax status (ie, where the entity or the participators in the entity are chargeable to tax on the entity’s income under foreign tax laws).
• Where proper classification has not been undertaken, we are seeing real-life examples of situations where entities may be incurring considerable expense and increases to their cost of business unnecessarily – in some cases based on a misunderstanding of the BVI requirements.
• Compliance can be straightforward for many BVI entities. For some, their existing arrangements may be sufficient to comply with the legislation – in other cases, the changes required to achieve compliance are very simple and can be achieved without significant changes.
• All reputable international financial centres are adopting ES requirements as required by the EU and OECD, whose Forum on Harmful Tax Practice group has confirmed the BVI’s legislation meets the global standard.

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