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

In this article, our goal is to provide you with a comprehensive understanding of the SVG Economic Substance Rules and highlight the key issues that businesses should be mindful of. Let’s look into the details and ensure your compliance with these important regulations.

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 criterion on fair taxation stated that jurisdiction 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 had to introduce the so-called SVG Economic Substance Rules to enhance their commitment to the EU’s global tax transparency policies.

Several amendments and legislation have been introduced to adapt to the new situations. For instance, certain tax exemptions available only to foreign investors and not to residents have been abolished.

SVG Economic Substance requirements

SVG has introduced its legislation and guidance on Economic Substance. The key requirements are generally based on the recommendations made by the OECD and the CCG.

SVG Economic Substance requirements can be divided into 3 stages:

Stage 1: Identify the scope of Economic Substance requirements

Stage 2: Satisfy the ‘adequate substance’ test

Stage 3: Comply with economic substance enforcement

Stage 1: Identify the scope of Economic Substance requirements

The SVG Economic Substance rule applies to ‘relevant entities’ that carry on ‘relevant activities’ in any assessment period.

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

• A company within the meaning of the Companies Act;
• A foreign company registered in SVG; or
• A company within the meaning of the Business Companies (Amendment and Consolidation) Act;

which carry on ‘relevant activities’ in SVG. ‘Relevant activities’ generally consist of the following types of business:

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

An Intellectual Property Holding entity needs to consider whether it is a ‘high-risk IP entity’, which is defined as:

(1) An entity that carries on intellectual property holding business and

• • acquires the intellectual property asset from a group entity or for funding research by another person situated in a country other than SVG; and
  • licenses the intellectual property asset to one or more group entities or generates income from the asset concerning activities performed by foreign group entities; or

(2) An entity that does not carry out either research and development or branding and distribution as part of core income-generating activities in SVG.

Stage 2: Satisfy the ‘adequate substance’ test

Once a company has fallen within the scope of the Economic Substance requirements and has been identified as undertaking relevant activities, the company will be required to demonstrate they have ‘adequate substance’ in SVG.

The ‘adequate substance’ requirement, will generally require that a company:

• has direction and control in SVG;
• has adequate employees, premises, and expenditure equivalent to the level of activity incurred in SVG; and
• conducts Core Income Generating Activities (‘CIGA’) in SVG.

Additional criteria are applied to each of the points above, mostly around CIGA and outsourcing. Specifically, a relevant entity may outsource CIGA if the activity is conducted and adequately supervised in SVG, and that outsourcing activity is solely attributable to generating income for the relevant entity.

There are also specific rules for high-risk IP companies and pure equity holding companies, which require a specific standard of evidentiary requirements.

For a high-risk IP company, there must be a sufficient demonstration that the entity:

• has an adequate degree of control over the development, exploitation, maintenance, and protection of the IP assets; and
• has an adequate number of qualified full-time employees who exercise the IP assets in SVG.

A pure equity holding company shall be subject to a reduced ‘adequate substance’ test. Particularly, it must demonstrate that the entity:

• has an adequate number of persons; and
• has adequate premises for managing its shares or equitable 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.

The detail of report requirements including documentation types, statements, and company records, shall be updated soon according to guidance from SVG’s Competent Authorities.

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.

Financial penalties for non-compliance entities

In the circumstances where entities have not satisfied the Economic Substance requirements during the assessment period, specific penalties shall be imposed.

Financial penalties will be charged in respect of a period in which the company fails to meet the economic substance requirements and is set to increase in cases of repeated failure.

The Comptroller will issue a penalty notice to the non-compliance entities, notifying the penalty amount and the date on which the penalty is due to be paid.

A relevant entity that receives a penalty notice will have to pay the stated amount to the Comptroller on or before the date specified in the notice.

Companies that fail to pay the penalty in the first assessment period are subject to committing an offense and are liable to a fine not exceeding $75,000 or 1-year imprisonment or both.

For the second or subsequent assessment period, failure to pay the penalty is subject to offense and is liable to a fine not exceeding $100,000 or 2 years of imprisonment or both.

Exchange of information

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 the exchange of information standard, all information of certain entities established in SVG must be exchanged with jurisdictions where those entities are tax residents.

The SVG Comptroller can conduct an exchange of information with Competent Authorities of other jurisdictions if the entity falls into the following categories:

• Relevant entity claiming to be tax resident in the jurisdiction outside SVG during the assessment period;
• Relevant entity carrying on a relevant activity that has not satisfied the Economic Substance requirements during the assessment period; and
• High-risk IP entity regardless of whether the entity fails the Economic Substance requirements or not.

Such exchange of information will be kept confidential and will not be disclosed without the consent of the Comptroller.

Conclusion

Entities in SVG that are subjected to Economic Substance Rule should start preparing their required information early to avoid the penalty as per the law.

Should you have any concerns or queries about this matter, feel free to contact us for support or send our team an email via service@bbcincorp.com.

Drop us a question or visit our SVG Company Formation for more useful information.

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