Introduction

The British Virgin Islands (“BVI”) had long been regarded as a tax haven for intellectual property (“IP”) businesses. In particular, it was common for Hong Kong entities to register the ownership of their IP businesses under a BVI entity as royalty income generated from IP would be tax-free in the BVI. However, several tax reforms were implemented in 2019 in the BVI and Hong Kong, including:

1.      the BVI economic substance law;

2.      section 15F of Hong Kong Inland Revenue Ordinance (“IRO”); and

3.      disclosure requirements in the Hong Kong profits tax return.

Following these reforms, does the BVI remain a tax haven for IP businesses?

The BVI economic substance law

The BVI Economic Substance (Companies and Limited Partnerships) Act, 2018 (the “Act”) became effective on 1 January 2019. The Act was implemented in response to global efforts to enhance tax transparency initiated by the European Union and the Organisation for Economic Co-operation and Development.

In order to comply with the Act, BVI entities (including entities incorporated in the BVI and foreign entities registered in the BVI) that carry on IP businesses are required to demonstrate that either:

1.      their IP was physically created and developed in the BVI; or

2.      they are tax resident in the tax jurisdiction where the IP was created and developed.

Companies incorporated in the BVI on or after 1 January 2019 have to comply with the Act from 1 January 2019. For companies incorporated before 1 January 2019, the first reporting period was 30 June 2019 to 29 June 2020. BVI companies may be subject to the following penalties for non-compliance with the Act:

1.      a fine of up to US$400,000 for a high-risk IP legal entity;

2.      being struck off the register by the BVI International Tax Authority;

3.      disclosure of information about the BVI company’s breach of the economic substance requirements to the relevant overseas tax authorities (e.g. the Hong Kong Inland Revenue Department (“IRD”)); and

4.      imprisonment of up to five years where fraudulent or misleading information is involved.

BVI entities are therefore advised to plan ahead and take appropriate actions promptly to comply with the Act.

Section 15F of the IRO

Section 15F of the IRO was introduced, with effect from the 2019/20 year of assessment , to provide for the taxation on value creation for IP rights. Under section 15F, income from an IP that accrues to an associated non-resident IP owner but attributable to functions performed and assets deployed in Hong Kong is deemed to be taxable receipts of the Hong Kong company.

Section 15F has a broad application. Any contribution in relation to the IP through development, enhancement, maintenance, protection or exploitation (“DEMPE”) are deemed as contribution to value creation, and therefore falls within the scope of this section.

As such, even if the ownership of an IP is registered under a BVI entity, the IRD may still impose tax on a Hong Kong entity if the DEMPE functions of the IP were performed in Hong Kong.

Disclosure in the Hong Kong profits tax return

With effect from 1 April 2019, Hong Kong entities must make the following disclosure in relation to an IP in their profits tax return:

1.     Supplementary Form S2 of the profits tax return

If a Hong Kong entity has entered into transactions with and received royalty income from any non-resident (including the BVI) associated entity, it is required to submit Supplementary Form S2 along with its Hong Kong profits tax return to disclose any related party transactions relevant to the royalty fees received from the BVI associated entities.

2.       Box 8.1.3 of the profits tax return

If a Hong Kong entity has performed DEMPE functions in Hong Kong for an IP of a non-resident associated entity, the Hong Kong entity must declare such arrangement in Box 8.1.3 of the  Hong Kong profits tax return from the 2019/20 year of assessment onwards.

Remedial actions for IP businesses

Traditionally, a business could arrange its IP to be held by a BVI company to alleviate its tax burden. However, this practice is no longer feasible but will instead significantly increase the compliance costs for the BVI company.

Based on our experience, it is difficult to prove that an IP was created and developed in the BVI to fulfil the BVI economic substance requirements. Therefore, if the DEMPE functions of the IP has been performed in Hong Kong, it is recommended that IP ownership should be transferred from the BVI entity to the Hong Kong entity. Alternatively, the IP can be registered in Hong Kong and all IP-related income (i.e., royalty income, etc.) shall be declared to the IRD.

There are a number of advantages of becoming a Hong Kong tax resident and filing tax in Hong Kong compared with other tax jurisdictions. The key benefits are as follows:

1.      Hong Kong is a tax jurisdiction with one of the lowest tax rates in the world. The profits tax rate is 8.25% to 16.5%, as compared with 25% of corporate income tax in the People’s Republic of China (“PRC”).

2.      Hong Kong tax residents can enjoy lower withholding tax rates on royalty income under applicable double taxation agreements (e.g. 7-10% in the case of the PRC).

3.      Certain types of income are not subject to tax in Hong Kong, e.g. offshore royalty income, dividend income, and capital gains on disposal of an IP. Starting from 1 January 2023, the relevant tax exemption applications should comply with the requirements of the Foreign-sourced Income Exemption Regime.

Conclusion

While the BVI was historically regarded as a tax haven for IP businesses, tax reforms in the BVI and Hong Kong in 2019 have changed the landscape. Advantages of holding IP by BVI entities are now diminished due to the compliance requirements under the BVI Economic Substance Act and section 15F of the Hong Kong Inland Revenue Ordinance. Therefore, if the DEMPE functions of the IP has been performed in Hong Kong, it is recommended that IP ownership should be transferred from the BVI entity to the Hong Kong entity. Alternatively, the IP can be registered in Hong Kong to enjoy the low tax rate and other tax benefits.

For enquiries, please feel free to contact us at:

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2025