BVI updates Economic Substance rules to account for UAE corporate tax regime

The British Virgin Islands’ International Tax Authority (ITA) issued, on 2 April, a new Version 4 of its Rules on Economic Substance (ES), which replaces the previous version from February 2023. The new ES Rules primarily provide an update to Rule 5, in which the United Arab Emirates (UAE) has been removed from the list of jurisdictions without a corporate income tax system.

The BVI’s ES requirements do not apply to entities that are considered non-resident for purposes of the economic substance legislation. Under the Economic Substance (Companies and Limited Partnerships) Act, a non-resident entity is defined as an entity that is resident for tax purposes in a jurisdiction that is outside the BVI and that is not included on Annex 1 of the EU list of non-cooperative jurisdictions for tax purposes.

Under the new ES Rules, an entity cannot be regarded as resident for tax purposes in a jurisdiction that does not have a corporate income tax system. Following the introduction of a corporate income tax system in the UAE for financial periods beginning on or after 1 June 2023, a BVI entity can now claim to be resident for tax purposes in the UAE for financial periods beginning on or after 1 June 2023.

The entity must provide relevant evidence, as set out in Rule 3 of the new ES Rules, to support the claim. Any claim for tax residency in the UAE related to financial periods beginning before 1 June 2023 will be rejected.

Anguilla, Bahamas, Bahrain, Barbados, Bermuda, Cayman Islands and the Turks & Caicos Islands continue to be listed as jurisdictions without a corporate income tax system in the new ES Rules. A BVI entity cannot therefore be regarded as resident for tax purposes in any of these jurisdictions for purposes of the ES Act.