Virgin Islands’ Queen’s Counsel (QC) and member of the Inner Bar, Mr Gerard St. C. Farara, says the Europen Union (EU) through its Economic Substance requirements has devised a plan to damage the local financial services sector of the Virgin Islands (VI) after achieving limited success in reaching previous detrimental objectives. Photo: VINO/File

Speaking as a guest on the show, ‘Umoja’ with host Cromwell Smith aka 'Edju En Ka’, Mr Gerard St C. Farara QC issued sound warnings to the VI saying that as a people, the territory is not as concerned enough about the EU's Economic Substance requirements, even though it has the potential to significantly impact the financial sector. Photo: Internet Source

Speaking as a guest on the show, ‘Umoja’ with host Cromwell Smith aka 'Edju En Ka’, Mr Farara issued sound warnings to the VI, saying that as a people the territory is not as concerned enough about Economic Substance, even though it has the potential to significantly impact the financial sector.

On 19 December 2018, the Government of the Virgin Islands passed final legislation, entitled the “Economic Substance (Companies and Limited Partnerships) Act 2018” (Act) that introduces increased substance requirements for certain VI-resident legal entities.

According to audit and tax consulting firm Deloitte, on their website, the legislation was introduced in response to concerns expressed by the Council of the European Union (EU) about the absence of clear general legal substance requirements for entities doing business in and through the VI.

The legislation reinforces VI’s commitment to meet the requirements imposed by the EU Code of Conduct Group on jurisdictions that currently appear on the EU’s “grey list” as a result of these concerns. VI and other grey list jurisdictions were provided with a deadline of December 31, 2018 for passage of domestic economic substance legislation.

Impacts on VI Economy

“The starting point in this discourse, is to say first of all that this is a topic, this is an issue [Economic Substance] that as a territory, we ought to be quite concerned about because it has the potential, on the one hand, to significantly impact the financial services industry and its continued success,” he said. 

He continued, “On the flip side of that it also creates some opportunities… that could result in a greater earning within the financial services sector itself depending on how it is handled.

Diving deeper into the conversation, Mr Farara noted that the substance requirement initiative came out of the ‘larger world’ which also called for beneficial ownership of companies.

“Now we have the economic substance, the economic substance initiative is one that is being led by the European Union,’ he said in noting that the EU has now used it as a strategy to ‘skin the cat’ of the financial services sector.

Requirements 

Further, Mr Farara noted that as a result of the EU having limited success in achieving certain detrimental objectives, hence a more drastic approach was taken via the new requirements.

“They have devised this particular one to say really in essence, that these companies who are incorporated in jurisdictions such as the BVI, must demonstrate based on the purpose for which they were incorporated and the activities which they are carrying on… they must demonstrate greater connectivity with the place of incorporation.”

Meaning, companies must now be able to show on an annual basis—via capital investments and human resources, amongst other requirements—that they are carrying out the type of business activity for which they are registered to do in the territory.

According to Deloitte, all entities now must provide information regarding any relevant activities performed; details of the parent entity (if any) and the jurisdiction in which the parent is formed; and where the entity is registered on a recognised stock exchange, details of the stock exchange listing.

Legal entities which carry on a relevant activity and are not considered nonresident must provide the following information in relation to each such relevant activity, on an annual basis:

• Total turnover generated;
• Expenditure incurred within the VI;
• Total number of employees engaged in the activity;
• Number of employees engaged in the activity within the VI;
• Address of any premises within the VI used in connection with the activity;
• Nature of any equipment located within the VI used in connection with the activity; and
• Names of the persons responsible for the direction and management of the activity, together with their relationshipto the company and whether they are resident in the VI.

In essence, according to Mr Farara, “What this is doing is that they have imposed this as a requirement and so each of the Overseas Territories that had to put in place the necessary legislation. Because the consequences of not doing that is to blacklist those territories and that can have a detrimental impact on the economy.”

The Act outlines a notice process with graduated penalties to be applied for failure to meet economic substance requirements following each subsequent notice. The maximum penalty is USD 400,000 for a high risk IP legal entity and USD 200,000 for all other legal entities.

The BVI International Tax Authority ultimately may recommend that the Financial Services Commission strike the legal entity off the Register of Companies or the Register of Limited Partnerships where either the economic substance requirements are not met after the second notice or it decides there is no realistic possibility of the legal entity meeting the economic substance requirements, Deloitte stated on its website.

According to Mr Farara, many companies who will be unable to meet the requirements of Economic Substance may choose to leave the territory, and that is where the challenge lies.