Harneys

In this episode, Partner Joshua Mangeot and Director of Fiduciary and Custodial Kerry Graziola discuss the various amendments in 2021 to the Economic Substance (Companies and Limited Partnerships) Act (the ESA) and the Beneficial Ownership Secure Search System Act (the BOSS Act) and provide an update regarding steps being taken by the International Tax Authority (ITA) to monitor entities' compliance. By way of background, the BOSS Act was amended twice in 2021 – first, with effect from 1 July 2021 via the Beneficial Ownership Secure Search System (Amendment) (No. 1) Act, 2021 (the First Amendment) and the Beneficial Ownership Secure Search System (Amendment) (No. 2) Act, 2021 (the Second Amendment and together with the First Amendment the 2021 Amendments). Many of the key changes made via the First Amendment were summarised in https://www.harneys.com/insights/bvi-economic-substance-update-limited-partnerships-and-investment-funds/ (our client update of 19 July 2021). Key takeaways: We expect the third version of the ITA economic substance (ES) rules and explanatory notes (the Rules) to be published later this year. We understand that publication has been delayed by the EU Commission and, as a result, the Rules do not yet reflect the 2021 Amendments. The main changes made by the Second Amendment relate to limited partnerships without legal personality (which includes foreign limited partnerships without legal personality registered in the BVI) (Relevant LPs) being added to the ES and beneficial ownership (BO) reporting regimes and expand the ES prescribed information to be reported by a “corporate and legal entity” (an Entity) for each ES financial period (FP) beginning on or after 1 January 2022. Many Relevant LPs are investment funds – and amendments to the ES Act in 2021 confirmed the industry view that “investment fund business” is not a relevant activity. Broadly, the 2021 Amendments: significantly expanded the scope of the ES reporting regime for FPs beginning on after 1 January 2022; provided that Relevant LPs must report their BO information within 15 days of identifying those matters following 1 January 2022, other than where the Relevant LP is an “exempt person” which does not carry on any ES “relevant activity” (an Exempt Person); introduced an obligation to identify, and report certain prescribed information in respect of, any “immediate parent” and “ultimate parent” (as defined) of every Entity, other than an Exempt Person; and expanded the scope of jurisdictions which may receive information under the spontaneous information exchange mechanism in Schedule 4 to include the overseas competent authority for each state in which an immediate parent or ultimate parent of the Entity is registered. Although the first reports under the new reporting regime for most Entities incorporated or formed prior to 1 January 2019 will be filed in 2023, Entities should ensure they are aware of the new requirements now and may need to discuss the changes with their accountants and legal advisors. We are already seeing the ITA take steps to investigate entities to determine compliance. The ITA has broad investigation powers to request any information it reasonably requires from any person to determine compliance and generally has up to six years from the end of an FP to make a determination, subject to some limited exceptions. The Harneys ES Classification Solution Our  Classification Solution has already been updated to reflect the 2021 Amendments and provides a cost-effective way for BVI companies and limited partnerships to demonstrate formally that they have considered their position under the ES Act. Our automated Classification Solution helps to classify your entity, provides tailored real-time legal advice, and is accessible through our online platform, at your convenience. https://harneys.economicsubstance.vg/payment/index (Classify your entity here). If you have any questions regarding the...

In the fourth episode of Substance on Substance season two, Philip Graham, our global head of Investment Funds and Regulatory, and Counsel Joshua Mangeot, our BVI economic substance specialist, consider the ITA’s investigation and enforcement powers under the Economic Substance (Companies and Limited Partnerships) Act 2018 and discuss some expected changes to the legislation, including limited partnerships registered in the BVI without legal personality being brought within the regime. Key takeawaysCompanies and other legal entities which have not yet classified themselves or which have missed their first reporting deadline (which was 30 December 2020 for the majority of BVI companies incorporated before 2019) should take urgent action. “Nil returns” are required for each financial period even where an entity did not carry on any “relevant activity”. Deadlines have not been extended despite the Covid-19 pandemic. Failure to identify relevant activity or report without reasonable cause is an offence (and offences committed by a body corporate may lead to personal liability for directors and other individuals in limited circumstances). If an entity is determined to be non-compliant with economic substance requirements, it will be liable to civil penalties and this may trigger a spontaneous exchange of its beneficial ownership and economic substance information held on the registered agent “BOSS” database with overseas competent authorities. The ITA’s investigation powers are broad and may extend to other persons associated with the entity (for example, directors, officers or the registered agent). Failure to provide information to the ITA without reasonable excuse (or the intentional provision of false information) is an offence, so we recommend that entities and their operators use this as an opportunity to ensure that books and records are up-to-date and comply with BVI law requirements. If you receive an ITA notice or information request, we recommend taking advice if you are at all uncertain. Draft legislative changes were published on Friday 12 March – we expect the drafts will be amended but it appears likely that limited partnerships registered in the BVI without legal personality will be brought within the regime (in line with EU requirements) and that there may be changes to some of the fines and penalties. Previously only limited partnerships with legal personality were affected. Our full guide regarding the ITA’s investigations and enforcement powers can be found https://resources.harneys.com/acton/ct/6183/e-293e-2103/Bct/l-tst/l-tst:3a/ct20_0/1/l?sid=TV2%3AaPCfyZdmn (here). This and our other client guides may need to be updated as appropriate if the legislative amendments are brought into force.

In the fifth episode of this season’s Offshore Litigation Take 10 podcast, guest speaker Victor Joffe QC of Temple Chambers joins Ian Mann to discuss Chu v Lau [2020] UKPC 24, a case that considers the test for winding up a company on the just and equitable ground, with particular reference to deadlock. Key takeawaysChu v Lau raises a number of interesting points about winding up on the just and equitable ground. In order to wind up a company on the just and equitable ground, certain conditions must be met, one of which is deadlock. There are two types of deadlock:Management (or functional) deadlock: Where two shareholders who are directors of a joint venture fall out, and as a result, are unable to agree on company management decisions, preventing the company from operating successfully. This type of deadlock will cause the court to wind up the company regardless of whether the individuals are in a quasi-partnership.Quasi-partnership deadlock: Where there is a complete failure of mutual trust and confidence. In this scenario, a winding up may be justified due to the failure of mutual trust and confidence, even though the underlying company continues to operate successfully and generate profits. There was also a debate about whether or not the behaviour complained of should be considered at the date of filing or at the date of the hearing. Section 162(1)(b) of the BVI Insolvency Act is in the present tense and therefore the court should consider whether there is deadlock at the time of the hearing, rather than at the date of the filing. When dealing with a quasi-partnership, it is the relationship between the quasi-partners that reveals the extent to which the necessary basis of trust and confidence has evaporated. Therefore, no aspect of a business relationship is irrelevant. In other words, all grievances within the relationship are relevant to the breakdown in trust and confidence. As a result, OSL was considered to be a quasi-partnership company, as its management included the management of the affairs of its wholly owned subsidiary, PBM, and in turn, Beibu Gulf. Essentially, the deadlock that occurred within Beibu Gulf could be relied upon to wind up OSL. Unfair prejudice vs just and equitable groundsOne could prove the breakdown of mutual trust and confidence without proving unfair prejudice in the management of the company. Unfair prejudice requires “the affairs of the company” to be unfairly prejudicial to its members, which is potentially more limited. When applying for a winding up, more behaviour can be taken into account when applying on just and equitable grounds in a quasi-partnership company than winding up on the grounds of unfair prejudice, ie more than just “the affairs of the company”.Alternative remediesIn the BVI, on a just and equitable winding up, a buy-out remedy cannot be obtained. In the Cayman Islands however, a buy-out remedy is possible. Had an unfair prejudice claim been filed instead of a just and equitable winding up, a buy-out remedy could have been obtained. Read more about Chu v Lau in this blog post.

