(Note: Content is as of April 2020 when the original English article was written)
Economic Substance Requirements (Economic Substance Requirement)
The European Union (EU) and other international bodies have imposed various new policies on "tax neutral countries" in recent years. However, following the report by the Code of Conduct Group on Business Taxation issued by the intergovernmental organization of the European Union in 2018, tax havens or low-tax jurisdictions such as the British Virgin Islands (BVI), Bermuda, Barbados, Isle of Man, Guernsey, and Jersey implemented Economic Substance Requirements at the end of 2018 to avoid being placed on the EU blacklist. The rules stipulated by the Economic Substance Requirements are made in accordance with the transfer pricing issues (BEPS) established by the OECD (Organisation for Economic Co-operation and Development). While details of the rules are currently under review, they are expected to be finalized in a manner that meets the expectations of the European Union (EU).
So what are Economic Substance Requirements, and what should holders of offshore companies pay attention to?
The definition of "Substance" in laws regarding Economic Substance Requirements covers various aspects such as the type of business, actual situation of corporate management (management), control rights, company operations, location of offices, and methods of managerial decision-making. Furthermore, the extent of substance required varies by business. If an offshore company is merely a holding company, the required substance is not strict; having a registration agent in the country of incorporation is almost sufficient to clear the substance requirements.
On the other hand, IP (Intellectual Property) businesses are subject to strict substance requirements. It is required to establish an office in the country of incorporation for the development, use, maintenance, and protection of intellectual property, hire the necessary number of people locally, and ensure qualified personnel are present locally. In Belize, one of the offshore jurisdictions, they have taken it a step further by prohibiting the establishment of IP business entities within the jurisdiction itself.
Therefore, for companies established offshore, it is necessary to first confirm whether they are conducting businesses that fall under substance requirements, and if so, accurately determine what kind of substance is required.
Whether a company falls under substance requirements or not, there is a need to report (report on substance requirements) to the local jurisdiction in either case. Failure to do so will result in penalties.
Zetland provides support regarding substance requirements.
European Union (EU) Blacklist
And on February 18, 2020, the European Union added new countries to the "List of Non-Cooperative Jurisdictions for Tax Purposes" (commonly known as the "Blacklist").
Cayman Islands, Palau, and Seychelles moved from the Grey List to the Blacklist, and Panama was newly added to the Blacklist.
Meanwhile, Armenia, Antigua and Barbuda, Bahamas, Belize, British Virgin Islands (BVI), Cape Verde, Cook Islands, Marshall Islands, Montenegro, Saint Kitts and Nevis, and Vietnam were removed from the Blacklist.
Currently, the countries on the European Union (EU) Blacklist are as follows:
- American Samoa
- Cayman Islands
- Fiji
- Guam
- Oman
- Palau
- Panama
- Samoa
- Trinidad and Tobago
- United States Virgin Islands
- Vanuatu
- Seychelles
Offshore companies established in the Cayman Islands are often used as investment vehicles, but according to the EU's view, it was determined that the response to domestic economic substance requirements for Cayman entities as investment vehicles is not appropriate.
(According to update information on October 8, 2020, the Cayman Islands were removed from the Blacklist)
Palau has not joined the Automatic Exchange of Information for Tax Purposes (AEOI), nor has it signed the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters, and the issue has not been resolved at this time.
Panama is not complying with regulations in the Global Forum on Transparency and Exchange of Information for Tax Purposes regarding tax transparency and exchange of information upon request, and the issue has not been resolved at this time.
Seychelles is pursuing harmful preferential tax policies, and the issue has not been resolved at this time.
Zetland provides a wide range of services from establishment to management and compliance for offshore companies. Detailed guidelines regarding economic substance requirements for offshore companies have also been covered in previous newsletters, so please refer to those as well.
