Economic Substance Requirements

What are the Economic Substance Requirements?

The Economic Substance Requirements are regulations imposed by certain jurisdictions where they require a tax resident company which engages in a relevant actity to have substance in the jurisdiction of formation.

It is important to note that Economic Substance Requirements do not apply to all businesses. For the Economic Substance Requirements to apply, the company has to meet two conditions:

1. To be a Tax Resident in that jurisdiction.

2. To be engaged in relevant activities.

If the company is not a tax resident because, for example, has it its place of management somewhere else, Economic Substance Requirements would not apply even if it is engaged in Relevant activities.

What are Relevant Activities under the Economic Substance Requirements?

In general, Relevant Activities, most of the time, are:

· Banking business

· Insurance business

· Fund management business

· Finance and leasing business

· Headquarters business

· Shipping business

· Holding business (pure equity holding entities)

· Intellectual property (IP) business

· Distribution and service centre business (this includes providing services to related companies)

Of course, each jurisdiction will have its own list of Relevant Activities, and what is comprised in each one of them.

What is the purpose behind Economic Substance Requirements?

The OECD requires certain jurisdictions to implement Economic Substance Requirements in order to avoid the artificial shifting of profit with the only purpose to avoid taxes or base erosion.

Which Jurisdiction impose Economic Substance Requirements?

Generally, pure tax havens and low tax rate jurisdictions impose Economic Substance Requirements to its tax resident companies. Some of these jurisdictions are:

British Virgin Islands.
Cayman Islands.
Jersey.
Belize.
Seychelles.

Which tax havens do not impose Economic Substance Requirements?

Several tax havens do not impose economic substance requirements on its tax resident companies, and don't even impose an Economic Substance Assesment requirement on non-resident companies. These can havens can be, but are not limited to:

United States of America.
Singapore.
Malta.
United Kingdom.