SVG Economic Substance Rules: The Biggest Issues To Watch Out For

Background of the Economic Substance

In December 2017, the European Union Code of Conduct Group (EU CCG) released a blacklist of non-cooperative jurisdictions, reviewing the areas of tax transparency, fair taxation, and anti-Base Erosion and Profit implementation Shifting Standards (BEPS). The blacklist consisted of 17 jurisdictions in total. However, the EU reviews the list annually, removing countries as they show commitment and compliance towards the EU’s agreed-upon standards.

The fair taxation criterion states that jurisdictions should not “facilitate offshore structures or arrangements aimed at attracting profits that do not reflect real economic activity in the jurisdictions”. As a result, many traditional offshore jurisdictions, including SVG, have introduced the Economic Substance Rules to align with the EU’s global tax transparency policies.

Several amendments and new legislation have been introduced to adapt to these requirements. For example, certain tax exemptions available only to foreign investors and not residents have been abolished.

Key requirements for SVG Economic Substance

SVG has introduced legislation and guidance on Economic Substance, based on recommendations from the OECD and the CCG. The requirements can be divided into three stages:

• Stage 1: Determine the scope of Economic Substance requirements
• Stage 2: Meet the ‘adequate substance’ test
• Stage 3: Comply with economic substance reporting obligations

Stage 1: Determine the scope of Economic Substance requirements

The scope of SVG Economic Substance requirements is determined based on whether an entity is a relevant entity that carries on a relevant activity.

Relevant entities, other than excluded entities, are generally defined as follows:

• A company as defined by the Companies Act
• A foreign company registered in SVG
• A company under the Business Companies (Amendment and Consolidation) Act that conducts relevant activities in SVG

Relevant activities generally encompass the following types of business:

• Banking
• Distribution and service centers
• Finance and leasing
• Fund management
• Headquarters
• Holding company
• Insurance business
• Intellectual property holding
• Shipping

For Intellectual property holding entity, the ES requirements apply only when the entity is considered a ‘high-risk IP entity’, which is defined as:

• An entity engaged in intellectual property holding business that
  • acquires the intellectual property asset from a group entity or funds research by another person located outside SVG; and
  • licenses the intellectual property asset to one or more group entities or generates income from the asset related to activities conducted by foreign group entities; or
• An entity that does not perform research and development or branding and distribution as part of its core income-generating activities in SVG.

It’s important that you clearly determine whether your entity falls within the scope of SVG Economic Substance requirements to ensure compliance.

Stage 2: Meet the ‘adequate substance’ test

If your company is an in-scope entity, it must pass the ‘adequate substance’ test to comply with SVG Economic Substance requirements. Generally, this involves ensuring the company:

• has direction and control within SVG;
• possesses sufficient employees, premises, and expenditures corresponding to the level of activity in SVG; and
• conducts Core Income Generating Activities (CIGA) within SVG.

Additional criteria are applied to each of the aforementioned points, primarily concerning CIGA and outsourcing. Specifically, a relevant entity may outsource CIGA activities if they are conducted and adequately supervised in SVG, and if that outsourcing activity is solely aimed at generating income for the entity.

There are also specific rules for high-risk IP companies and pure equity holding companies, which necessitate a higher standard of evidence.

For a high-risk IP company, it must be sufficiently demonstrated that the entity:

• exercises substantial control over the development, exploitation, maintenance, and protection of its IP assets; and
• employs an adequate number of qualified full-time employees who manage these IP assets within SVG.

A pure equity holding company is subject to a reduced ‘adequate substance’ test. Specifically, it must show that the entity:

• has an adequate number of personnel; and
• maintains adequate premises for managing its shares or equity interests.

Stage 3: Comply with economic substance reporting obligations

Once the substance is established, an SVG resident entity carrying on relevant activities must submit a report to the Comptroller, an Economic Substance report shall

• be in the approved form;
• contain information as may be prescribed or specified in the approved form; and
• be submitted to the Comptroller at such times and intervals as may be prescribed.

An SVG resident entity that fails to submit a report to the Comptroller is deemed to commit an offense and is liable to a fine not exceeding $100,000 or 2 years imprisonment or both.

For comprehensive details on report requirements, including documentation types, statements, and company records, please contact our support team at service@bbcincorp.com for practical guidance.

Financial penalties for non-compliance entities

Entities that fail to meet the Economic Substance requirements during the assessment period will face specific penalties. Financial penalties will be imposed for any period in which a company does not comply, with increased penalties for repeated failures.

The Comptroller will issue a penalty notice to non-compliant entities, detailing the penalty amount and the payment deadline. Upon receiving a penalty notice, the relevant entity must pay the specified amount to the Comptroller by the indicated date.

Companies that do not pay the penalty during the initial assessment period may be committing an offense and could face a fine of up to $75,000, one year of imprisonment, or both. For subsequent assessment periods, failure to pay the penalty can lead to a fine of up to $100,000, two years of imprisonment, or both.

Exchange of information standard

According to the OECD, the exchange of information aims to ‘establish high standards of information sharing between jurisdictions to improve tax authorities’ ability to deter, detect and disrupt tax evasion and avoidance’.

As part of this standard, all relevant information concerning certain entities established in SVG must be shared with jurisdictions where those entities are tax residents. The SVG Comptroller may exchange information with Competent Authorities of other jurisdictions if an entity falls into any of the following categories:

• An entity claiming to be a tax resident in the jurisdiction outside SVG during the assessment period
• A relevant entity engaged in relevant activities that has not met the Economic Substance requirements during the assessment period;
• A high-risk IP entity, regardless of compliance with Economic Substance requirements

This exchange of information will be kept confidential and will not be disclosed without the Comptroller’s consent.

Conclusion

Entities in SVG subject to the Economic Substance Rule should gather and prepare their required information early to avoid legal penalties. If you have any concerns or questions regarding this matter, don’t hesitate to reach out to our support team. For further information, please visit our SVG company formation page.

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