In a bumper episode for the holiday season, Phil and Josh venture into the weeds of the ES reporting requirements, giving a "deep-dive" into the reporting criteria and their long-awaited discussion of tax non-residence claims and Part 4 of the International Tax Authority (ITA) Rules.Key takeawaysReports must be filed by every "corporate and legal entity" (which includes all BVI companies) under the Beneficial Ownership Secure Search System Act 2017 via the registered agent within six months of the end of the financial period.The format of reporting via the BOSS(ES) database is prescribed by the ITA and reflects EU and OECD requirements.Every entity must file a report within the deadline - even if this just a "nil return".There are special regimes for "pure equity holding entities" (which only need to report on their "employees" and premises) and for "intellectual property business" - the latter is extremely complex and persons considering IP business are recommended to seek legal advice.Entities with other relevant activities, which are not tax "non-resident", are subject to the "general economic substance requirements" and must broadly report on:Turnover (or revenue/gross income) from the relevant activity.The person(s) responsible for direction and management of the relevant activity.Expenditure incurred on the operation of the relevant activity (both total and within the BVI)."Employees" (which includes individuals managed as employees, if employed by someone else) engaged in the relevant activity (both total and physically present within the BVI).Premises used in the relevant activity in the BVI.Details of "core income generating activity" (CIGA) carried on in the BVI.Further prescriptive details if any CIGA have been outsourced to any entity in the BVI.The ITA has encouraged entities to make use of professional services and other providers in the BVI to provide substance - particularly given the Covid-19 pandemic.Entities which carry on relevant activities may be treated as tax "non-resident" and exempted from ES requirements if, during the financial period:they are tax resident in another jurisdiction;they are "transparent", meaning all of the profits and gains are attributable to and taxable all some or all of the participators or partners in the entity; orthey are not a "pure equity holding entity" and all of their income from relevant activities is subject to tax in another jurisdiction,provided in each case the relevant jurisdiction does not appear on the EU's tax "blacklist".These rules can be complex to apply in the case of territorial, sectoral or source-based tax regimes and persons considering such regimes or making such claims are recommended to seek legal advice.Entities making such a claim must report on any "parent" and provide evidence of their tax status with their report - there is a mechanism to be treated as provisionally non-resident by the ITA in certain circumstances where evidence cannot be provided within the six-month reporting window.Making a non-residence claim will trigger spontaneous information exchange with the relevant overseas tax authorities (and any EU member state within which a beneficial owner or legal owner of the entity resides) to ensure the claim is valid.BVI entities which do not carry on any ES relevant activity do not need to report on (but should still ensure they have considered) any foreign tax status or obligations.

In the second episode of our Substance on Substance Season two, Philip Graham, our global head of Investment Funds and Regulatory, and Joshua Mangeot, our BVI Economic Substance specialist, give an update on points directors and operators of BVI entities should be aware of regarding the economic substance reporting deadlines. Key takeawaysDirectors need to first assess where they are in the compliance reporting cycle - most BVI companies incorporated before 2019 will have to file their first report by early December 2020Obligations depend on the classification and greatly vary in what is requiredAllowing a company to incur fines or penalties for non-compliance may be a breach of directors’ duties, which can expose the director to personal liabilityThere are also specific offences under the Beneficial Ownership Secure Search System Act 2017 that can occur when a company has failed without “reasonable cause” to: Identify any “relevant activity” it carries onIdentify prescribed information regarding any such activities and its beneficial ownershipReport the prescribed information to its BVI registered agent within the relevant deadlinePenalties include significant criminal fines and penalties (and even personal liability where intent or failure to exercise all reasonable diligence can be shown), subject to a limited defence of “reasonable cause”We can help manage the classification, compliance and reporting process by: Performing a scoping exercise and working through the initial classificationsEstablishing whether or not there is relevant activity and advising next stepsAdvising the directors and the company to show they have discharged their dutiesWorking with directors and companies to establish and carry out the next steps that need to be takenWe are able to offer a suite of online tools to make this process easier.Harneys’ Economic Substance Classification Solution which provides real time formal legal advice to any BVI company or limited partnership for a low fixed fee can be found here. This solution offers users access to high quality legal advice on their entity’s status and obligations within minutes.More information about Harneys' Economic Substance reporting tools we have developed to assist registered agents and service providers coordinate reporting can be found here.

In our final episode of The Funds Download season one, our host and the Global Head of Funds and Regulatory, Philip Graham, is joined by Partners Lewis Chong and Matt Taber, and Associate Marc Piano, our in-house crypto experts. They consider the most frequently asked questions encountered in their extensive experience with guiding emerging managers in this industry.

Our BVI economic substance specialists Counsel Joshua Mangeot and Director of Client Services Amy Roost address some FAQs regarding the reporting process, which are relevant to all BVI companies.Key Takeaways:The reporting deadlines for most BVI companies and other relevant entities are imminent - and in some cases have already passed. Most BVI entities must ensure reports are submitted by their registered agent (RA) before 30 December 2020 or face significant fines and penalties - and even personal liability.Deadlines have not been allowed to be extended by the EU despite COVID-19 but the regulator has issued practical guidance in this area. Please click here for our alert on this topic.Compliance is assessed by “financial period”. Entities incorporated before 1 January 2019 have a default first financial period of 30 June 2019 to 29 June 2020. Companies incorporated from 1 January 2019 onwards have a first financial period of 12 months from incorporation. After the end of the financial period, entities have six months in which to arrange reporting into the BOSS(ES) system via their RA.The ES financial period may not be the same as the entity’s tax or accounting financial year. The entity needs to review its individual non-consolidated accounts to determine its assets and sources of gross income over the financial period - this may require discussion with the entity’s accountants.Since most BVI companies were incorporated before 2019 (and may not have changed their default financial period), their first report will have to be filed by their RA before 30 December 2020. Where any relevant activity was carried on during the financial period, entities either need to claim and evidence exemption due to their tax status under the “non-resident” exemption or submit reporting information demonstrating how they had adequate BVI substance over the period.There are special regimes for pure equity holding entities (holding business) and intellectual property business - the latter regime is extremely onerous and entities with any potential IP business should seek BVI legal advice. For entirely passive holding businesses or entities without any relevant activity, compliance and reporting should be quite straightforward. Nil returns are required even where there is no relevant activity.The tax non-resident exemption can also apply to transparent/disregarded entities and certain entities subject to tax on their income from relevant activities. Care needs to be taken when dealing with territorial or sectoral tax regimes and objective evidence will need to be provided to back up a claim. There is a mechanism to apply for provisional non-resident treatment, where such evidence cannot be obtained within the 6-month reporting window. This can be complex and may need tax advice. Josh and Amy’s practical guide to BVI ES reporting is available by clicking here.

In the ninth episode of our Funds Download podcast series, our host and the global head of Funds and Regulatory, Philip Graham, is joined by Partner Matt Taber and Associate Marc Piano, to focus on how the FinTech evolution continues to provide a platform for serious innovation in the industry.

