SOS Substance on Substance – Holding Business and Finance and Leasing Business

Phil and Josh discuss the “holding business” and “finance and leasing business” definitions under the economic substance legislation and provide some practical examples of how Harneys considers the law will be applied in practice.

• We are waiting for the International Tax Authority (ITA) to publish its final Code. We understand the enabling legislation required for this to happen has been read in the BVI House of Assembly and should appear in the official Gazette soon. The Code will then be released by the ITA.
• We are receiving a number of queries regarding how to apply the narrow “pure equity holding entity” definition. Very broadly, Harneys’ view is that:
• Reading the definition purposively, a current account (whether or not it is interest-bearing) that is operated to receive dividends or capital gains and to pay the entity’s expenses should not be viewed as taking an entity outside the definition
• Conversely, having a bank account that holds significant cash sums received from other sources of income, generates interest or holds sums of a significant value in proportion to the value of the equity participations held by the entity (for example, as part of a broader reinvestment or working capital strategy) may mean that the narrow definition is not met
• The majority of brokerage accounts held by BVI entities that we have encountered are not of a type that would bring the entity within the narrow definition of “holding business”
• Many people are also asking how to apply the “finance and leasing business” definition. This is a highly complex area and the definition is very broad on its face – if you are in doubt, please speak to a lawyer. It is worth noting though that it is the current Harneys’ view that many simple intercompany debt arrangements which are non-interest bearing are unlikely to constitute a “finance and leasing business”.

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