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BVI Economic Substance Requirements for Holding Company (HoldCo) Business

Updated: Mar 10, 2020

For general background on The Economic Substance (Companies and Limited Partnerships) Act, 2018 (the "Economic Substance Act"), the related draft International Tax Authority Economic Substance Code that was issued on 22 April 2019 (the "Guidance") and for the meaning of 'legal entity', please click here


This update assumes that an entity has already been determined to be a 'legal entity' under the Economic Substance Act and that the 'legal entity' is now considering whether it is carrying on one of the nine categories of geographically mobile 'relevant activities' - in particular, under the 'Holding Company business' category.


What is 'Holding Company Business'?

Holding business' in the Economic Substance Act is defined to mean 'the business of a pure equity holding entity' which itself is defined to mean a 'legal entity that only holds equity participations in other entities and only earns dividends and capital gains'.


Economic Substance Test

If a 'legal entity' only carries on a 'relevant activity' that is the 'business of a pure equity holding company', it will be subject to a reduced economic substance test as set out in Section 8(2) of the Economic Substance Act (the "Reduced Economic Substance Test"). The Reduced Economic Substance Test can be satisfied if the legal entity:

  • (a) complies with its statutory obligations under the BVI Business Companies Act, 2004 or the Limited Partnership Act, 2017 (whichever is relevant);

  • (b) has, in the British Virgin Islands, adequate employees and premises for holding equity participations and, where it manages those equity participations, has, in the British Virgin Islands, adequate employees and premises for carrying out that management.


The Guidance further provides that condition (a) described above is met by complying with the legislative requirements imposed by the Business Companies Act or the Limited Partnerships Act, as appropriate.


For condition (b), the Guidance provides that what is required for compliance, as with economic substance generally, will be a fact sensitive question, dependent on the nature of the activity being carried on. At one extreme, the requirement for being a pure equity holding entity is simply holding equity participations. If this is all the legal entity does during a given financial period, the relevant activity will be entirely passive in nature and the requirements for adequate and suitably qualified employees and for appropriate premises will be applied accordingly. Any legal entity will of course retain the services of a registered agent, and the performance of those services will be taken into account when assessing economic substance for pure equity holding entities. On the other hand, the entity may actively manage its equity participations, in which case it should have adequate and suitably qualified employees, and appropriate premises, in the British Virgin Islands to carry out this function.


In addition, the Guidance clarifies that for a pure equity holding entity there is no requirement that the entity is directed or managed in the British Virgin Islands. Nor is there a requirement that the entity carries on core income generating activity in the British Virgin Islands (as there is no core income generating activity relating to holding busines