In the fourth episode of this season’s Offshore Litigation Take 10 podcast, Ian Mann is joined by guest speaker Victor Joffe QC of Temple Chambers to discuss the UK Supreme Court case of Sevilleja v Marex Financial Ltd [2020] UKSC 31, a case that looked at whether the rule against reflective loss prevented creditors of a company from claiming directly against a third party for asset-stripping the company.Key Takeaways:Sevilleja v Marex – The facts:Mr Sevilleja controlled two BVI companies which were sued by Marex Financial Ltd. In the Court of Appeal, Marex was successful in obtaining a judgment of over US$5 million and costs. A copy of the draft judgment was provided to both parties, prior to the final judgment due to be handed down a few days later. During those days, Mr Sevilleja caused his BVI companies to transfer over US$9.5 million out of their accounts and subsequently put the companies into liquidation, making it impossible for Marex to receive payment on the judgment debt.As a result, Marex brought claims against Mr Sevilleja, seeking damages for violating Marex’s rights in avoiding the judgment and other intentional economic torts.Mr Sevilleja’s defence stated that Marex’s claims were barred by the principle of reflective loss.Reflective loss:The reflective loss principle states that if a company suffers a loss, only the company can sue in respect of that loss. The shareholders cannot sue in respect of the loss because the loss suffered is not a personal loss, but a reflection of the loss suffered by the company.In Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, the Court of Appeal held that reflective loss applied to claims brought by shareholders in respect of diminution in the value of their shares, and diminution in the flow of distributions, caused by a wrongdoer who had acted in breach of duty both to the company and to the shareholders.In a number of subsequent cases, Johnson v Gore Wood & Co [2000] UKHL 65 has been relied upon to justify an expansion of the reflective loss principle, particularly due to Lord Millet’s speech. For example, the rule was expanded to apply to shareholders who are creditors (as seen in Gardner v Parker [2004] 2 BCLC 554) and then to apply to creditors who are not shareholders, as seen in the Court of Appeal in Sevilleja v Marex.Ultimately, the Supreme Court in Sevilleja v Marex pairs back the reflective loss rule to its original and limited scope as decided originally in the decision of Prudential - making it clear that reflective loss only applies to diminution in shareholdings and diminution in the flow of distributions. It does not apply any further and there are no exceptions to the rule. It does not prevent creditors of a company from claiming directly against a third party for asset-stripping the company.

Host and the global head of Funds and Regulatory, Philip Graham is joined by Partner Lewis Chong and Associate Marc Piano, to discuss the hot topic of Cryptocurrency; how it has evolved, its recent resurgence and the essential role offshore jurisdictions play in supporting this dynamic industry.

In our fourth episode of R&I over Wi-Fi, Senior Associate Lachlan Greig sits down with Partner Paul Madden to discuss provisional liquidation. The focus of this episode is on the appointment of restructuring provisional liquidators when the company is unable to pay its debts.

In the seventh episode of our Funds Download podcast series, our host and the Global Head of Funds, Philip Graham, is joined by the Head of our Regulatory and Tax Department, Aki Corsoni-Husain, to talk us through the global regulatory framework that all aspiring fund managers and service providers should be aware of.

In the sixth episode of our Funds Download podcast series, our host and the global head of Funds and Regulatory, Philip Graham, is joined by head of Funds and Regulatory, Asia, Maggie Kwok, to share insights from the region.

Our podcast series Practically Speaking, was launched to provide our listeners with practical advice and insights on issues applicable to stakeholders of BVI entities.In our eighth episode, Transactional Partner Rachel Graham and Senior Associate within Harneys’ Private Wealth team, Matthew Howson discuss the following:What happens when a non-resident holder of BVI shares passes away, whether they held the shares absolutely or via a nomineeship? How to bridge the gap between the law of the BVI company and the law of the Deceased’s home jurisdiction: covering some near universal misperceptions. What works to ensure that BVI assets and shares are transferred directly to beneficiaries, and what doesn’t. Provisions necessary for nominating a reserve director for a BVI company holding vehicle, in the event that the sole individual shareholder and director passes away.

In the fifth episode of our Funds Download podcast series, our host and the global head of Funds and Regulatory, Philip Graham, is joined by Harneys Fiduciary Managing Director of the Americas, Maria Pia Buchi, to examine market trends originating from Latin America and how investment fund products are structurally so important in the plumbing of the region.

Our podcast series Practically Speaking was launched to provide our listeners with practical advice and insights on issues applicable to stakeholders of BVI entities. In our seventh episode, Transactional Partner Rachel Graham and Director of Fiduciary & Custodial Kerry Graziola discuss how to establish substance for relevant in scope entities in the BVI, outlining: The obligations facing both passive and active entities conducting holding business and how they differ. The requirements for direction and management and how they might be managed practically in a Covid 19 world. How the ITA has been responding to the current travel climate and its effects on obligations. The obligations facing entities which are required to conduct core-income generating activities relating to the relevant business and how outsourcing certain roles and functions to professionals on island might assist. How the requirements for adequate premises and adequate employees in the BVI might be met by companies conducting the relevant activities of finance and leasing, fund management and headquarters business. Find out more about the ITA’s updates regarding compliance and reporting in response to the COVID-19 outbreak here.

Our podcast series Practically Speaking, was launched to provide our listeners with practical advice and insights on issues applicable to stakeholders of BVI entities. In our sixth episode, Transactional Partner Rachel Graham and Transactional Counsel Thomas Dugdale discuss the following:What a continuation, “re-domiciliation” or “migration” is Why continue or migrate to another jurisdictionPractical considerations of continuing your company in or out of a jurisdictionHow continuations might affect creditors and other interested partiesCommonly encountered issues and solutionsTo read more about continuations into the BVI click here

In the fourth episode of our Funds Download podcast series our host and global head of Funds and Regulatory, Philip Graham, is joined by the head of our Luxembourg Investment Funds team, Vanessa Molloy, to take a closer look at the reasons why Luxembourg is such a successful investment funds jurisdiction, and the main factors to consider if you are thinking of establishing a Luxembourg structure.

Welcome to this season’s third episode of the Offshore Litigation Take 10 podcast. In this episode, Paula Kay joins Ian Mann to discuss privatisation, the process by which a company transfers from public to private ownership and control. Key TakeawaysWhy privatise?Given the current economic and geopolitical climate, publicly listed companies are facing great pressure and are looking for ways to either exit from their current stock exchange and relist elsewhere, or to exit the stock exchanges completely.Increased reporting requirements as a result of the US-China trade war has also played a role in many organisations’ desire to privatise. Options for privatisation for a Cayman Islands company Standard merger process in which a public company merges with a private company in order to come off the stock exchange. Privatisation via a scheme of arrangement has a similar time frame to a standard merger, but does not require a fair value pay-out to dissenting shareholders. However, a majority in number and 75 per cent present and voting is needed, which may be challenging to obtain.Mergers in accordance with Part XVI s233 only require a special resolution (usually 66 per cent), which may be easier to obtain. However, dissenting shareholders have the right under s288 to seek the Courts assistance to determine a fair value. Should the Court decide that the value of the shares at the time of the merger was not fair, the dissenters are entitled to an uplift. Part XVI s233(7) is an exception to the standard merger process, referred to as a Short Form Merger, which is a combination of a Squeeze Out (where 90 per cent of the shares are acquired) and a merger to follow. As 90 per cent of the shares are owned, there is no requirement for a meeting of the members as there is no need for a special resolution to be passed, resulting in a compulsory buyout of the remaining shares. In this event, dissenting shareholders do not have the opportunity to provide notice or to seek the Courts assistance to determine fair value. Regardless of the way in which a company privatises, financial advice from an independent third party and an independent special committee to assess the merits of the merger are essential to ensure that the deal is the correct price for the shareholders.

