Date of publication: 27 May 2019
Nina Bets, Lawyer
Source: Yurydychna Gazeta
Today, the world is actively fighting against financing of terrorism and money laundering. It all started with banks, which, fearing heavy fines, were the first to refuse servicing of the non-resident companies, and then of the resident companies having no economic presence in the state of residence.
In December 2018 even the Government of the British Virgin Islands (hereinafter referred to as the BVI) adopted the Law on Economic Presence, which came into force on 1 January 2019. The requirements for economic presence in the BVI apply to legal entities engaged into specific activities, in particular:
• holding activities;
• financial/leasing activities;
• activities in the field of intellectual property;
• activities of the head office (headquarters);
• activities of a group center for the sale of goods and provision of services;
• banking activities;
• fund management;
• insurance;
• shipping.
The Law provides for three regimes of requirements for economic presence (common, simplified and complicated), depending on the types of activities of the company. In most cases, the common regime provides for the following criteria:
• the company management should be carried out directly in the BVI;
• a sufficient number of skilled workers physically located in the territory of the BVI is required;
• a confirmation that sufficient expenses have been incurred to organize such activities of the company is necessary;
• the company shall own or rent a suitable office in the BVI.
The most severe rules apply to the companies operating in the field of intellectual property. The Law provides that all companies doing business related to intellectual property shall be considered as those having no sufficient economic presence in the BVI, unless otherwise proved by such companies. Furthermore, if the relevant activities of the company require the use of special equipment, such equipment should be physically located in the jurisdiction.
At the request of the BVI tax authorities all legal entities are required to provide information on the type of their activities, as well as whether they have complied with the requirements for sufficient economic presence. Such companies must also prepare and submit annual reports on compliance with the economic presence requirements.
The violation of the rules established by law is punishable by penalties imposed in the form of fines, imprisonment and/or liquidation of the company. The fine varies from USD 5 thousand to USD 50 thousand for the first violation and from USD 10 thousand to USD 400 thousand for the repeated violations.
Taking into account the active cooperation of the BVI tax authorities with the tax authorities of other jurisdictions regarding the disclosure of information about the company and having due regard to the fact that European banks have long refused to cooperate with companies registered in this jurisdiction, as well as to the fact that the maintenance costs of such companies will definitely increase due to the economic presence requirements, it becomes quite obvious that more advantageous jurisdictions are to be considered.
It has been 3 years since Ilyashev & Partners opened its office in Estonia. Due to the zero income tax today this European state is considered to be the most attractive for doing business. Estonia is the so-called “white” jurisdiction of the EU and it is not included in the list of countries the transactions with the counterparties from which are recognized as controlled transactions for the purposes of transfer pricing.
The Estonian company is convenient to use when engaged in trade transactions (in particular, when delivering goods from or to the EU member states). There is no such thing as currency control in Estonia, no restrictions on the equity to shareholders’ capital ratio. Thus, a company can receive an uncapped loan from its member.
Back in 1996 Ukraine and Estonia signed an Agreement on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, which allows using preferential rates of repatriation tax.
The founder of an Estonian company can be any individual or legal entity, including a non-resident one. A member of the board (director) may obtain a residence permit for a period of 2 years with the right to renew it. Most importantly, there are no mandatory requirements for economic presence in Estonia, and European banks are not reluctant to cooperate with companies registered in this jurisdiction.
It’s high time to refuse the use of classic offshore companies and consider transferring your business to European countries.