As more jurisdictions bring in economic substance regulation, Helen Swire asks what it means for practitioners and clients to comply
In recent years, remaining compliant and competitive in today’s world of increased transparency and regulation has been the name of the game for jurisdictions worldwide as they seek to continue to attract business and investment, while meeting the high international standards set by the OECD and other such bodies.
In 2018, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting introduced minimum global standards on jurisdictions’ economic substance to ensure that none were facilitating structures aimed at attracting profits without any real economic activity in the jurisdiction. By January 2019, numerous jurisdictions had enacted legislation, bringing into play enhanced economic substance requirements for tax purposes, while others have been drafting and consulting on legislation to introduce imminently.
Currently, these jurisdictions include: Anguilla, the Bahamas, Bahrain, Belize, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, the Marshall Islands, Mauritius, the Seychelles, Turks and Caicos, the UAE and Vanuatu.
The setting of a base standard has been greeted broadly positively by practitioners. ‘The benefit for those companies who were already compliant is that it levels the playing field, while for those who did not fully comply, it provides clear guidance and certainty of what is expected of them in order to meet current international standards,’ explains Craig Brown, Managing Director at IQ-EQ Isle of Man. ‘It is a very important tool for international fiscal bodies and tax authorities in tackling unacceptable tax practices.’
The practicalities
The regulations encompass largely the same principles. For entities in most jurisdictions to be in scope for economic substance purposes, they must have tax residency and generate any gross income in the jurisdiction.
If in scope, the entity must demonstrate that it is directed and managed in the jurisdiction and has adequate physical presence, expenditure, employees and premises in the jurisdiction, as well as its core income-generating activities being conducted there.
Those entities must prepare and submit to an annual report containing prescribed information for the purpose of establishing that the economic substance has been satisfied. The BVI and the Cayman Islands are working to similar requirements, as are the Crown Dependencies. Indeed, Guernsey, the Isle of Man and Jersey have worked together to formulate guidance on their requirements.
However, there is some considerable variation on the entities taken into account by economic substance rules, as well as the penalties for non-compliance.
Explaining from the point of view of the Cayman Islands, Bernadette Carey TEP, Partner at Carey Olsen, notes: ‘Economic substance requirements apply to any “relevant entity” carrying on “relevant activities”. Relevant entities include Cayman Islands companies (save for domestic companies), limited liability companies and limited liability partnerships. Relevant activities include banking, insurance and fund management business, as well as holding company business; although the latter is subject to reduced requirements.’
In Belize, holding companies and international business companies controlled and managed outside the country are exempt if they are tax-resident in a foreign country, while pure-equity-holding companies fall into the scope of reduced substance requirements. Similarly, in Bermuda, equity-holding entities that carry on another commercial activity remain out of scope, and pure-equity-holding entities are exempt from all but the minimum substance requirements.
Regulated public and private fund companies in the Crown Dependencies do not fall under the reporting requirements, while all entities registered in the Cayman Islands’ general registry are covered by the regulations.
In the UAE, several entities have been exempted from the substance reporting regime, although they must still file annual reports, including: investment funds; entities that are not UAE tax-resident; entities wholly owned by UAE residents that are not part of a multinational enterprise and which carry out business only in the UAE; and subsidiary branches taxed in their foreign parent’s jurisdiction.
News Source：【STEP 2021/01/13】