Our podcast series Practically Speaking was launched to provide our listeners with practical advice and insights on issues applicable to stakeholders of BVI entities. In our fifth episode, Director of Client Services Amy Roost and Global Head of Investment Funds, Philip Graham discuss the following: Private Investment Funds (PIFs), what they are and why they were introduced the various ways in which you can determine whether this new regime affects your BVI entity the need for PIFs to apply to be recognised by the Financial Services Commission in the BVI on or before the June 30, 2020 deadline the application process Read more about PIFs in our initial post published back in January 2020. To schedule an immediate formal assessment of your BVI vehicle and to discuss the exemptions that are available please contact our legal team by clicking here.

When things go horribly wrong; Lehman, Madoff and the global financial crisis of 2008/2009In the third episode of our Funds Download podcast our host and the Global Head of Funds and Regulatory, Philip Graham, is joined by the Co-Head of Funds and Regulatory in the Cayman Islands, Matt Taber, the Global Head of Dispute Resolution, Phillip Kite and the Head of Dispute Resolution in the Cayman Islands, Nick Hoffman, to share their collective insights and knowledge acquired from the crash in 2008 and its aftermath.

In the second episode of our Funds Download podcast, our host and the global head of Funds and Regulatory, Philip Graham, is joined by the co-head of Funds and Regulatory in the Cayman Islands, Matt Taber, the global head of Dispute Resolution, Phillip Kite, and the head of Dispute Resolution in the Cayman Islands, Nick Hoffman. They relive the events of the financial crises of 2008/2009 and examine what valuable lessons were learnt by the Funds industry as a result.

Our podcast series Practically Speaking, was launched to provide our listeners with practical advice and insights on issues applicable to stakeholders of BVI entities. In our fourth episode, Transactional Partner Rachel Graham and Director of Fiduciary & Custodial Kerry Graziola discuss the following: the liquidation process in the BVI the external factors that might affect how quickly the company can be liquidated how to reorganise the company to help simplify the liquidation process the on-going duties and annual reporting obligations under the economic substance regime Our recently updated article on Bringing your BVI company to an end: strike off vs liquidation can be found here.

Our third episode is hosted by Jayson Wood and Jessica Williams, Partners in our Litigation and Insolvency practice group.Key takeawaysThe appointment of restructuring provisional liquidators in the Cayman Islands provides protection for a Cayman Islands company while a restructuring is negotiated in the US (and triggers a Cayman statutory moratorium).The gateway for the appointment of restructuring provisional liquidators is: (i) that the company is unable to pay its debts; and (ii) that it intends to present a compromise or arrangement to its creditors. The Cayman Islands has not adopted the UNCITRAL Model Law. US Bankruptcy practitioners will therefore consider if steps should be taken in Cayman, through a parallel restructuring, to protect the effectiveness of the Chapter 11 plan (and taking into account the Gibbs rule).The decision will largely come down to risk appetite (rather than costs), with parallel restructurings in the country of the law of the debt and the place of incorporation providing maximum effectiveness and recognition to the restructuring.

During this episode of our Practically Speaking podcast series, Rachel Graham and Amy Roost discuss the ins and outs of de-enveloping BVI companies, outlining:which companies may want to de-envelope and why commonly used structures involving BVI companies for holding real estate and other assetsoptions available for de-enveloping assets from these structureskey steps to be taken before de-enveloping can occur, including the need for the company to be in good standingrelevant timings

Welcome to this season’s second episode of the Offshore Litigation Take 10 podcast. In this episode, Andrew Johnstone and Ian Mann discuss the decision in CEFC Shanghai: the first PRC office holder to be recognised under the common law in Hong Kong.Key Takeaways:CEFC ShanghaiCEFC Shanghai was a PRC company in Administration. The Administrators sought common law recognition in Hong Kong in order to stop a garnishee order nisi from being made final.The House of Lords decision of Galbraith v Grimshaw [1910] AC 508 not followed, but obiter dicta in Privy Council decision of Grupo Torras SA v Al-Sabah [2014] 2 CLC 636 followed.The decision in CEFC Shanghai was consistent with established principles of common law recognition.Cross border recognition: BVI vs Cayman IslandsIn the BVI, Part XIX of the BVI Insolvency Act permits orders in aid of foreign insolvency proceedings at the request of a foreign liquidator, but only to representatives appointed in 9 specific jurisdictions, of which the PRC is not included.Could the common law power of recognition be relied upon by PRC Administrators instead? The answer is: “maybe”, but the BVI Court of Appeal will have to clarify some conflicting first instance decisions.The Cayman Islands does have a statutory provision for recognition of foreign companies under Part XVII of the Cayman Islands Companies Law.

In our first episode Global Head of Investment Funds, Philip Graham, and Partner Matt Taber, examine the investment funds market in Q1 2020, and make projections of the emerging issues as we step into Q2.

In our second episode, Transactional Partner Rachel Graham and Director of Client Services Amy Roost discuss the options available to directors and shareholders when a BVI company has reached the end of its useful life, with a particular focus on the on-going annual reporting obligations under the economic substance regime. Key Takeaways: Where an entity is no longer required there are two options available: first is solvent liquidation, a formal process to wind up and dissolve the company, bringing it to an orderly end; second is to allow the company to fall out of good standing and be struck off the register and eventually dissolved some 7 years later. Liquidation: This formal but straight-forward process brings the company to an orderly end. It brings formal closure and much greater certainty as well as mitigating risk for directors, shareholders and other stakeholders. In many cases, where the company has already disposed of its assets and settled all its liabilities, the entire liquidation process can be completed within four to six weeks. Once a company which has been voluntarily liquidated and dissolved, it no longer exists and can no longer incur liabilities or sue or be sued.The date of dissolution is significant, however, since the company will continue to have reporting obligations under the economic substance regime, for the financial period that the entity is in at the time of its liquidation. Strike off: For decades it has been the norm to leave entities that are no longer required to be struck off. Strike off is automatic, when an entity no longer meets certain requirements eg not paying its annual licence fee. A company remains struck off for 7 years before it is formally dissolved and during that period the company, as well as its directors and shareholders, are exposed to ongoing risk of liability and uncertainty.The risk and uncertainty is increased with the introduction of ongoing reporting obligations under the economic substance regime, which continues to apply during this 7 year period, even if the struck off company is not carrying on any activity.Fines and penalties for non-reporting under the economic substance regimePotential penalties are severe with significant financial and criminal actions available to the competent authorities. Conclusion: Where an entity is no longer required, directors (and shareholders) of BVI companies are strongly advised to consider liquidating the company rather than allowing the company to be struck off. Entities may wish to consider seeking further legal advice to go over their options, and the ongoing implications. Stay tuned for more episodes of Practically Speaking.

