ECONOMIC SUBSTANCE LAW
Back Ground of Economic Substance Regulations:
In December 2017, codes of conduct group from European Union (EU) investigate the tax policies of certain jurisdictions with zero or very low tax with against criteria of economic substance. These criteria clearly stated that any jurisdiction should not facilitate any form of offshore structure which does not show the real economic activity in that jurisdiction. The main factors of the criteria are:
- Tax Transparency
- Fair taxation
- Implementation of anti-BEPS rules and regulations
In November 2018, the organization for Economic Cooperation and Development (OECD) published new rules and standards to prevent the businesses to shift their profit to no or nominal jurisdictions.
The jurisdictions which does not qualify the specified criterial and fall into EU grey list are
- Isle of Man
- Cayman Islands
- British Virgin Island (BVI)
Economic Substance Law:
In response to EU Code of Conduct group, certain jurisdictions passed new laws relating to companies operating in that jurisdiction to show their sufficient physical substance to justify their profit and economic activities in jurisdiction where they are tax resident.
The news law imposes economic substance requirements on all entities created under the law and carry on or more of the following relevance activities:
- Banking Business
- Funds Management
- Leasing and Finance Business
- Headquarters Business
- Shipping Business
- Business of Intellectual Property
- Business of Distribution and Service Centre
- Shipping Business
- Holding Business
Economic Substance Rules:
The economic substance rules introduced and applied by the certain jurisdictions are more or less the same. They are mostly based on the guidelines specified by EU and OECD. The following 3 rules are imposed on a resident entity that engaged with relevant activity.
- Directed and Managed Test: This test requires that the legal entity should be directed and managed from the area or jurisdiction where the entity is a tax residence. The main requirements of this test are
- Frequency of Annual General Meeting: The directed and managed test requires that there should be a reasonable number of meetings between the entities board of directors depended on the activities of the entity. In general it is considered that there should be at least one annual general meeting per annum of board of directors.
- Complete Quorum: The quorum should meet by the physical presence of directors in the entities board of directors meetings.
- Meeting should be recorded: The minutes of the meeting should be recorded in a proper way for future reference.
- Core Income Generating Business Activities (CIGA) : The entity need to pass the test that the CIGA carried out in the jurisdiction where the entity is a tax resident.
- Deployment of Adequate Resources: The entity needs to deploy adequate number of business resources in the jurisdiction like
- Employees: The Company has to deploy an adequate number of employees in the jurisdiction according to the company’s activities.
- Adequate Expenditure: A record of sufficient amount of expenditure is required from the entity in the jurisdiction.
- Registered Office: The entity is required to show their physical presence in the form of office in the jurisdiction.
How We Can Help:
- Preparation of all relevant documents according to the applicable rules and regulations.
- At A&A Associates, we provide assistance in assessing adequate levels of premises, expenditure and people in the said jurisdiction.
- A continuous monitoring of new legislation will be provided along with valuable guidance according to the applicable laws.