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.