In our second episode, partners Andy Thorp, Stuart Cullen and Ellie Crespi discuss the US$1.67 billion global debt restructuring of Brazilian oil and gas services group Constellation (formerly Queiroz Galvão Oil & Gas). The transaction saw a creative move by the BVI courts, who accepted the appointment by the company of a light touch provisional liquidator over the BVI subsidiaries of Constellation, providing a moratorium against its unsecured creditors and breathing space for the Brazilian restructuring to operate. Here we take a closer look at the legal and practical implications of the restructuring, and whether legislative reform is on the cards in the BVI. Key Takeaways: The Operation Car Wash (lava jato) investigation, as it did with many Brazilian businesses in the same industry, had a massive impact on the operations of Oil and Gas giant Queiroz Galvão Oil & Gas group (now Constellation). The restructuring involved an unprecedented move by the BVI courts, who accepted the appointment by the company of light touch provisional liquidators, with only minimal supervisory powers but providing the umbrella protection of a moratorium. The ejection of one of the key BVI subsidiaries from the Brazilian restructuring required a BVI solution to compromise its obligations to allow the reissuance of fresh notes and security. Following the successful Brazilian RJ, the BVI scheme was approved in February of this year and obtained Chapter 15 recognition in the SDNY in March to complete the US$1.5+ billion restructuring.

Welcome to the first episode of our second season of the Offshore Litigation Take 10 podcast. In this episode, Julie Engwirda and Ian Mann discuss directors’ duties and obligations where a company is experiencing financial pressure. Key Takeaways: 2020 has seen the global economy affected in unprecedented ways. With major loss of revenue, global stock market crashes, and millions of jobs affected, directors across all sectors are having to reassess their businesses and plan for an uncertain future. Directors will need to adapt to the changing landscape to ensure survival of their businesses, with an emphasis on maximising cash flow whilst minimising expenses. Having cash flow issues does not necessarily mean a company is insolvent. Many common law jurisdictions give statutory guidance to directors when considering solvency issues. When directors know or ought to know that the company is, or is likely, to become insolvent, they owe duties to creditors (instead of shareholders). Risks: BVI: insolvent trading. Cayman Islands: fraudulent trading.

Transactional Partner Rachel Graham and Director of Client Services Amy Roost host the first episode of our new podcast series: Practically Speaking. This series was launched to provide our listeners with practical advice and insights on issues applicable to stakeholders in BVI. We hope that the series will be of interest to directors, shareholders, trustees and others concerned with BVI entities. In this episode, Rachel Graham and Amy Roost discuss two topics: the implications of COVID-19 on economic substance compliance and reporting, and matters directors should be considering if they find their company is moving towards financial difficulties. Take a listen below. Key takeaways Travel restrictions due to COVID-19 and how directors of BVI entities can still comply with their economic substance obligations. Directors duties in turbulent times. The BVI ITA released some temporary guidance on the 27 March 2020, outlining that they do expect the economic substance requirements to be met. Decisions involving Core Income Generating Activities (CIGA) require meetings to be held in the BVI. BVI ITA has provided alternative ways for entities to meet their economic substance requirements. Documentation is key; directors are responsible for recording when they are unable to meet requirements and the steps they have taken to attempt to meet these requirements. Directors are expected to use virtual board meetings and/or alternate directors when they are unable to travel to the BVI. Directors are required to be aware of the financial position of their company at all times, but this obligation is even more pertinent in times of worldwide economic disruption. Directors need to monitor their relationships with their bankers, insurance providers, and other external creditors and take legal advice at an early stage. Directors are advised to consider and action those steps which allow them to make prudent and reasonable decisions in the circumstances and to keep supporting documents relating to those decisions. Directors should be mindful of the fact that when a company becomes insolvent or is at risk of insolvency, their duties shift from being owed to the company and its shareholders to being owed to creditors. Stay tuned for more episodes of Practically Speaking.

Introducing R&I over Wi-Fi, Harneys’ newest podcast series. Taking a deep dive into the various strategies and tactics you can take when faced with a restructuring, while keeping you up to date on emerging and critical issues surrounding restructuring and insolvency. Key Takeaways: A cross-border restructuring of an offshore company needs to ensure that the compromise which is effective in one jurisdiction also has practical effect in all other jurisdictions in which the company holds assets. The steps required to give practical effect to any particular restructuring are necessarily fact sensitive and will depend on the precise nature of the compromises implemented by the restructuring process. The starting point in any debt restructuring is the “Gibbs Rule” which provides that where a debt is governed by the law of a particular jurisdiction, it cannot be compromised by a foreign insolvency proceeding unless the creditor submitted to that foreign proceeding. The commercial imperative is to ensure that a disgruntled creditor cannot undermine the negotiation or implementation of a restructuring in the jurisdiction where the scheme company is incorporated. Robust protections are available in the Cayman Islands, the British Virgin Islands, and Bermuda to ensure the smooth running and the cross-border effectiveness of onshore debt restructurings.

In the fifth and final episode of our Take 10 podcast series for 2019, Ian Mann and Dayton Riddle discuss whether a board of directors of a Cayman Islands company has the right to petition to wind up the company without shareholder approval, for restructuring or insolvency purposes.We hope you have enjoyed our Take 10 series this year and we look forward to providing you with more insightful podcasts in the new year.Stayed tuned and thanks for listening!

Welcome to the fourth episode our litigation podcast “Take 10”. The series features casual 10 minute discussions on the latest litigation cases and market developments relevant to our offshore jurisdictions.In the fourth episode, Ian Mann and Julie Engwirda discuss the shareholder remedy of derivative actions, particularly multiple derivative actions in the British Virgin Islands.

"Take 10” is Harneys Offshore Litigation podcast series. In the third episode, Ian Mann and Jayesh Chatlani discuss their experiences in the Privy Council, the final court of appeal for offshore Caribbean jurisdictions.

"Take 10” is Harneys Offshore Litigation podcast series. In the second episode, Ian Mann and Dayton Riddle discuss common law recognition and the case of Supreme Tycoon.

“Take 10” is Harneys Offshore Litigation podcast series. In the first episode, Ian Mann and Gareth Murphy discuss lessons learned from the recent shareholder case of Dinglis.

In the fifteenth and final episode of Harneys’ Substance on Substance series for 2019, Philip Graham and Joshua Mangeot (plus special guest George Weston) examine the journey of economic substance in the BVI to date, from the inception of the Act to the final ITA Rules and discuss how BVI entities are coming to terms with these developments. Key takeaways-We are seeing an increasing level of conversancy with the key concepts of economic substance, following the draft ITA Code being released in April and the final Rules being released in October-We are seeing an increasing amount of entities classifying in order to ensure they are compliant with the new requirements – many entities are finalising their classifications, finding out whether they are affected at all or whether they are exempt or are passive “pure equity holding entities”, in which case no or very few changes will be required-Based on user feedback, we have updated our BVI Economic Substance Classification Solution (which is available at https://economicsubstance.vg), building out the functionality and expanding Harneys’ legal advice given to users throughout the process and to provide board resolution template wording for more straightforward cases-A large number of entities have progressed passed the classification stage and it is encouraging to see how many people are putting substance solutions in place (such as holding board meetings, appointing local directors and developing their presence in the BVI)-Ultimately, it is companies’ and other legal entities’ obligation under BVI law to identify whether they have relevant activity and if so, to take steps to ensure compliance – if entities have not yet considered this and classified themselves, we strongly recommend that they do soWhilst this is the last episode of the Substance on Substance series, more updates and a new podcast series will be coming your way in the new year; stayed tuned and thanks for listening! If you would like to subscribe to our client alerts on economic substance, please visit https://www.harneys.com/newsletter/.

