New regulations in key offshore jurisdictions including the British Virgin Islands, Cayman Islands, Bermuda, Guernsey, Jersey and Isle of Man, Marshall Islands came into force at the beginning of 2019 which require entities carrying on specific types of business to demonstrate adequate economic substance in that jurisdiction, with reporting requirements commencing in 2020.
The rules require both local and foreign registered companies, as well as limited partnerships which carry on ‘relevant activities’ in an offshore jurisdiction and are not tax resident in another jurisdiction, to comply with the economic substance requirements for such activity in the offshore jurisdiction.
|What constitutes a “relevant activity?”|
Relevant activities are limited to: (a) distribution and service centre business; (b) financing and leasing business; (c) fund management business; (d) headquarters business; (e) holding company business; (f) intellectual property business; (g) shipping business; (h) banking business; and (i) insurance business.
|Economic Substance Requirements|
- The entity should be managed and directed in the offshore jurisdiction;
- Core income generating activities must be undertaken in the offshore jurisdiction with respect to the relevant activity;
- The entity should maintain physical presence in the offshore jurisdiction;
- There should be full time employees in the offshore jurisdiction with suitable qualifications; and
- There have to be operating expenditure incurred in the offshore jurisdiction in relation to the relevant activity.
A pure equity holding company is subject to reduced economic substance requirements.
Assessment:The Registrar may determine that a relevant entity has not met the economic substance test during any financial period of the entity starting on or after 1 January 2019.
Penalties can be imposed both for a failure to provide required information and for operating a legal entity in breach of the economic substance requirements, including fines, imprisonment and/or strike-off.