SOS Substance on Substance: Episode fourteen – Timing of compliance and reporting obligations In the fourteenth instalment of Harneys’ Substance on Substance series, Philip Graham and Joshua Mangeot discuss timing for compliance and reporting and address the ongoing obligation on BVI companies and other legal entities to identify “relevant activities”. This obligation came into effect from 1 October 2019 but is distinct from the reporting obligations which will generally commence in 2020 (except in the case of previously “exempt persons”, who now need to be reporting beneficial ownership information if they carry on any relevant activities).Key Takeaways• The amendments to the Beneficial Ownership Secure Search System 2017 (the BOSS Act) enacted on 1 October 2019 included an ongoing obligation to identify relevant activities (and failure to do so without reasonable cause is technically an offence)• As of the 1 October amendments, previously “exempt persons” under the BOSS Act which carry on any relevant activity have ceased to be exempt from reporting beneficial ownership information – this must generally be reported within 15 days (so potentially from 16 October 2019 at the earliest)• This bolsters any compliance obligations under the main economic substance legislation which came into effect for BVI companies and legal entities earlier in the year• All entities should generally have identified any “relevant activities” by now, if they have not already done so – although many BVI legal entities will be exempt from requirements to demonstrate substance either (i) because they are not carrying on any relevant activity or (ii) due to their tax status under non-BVI law• Conversely, reporting of the prescribed economic substance will generally commence in 2020 and is expected to be done via an entity’s BVI registered agent• The ITA is generally expected to commence an audit and investigation of entities’ compliance with the economic substance requirements under its broad power following the first round of reporting in 2020 but this will be on a “backwards-looking” basis in respect of the first compliance “financial period” – so entities should be maintaining robust books and records for the first financial period to be ready to report and comply with any ITA information requests• Where entities have taken legal advice on their position under the economic substance legislation, we recommend that they consider taking steps to preserve legal advice privilege in the advice itself (particularly if this will be provided to their registered agent or other third-parties)• Generally, the ITA has six years from the end of the relevant financial period to make a determination of non-compliance (but this timeframe is unlimited in cases of deliberate misrepresentation or negligent or fraudulent action)

SOS Substance on Substance: Episode thirteen – What should directors and fiduciary service providers be considering?In the thirteenth instalment of Harneys’ Substance on Substance series, Joshua Mangeot and special guest George Weston discuss BVI directors’ duties in the context of the Economic Substance (Companies and Limited Partnerships) Act 2018 (the ES Act) and provide an update on amendments to the Beneficial Ownership Secure Search System Act 2017 (the BOSS Act).Key takeaways:• We have received numerous queries from directors and officers of BVI companies and fiduciary and corporate services providers (CSPs) regarding their responsibilities in this area – the majority of questions relate to BVI companies• Directors of BVI companies are subject to various common law and statutory duties – broadly, the main duties under the BVI Business Companies Act 2004 (the BC Act) are (i) to act bona fide in the best interests of the company; (ii) to exercise their powers for a proper purpose and in accordance with the BC Act; and (iii) to exercise reasonable care and skill• Where a director allows or permits a company to incur fines or penalties for non-compliance with the economic substance requirements, this may give rise to potential liability to the company for breach of their general duties•There are also some specific obligations to be aware of under the ES Act and the BOSS Act – broadly:o as of 1 October 2019, every BVI company and other corporate and legal entity must identify whether it carries on one or more “relevant activities” under the ES Act (and if so, which activities) – failure to do so without “reasonable cause” is an offence and, in the case of a company, may be committed by directors, officers and other persons in certain limited circumstances by virtue of the BVI’s Interpretation Act (Cap. 136)o the International Tax Authority (ITA) has broad investigation powers to service notice on any person requiring them to provide such documents and information as the ITA may reasonably require to exercise its functions under the ES Act – failure to provide information without “reasonable excuse” or intentionally providing false information is an offenceo conversely, the general financial penalties for non-compliance with the ES Act do not fall on directors or officers but on the company, subject to the point made regarding directors’ duties generally• We therefore recommend directors and CSPs providing fiduciary services take appropriate legal and/or tax advice where they are uncertain regarding their companies’ compliance and reporting obligations under the ES Act – legal advice may benefit from legal privilege and, broadly, reliance which has been reasonably placed on such advice may discharge a director’s duties by virtue of specific provisions in the BC Act and may provide “reasonable cause” if the ITA investigates or challenges the basis of the classification• Directors should ensure they have understood these new obligations and classified their company and may wish to pass resolutions or hold a meeting to record the basis of their determination of their company’s position under the ES Act and the BOSS Act and to record the fact that they took appropriate advice• Expected amendments to the BOSS Act were published on 31 October 2019 – broadly, these bring the BOSS Act into line with the position anticipated by the ITA Rules of 9 October 2019This episode was recorded on Monday 4 November 2019.​Stay tuned for more Substance on Substance.

Economic substance legislation and its impact on liquidationsIn the twelfth instalment of Harneys’ Substance on Substance series, Philip Graham and Joshua Mangeot discuss how BVI entities currently in liquidation or considering this option should approach the BVI economic substance (ES) requirements. They also consider the position of liquidators and points they should be aware of in this regard.Key takeaways:• We are not seeing many clients move to liquidate BVI vehicles as, once they have classified themselves, many BVI entities find they are either (i) exempt from the ES requirements as they are not carrying on any “relevant activity” or are “non-resident” for tax purposes under the expanded definition in the ES legislation and Part 4 of the International Tax Authority (ITA) Rules, (ii) already compliant as an entirely passive “pure equity holding entity”, or (iii) able to achieve compliance through other simple reorganisational steps• The ITA will expect that any applicable ES requirements will be complied with during the time an entity is in liquidation – so this is an area of interest to persons undertaking or contemplating a BVI liquidation• However, if an entity has been dissolved prior to an ES reporting obligation falling due, it will not exist and therefore cannot make a filing (noting that it is conceivably possible for an entity to be restored by a court)• Accordingly, directors/general partners and liquidators should (i) classify the entity (or confirm its classification remains correct), (ii) determine it is still carrying on, or receiving income from, any relevant activity (or if the business and receipt of income has ceased), (iii) consider the anticipated timetable of the liquidation alongside the entity’s ES “financial period” and reporting obligations, (iv) where necessary, put in place a compliance and/or reporting plan, and (v) ensure that they have maintained appropriate written records – particularly if the entity may still be in existence when a reporting deadline falls due• Professional liquidators and insolvency practitioners may also wish to review their terms of engagement and ensure that they have sufficient contractual protections and access to information as they will assume primary responsibility for compliance or reporting obligations from the onset of liquidation• In some cases, it may be desirable to elect or apply to the ITA to amend a “financial period” so there is a clear period for which the liquidator will be responsible for monitoring and, if necessary, reporting on compliance• We anticipate further guidance and legislative amendments this year regarding the “striking-off” regime under the BVI companies and limited partnership legislation, so will address that topic in future updatesThis episode was recorded on 23 October 2019.Stay tuned for more Substance on Substance.

In the eleventh instalment of Harneys’ Substance on Substance series, Philip Graham and Josh Mangeot summarise the presentation which representatives from the BVI Government, BVI Finance and the International Tax Authority (ITA) delivered to BVI industry participants on 16 October 2019.Key takeaways: • The ITA Rules were formally published on 9 October 2019. The rules with statutory effect under the BVI Beneficial Ownership (Secure Search System) Act 2017 (BOSS) will come into effect when a further amendment to BOSS is enacted. This is expected to be passed by the BVI House of Assembly in one sitting within the next few days, as the proposed changes are purely for clarification.• We expect a revised Rules “v2.0” later this year reflecting consequential legislative changes (for example, to the BVI Business Companies Act 2004 and the Limited Partnership Act 2017) referred to in earlier ITA guidance and to clarify the format and timing of reporting via the updated BOSS system.• We also expect industry communications regarding funds and collective investment vehicles and the revised BOSS IT system before the end of 2019. Regulated BVI funds are not expected to be within the scope of the economic substance legislation.• The ITA confirmed that every legal entity must identify whether it carries on any relevant activity and report this via its BVI registered agent (RA), even if wishes to claim it is “non-resident” under Part 4 of the Rules – “nil returns” will be required and there is expected to be an annual filing obligation.• The obligation to identify this and the other prescribed economic substance information under BOSS falls on the entity (rather than the RA). The ITA encourages BVI entities to seek appropriate legal advice if they are at all uncertain regarding their classification and expects they will have maintained a clear record of the basis for their classification (including by reference to advice, where required). This reflects an ongoing obligation under section 9 of BOSS (from 1 October 2019 onwards) to identify whether the entity carries on any “relevant activity”, unless the entity has a “reasonable cause” not to have done so. The ITA expressed the view that the primary legislation passed in January 2019 and the draft guidance available since April 2019 should have allowed entities to classify themselves in most cases but that, in circumstances where the final Rules have changed or clients have reasonably relied on legal advice with which the ITA disagrees, this should be taken into account.• It was confirmed that entities will have six months from the end of the relevant “financial period” to submit the prescribed economic substance information to their RA, to be uploaded to the BOSS system. The filing timings will be set out in Regulations.• Entities carrying on a relevant activity requiring substance in the BVI (other than “non-resident entities” and most passive “pure equity holding entities”) which are moving their business and employees to the BVI do need to consider any applicable obligations under the BVI’s trade or financial services business licensing requirements and employee-related obligations (such as work permits, payroll tax and other contributions). The Premier confirmed that the BVI Government is standing ready to assist BVI entities to make that process as efficient as possible. Where an entity wishes to outsource activity within the BVI (for example, via their RA), it was noted that such outsourcing providers will have appropriate licenses and permits for their business and employees already.• There is further clarification around the obligations of entities in liquidation, which we will address in a future recording.This episode was recorded on 16 October 2019.Stay tuned for more Substance on Substance.

Classify, Classify, Classify In the tenth instalment of Harneys’ Substance on Substance series, Philip Graham and Josh Mangeot discuss the release of the final version of the guidance formerly known as the “Code”, which was published by the ITA on 9 October 2019 as its newly-titled Rules and explanatory notes (the Rules). Key Takeaways• With the certainty provided by the final Rules, it is vital that all directors and operators of BVI entities classify their entities as a matter of priority, if they have not already done so. There is an ongoing legal obligation on BVI entities under the Beneficial Ownership (Secure Search System) Act 2017, as amended with effect from 1 October 2019, to determine whether they are carrying on a relevant activity and the first compliance periods have started for all companies and other relevant legal entities.•Harneys online economic substance classification solution remains available for use at https://economicsubstance.vg and provides formal legal advice for a fixed fee – the solution reflects the final Rules and classifications received by users who have previously classified their entities using the solution are unaffected, subject to some minor cross-references to the numbering used in the final Rules.• The ITA released a useful summary document of the relatively minor amendments made to the last public published by the ITA. The key changes include: o where an entity wishes to be treated as provisionally “non-resident” due to its tax status under foreign laws, the “reasonable period” in which to provide the ITA with evidence of such status will be two “financial periods”o BVI entities in liquidation are still generally expected to comply with the substance requirementso the presumptions of non-compliance for BVI entities that are carrying on IP business have been made more difficult to rebut (ie disprove) and are subject to expanded reporting and evidentiary requirements• Economic substance reporting for each BVI entity will generally begin in 2020 at the end of the current financial period, so all BVI entities should determine any economic substance compliance requirements for the current period.This episode was recorded on 10 October 2019.

In the ninth instalment of Harneys’ Substance on Substance series, Philip Graham and Josh Mangeot discuss points to consider if your BVI entity may hold intellectual property (IP).Key takeaways: • A key focus of the EU and OECD has been on IP, as part of the base erosion and profit-shifting (BEPS) initiative.• The BVI definition of IP rights includes the typical types of IP (eg, copyrights, patents, trademarks, brand and technical know-how) although the list is non-exhaustive. If you are in doubt as to whether an asset may be IP, we recommend that you take legal advice.• It is important to note that the BVI “intellectual property business” definition requires an IP right in an intangible asset from which identifiable “income” accrues to the business (so if no identifiable income accrues there is no IP asset at all, for these purposes). Such income must also be separately identifiable from any income generated from any tangible asset in which the right subsists, if relevant. In practice, this probably requires consideration of the entity’s accounts or financial records in the first instance.• In practical terms, the primary focus of the economic substance legislation is on IP that has been artificially transferred to, or diverts income to, an offshore vehicle (eg, for tax planning purposes). That is really what the BEPS initiative is directed at – it is not aimed at IP that is held protectively or IP which is part of a separate business. “Income” is defined broadly but many entities will hold IP as part of an adjunct to their actual business and which does not generate any identifiable income itself but simply contributes to the general profitability of the business.• If you have some form of IP within your BVI entity we recommend that you speak to a Harneys lawyer. The penalties and fines around “high risk IP legal entities” in particular are potentially significant (and range up to US$400,000). There are also certain presumptions of non-compliance which may arise, where there is an “intellectual property business”.• The final version of the BVI International Tax Authority’s economic substance Code is scheduled for release on 30 September 2019.This episode was recorded on 26 September 2019.Stay tuned for more Substance on Substance.

In the eighth instalment of the Harneys Substance on Substance series, Philip Graham and Ross Munro discuss Substance Solutions in the BVI.Episode EightPhil and Ross highlight the options available to BVI entities once they have classified themselves under the Economic Substance legislation and have determined that they need to put substance in place in the BVI.Key takeaways: • After the classification process is completed, BVI entities who have determined that they are conducting “holding business” will ask whether their current set up in the BVI is enough to meet their Economic Substance obligations.• There are a large number of entities in the BVI that would describe themselves as “holding companies” if asked, but will not actually be conducting “holding business” for the purposes of this legislation. We have touched on this in earlier podcasts.• Companies which are classified as conducting “holding business” are required to comply with their statutory obligations and have adequate premises and employees in the BVI. In most cases, adequate premises and employees will be satisfied by the registered office and registered agent function they already have in the BVI. However, this is not an absolute certainty. If a company conducting “holding business” is very active, then it might need to put additional substance in place.• Harneys are offering various degrees of health checks for BVI entities to ensure that all holding businesses are meeting their statutory obligations. This is something they should be doing anyway.• For the other relevant activities, BVI entities will need to establish the nature and scope of that relevant activity before determining what substance is required. Harneys Fiduciary can provide a number of different services including:o directorships to help with the direction and management requirement;o outsourcing services to perform the core income generating activity;o administration to provide accounting services and record keeping;o premises (shared and dedicated premises space); ando immigration, labour and work permit support, as well as the secondment of Harneys’ staff for certain activities.This episode was recorded on 10 September 2019.Stay tuned for more Substance on Substance.

In the seventh instalment of Harneys’ Substance on Substance series, Philip Graham and Joshua Mangeot give an update on timing of the ITA Code and consider some FAQs around the “holding business” and “finance and leasing business” definitions.Episode SevenPhil 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.Key takeaways: • 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:o Reading the definition purposively, a current account (whether or not it is interest-bearing) which 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 definitiono Conversely, having a bank account which 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 meto The majority of brokerage accounts held by BVI entities that we have encountered are not of a type which 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”.This episode was recorded on 4 September 2019.Stay tuned for more Substance on Substance.

In the sixth episode of Harneys’ Substance on Substance series, Philip Graham and Joshua Mangeot examine good governance principles for BVI entities in the context of the classification process and what entities should be doing now in light of their statutory obligationsEpisode SixPhil and Josh discuss the release of the BVI Economic Substance Code (the Code) and the responsibilities of directors of BVI companies.Key takeaways:• The House of Assembly postponed the second and third reading of the Beneficial Ownership Secure Search System (Amendment) No 2 Act, 2019 due to Hurricane Dorian; they will meet next week to pass the law into effect• Following on from that, the International Tax Authority (ITA) will then finalise the Code• The day-to-day responsibility for managing the business and affairs of BVI companies falls on its directors, who are subject to various statutory and fiduciary duties – as such, they need to ensure they have classified their company and understood its obligations under the law as the first compliance periods have started and there are potentially onerous consequences for non-compliance• There are provisions in the BVI Business Companies Act 2004 (BCA) which broadly allow directors to rely upon expert advice when discharging their duties• The ITA has made it clear that it will expect to see robust documentary evidence of the basis of the classification, such as board resolutions (which will typically be provided to the registered agent in some form as part of instructing it to make the relevant filings under the BOSS system) – these can also be used to record that the board sought expert legal advice• There are existing statutory obligations under the BCA for BVI companies to keep records and underlying documents that enable the financial position to be determined at any point in time with reasonable accuracy – these include a statement of assets and liabilities and records of receipts and expenditure. If the ITA is unable to determine a clear basis for the classification, there is a risk that companies (or their registered agent, directors or other functionaries) may incur additional scrutiny in the event of an ITA investigation if they are unable to produce the required evidence promptly on requestThis episode was recorded on 28 August 2019.Stay tuned for more Substance on Substance.

In the fifth episode of Harneys’ Substance on Substance series, Philip Graham and Joshua Mangeot confirm that the first economic substance (ES) compliance “financial period” has commenced for all BVI companies and other relevant legal entities and also address some common misunderstandings regarding the ES timetable. Episode FivePhil and Josh discuss the release of the finalised International Tax Authority (ITA) ES Code, confusion on classification and compliance deadlines, and to which types of entity the ES requirements apply.Key takeaways: • The final form of the ITA Code is known and it should be available for formal release to the public by the end of August (as it requires enabling legislation) • The BVI ES legislation had immediate effect from 1 January 2019 for companies or limited partnerships with legal personality incorporated or registered in the BVI (legal entities) on or after that date• There was a grace period until 30 June 2019 for legal entities existing before 1 January 2019 – this has not been extended• As a result every legal entity is now in its first compliance “financial period” and needs to have classified its activities• There have been references to an October date but this point is of narrow application and relates to a delay to some new reporting obligations – it was not a change to the commencement dates for legal entities’ “financial period”• All BVI legal entities should be classified regardless of whether they are perceived to be out-of-scope – “nil returns” will be required in 2020• Based on statements by the ITA regarding the exercise of its investigation powers, entities should maintain a robust written record of the basis of their classification• Affected legal entities with relevant activities (which are not “non resident” for tax purposes) should be taking steps to become compliant or reorganise themselves if the ES requirements necessitate itThis episode was recorded on 21 August 2019.Stay tuned for more Substance on Substance.

In the fourth episode of Harneys’ Substance on Substance series, Philip Graham and Josh Mangeot discuss the option of continuing a BVI entity out of the jurisdiction (sometimes called a “re-domiciliation” or “migration”) as a response to the economic substance legislation.Episode FourPhil 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.Key takeaways:• 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.This episode was recorded on 13 August 2019.Stay tuned for more Substance on Substance.

In the third installment of Harneys’ SOS Series, Phil Graham and Josh Mangeot examine the implications of the first reading of the BOSS (Amendment) No 2 Act, 2019 in the House of Assembly, which is the enabling legislation for bringing into force the International Tax Authority (ITA)’s economic substance Code in the BVI. It is expected that the second and third reading will take place in the House as soon as possible, and will come into law shortly thereafter.Episode ThreePhil and Josh discuss the process involved in the Code being finalised in the BVI and what steps entities should be taking right now – particularly if they may be in breach of the Economic Substance (Companies and Limited Partnerships) Act, 2018, given that the first compliance period has now started.Key takeaways:• The first compliance period has commenced for all BVI registered companies and limited partnerships with legal personality.• Such entities are now in their first “financial period” for compliance purposes and need to classify their activities (and to consider their tax status, if they carry on any “relevant activity”) and take steps to ensure that they are compliant as soon as possible, if they have not done so already.• Nil returns” will be required for all BVI entities.• The ITA is expected to provide further clarification around what “evidence” will be accepted where an entity wishes to claim it is “non resident” for tax purposes. This episode was recorded on 19 July 2019.Harneys’ online classification solution Harneys’ Economic Substance online classification solution provides a cost effective way for BVI companies and limited partnerships with legal personality to demonstrate formally that they have considered their position under the economic substance legislation. The automated classification solution provides tailored real-time legal advice, provided by Harneys, for a flat fee of USD $250. For further information, please visit https://economicsubstance.vg Stay tuned for more Substance on Substance.

The SOS series was launched to provide our audience with the latest news on developments in the Economic Substance space, cutting through the confusion to deliver expert guidance from our Economic Substance Analysis team. Episode 2In the second episode, Phil Graham and Josh Mangeot discuss the key aspects of an industry update provided by BVI Finance on 12 July 2019. The update clarified that the commencement dates for entities’ first “financial period” remain unchanged and discussed the BVI International Tax Authority (ITA)’s stated approach to the use of its investigation powers as they relate to BVI entities, registered agents and other corporate service providers. Key takeaways: • The first compliance “financial period” has commenced for all BVI companies and limited partnerships with legal personality as set out in section 4(1) of the Economic Substance (Companies and Limited Partnerships) Act, 2018 – in particular, the 30 June 2019 commencement date for entities formed or registered before 2019 remains unaffected • All BVI companies and relevant entities should have conducted an entity classification to determine whether they carry on any relevant activities and, if so, to determine their compliance and reporting obligations• The ITA has stated that the manner in which a legal entity determines its classification should be formalised in such detail so as to allow the ITA to make a determination of compliance or non-compliance and, as part of its investigation and enforcement powers, it will be expected that registered agents will retain the relevant details and documentation to ensure the timely provision of that informationThis episode was recorded on 19 July 2019.Harneys’ online classification solutionHarneys’ Economic Substance online classification solution provides a cost effective way for BVI companies and limited partnerships with legal personality to demonstrate formally that they have considered their position under the economic substance legislation. The automated classification solution provides tailored real-time legal advice, provided by Harneys, for a flat fee of USD $250. For further information, please visit https://economicsubstance.vgStay tuned for more Substance on Substance.