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About Economic Substance


In early January 2019, several offshore jurisdictions enacted economic substance (ES) requirements.  As a high level summary, Offshore companies tax domiciled in the offshore jurisdiction that have been essentially a file folder company will now have to provide some substance for their existence operating in the jurisdiction.


In November 2018, the Organisation for Economic Co-operation and Development ("OECD") issued a report called "Resumption of Application of Substantial Activities Factor to No or only Nominal Tax jurisdictions"that imposed a global standard that requires no/low-tax jurisdictions to introduce economic substance requirements under the banner-head of anti-money laundering crackdown.

Consequently, many of the offshore financial jurisdictions have speedily enacted their ES law in response to  the OECD pressures and consistent with the Council of the EU's time frame to have such legislation in place on January 1, 2019. This is also to bring their tax regimes in line with the EU's fair taxation principle that "a jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction," and avoid being included in the EU's list of non-cooperative jurisdictions (aka the EU blacklist).

Scope of the new requirements

As an overview, although each of the offshore jurisdictions has independently created their own ES legislation and guidance, the requirements are mostly the same across each of the jurisdictions; generally following the requirements and recommendations of the OECD.

Under the ES law:

  • a `Relevant Entity' conducting a `Relevant Activity' has to report annually and maintain adequate ES on an ongoing basis;

  • a `Relevant Entity' which does not conduct a `Relevant Activity' only needs to submit notifications to the local authorities in the offshore jurisdiction where registered

  • an entity that is not a `Relevant Entity' is out of scope and, therefore, it has no obligations in this regard


Relevant Entities includes both domestic and foreign companies and partnerships incorporated or registered in the offshore jurisdiction. However, the following are generally not defined as Relevant Entities:

  • Investment funds: including the fund entity itself and any company through which the fund directly or indirectly invests or operates

  • entities that are authorized to carry on business as domestic companies locally in the offshore jurisdiction at hand

  • entities that are tax resident in the offshore jurisdiction or another jurisdiction by reason of its domicile, residence or any other similar criteria.


For entities that are Relevant Entities, it will have to be determined if their activities are "Relevant Activities."  A Relevant Entity carrying on one or more Relevant Activity is required to satisfy the ES test in relation to each Relevant Activity.  In principle, Relevant Activities for the purpose of ES legislation cover the following business activities:

  • Banking business

  • Distribution and service center business

  • Financing and leasing business

  • Fund management business

  • Headquarters business

  • Insurance business

  • Holding business (i.e. Hold Co.)

  • Intellectual property (IP) business.

  • Shipping business

Although investment funds (established in a no or nominal tax jurisdiction) are currently not being considered Relevant Entities (and thus are not required to comply with ES requirements), offshore companies carrying on any form of fund management business fall within the scope of Relevant Entity and Relevant Activity and are required to comply with ES requirements.


The ES that would have to be established and maintained by a Relevant Entity in relation to (one or more Relevant Activities) in the offshore jurisdiction include the following:

  • the entity has to be directed and managed in that jurisdiction;

  • the core income generating activities (CIGA) are undertaken in that jurisdiction;

  • the entity has to maintain adequate physical presence in that jurisdiction;

  • having adequate suitably qualified employees in that jurisdiction;

  • adequate operating expenditure incurred in that jurisdiction.

The new law on ES requirements have entered into operation since January 2019, with a six-month grace period provided to existing Relevant Entities to ensure they are compliant.

Relevant Entities incorporated on or after January 1, 2019 must satisfy the ES test from the date on which a Relevant Activity commences.


Relevant Entities carrying out Relevant Activities are required file an annual report to the local tax authorities in the offshore jurisdiction in relation to their compliance with ES requirements during the preceding financial period. Failing to submit the information required may result in severe penalties.


  • For operating an entity failing to meet the ES requirements, the Relevant Entity be notified of such determination and directed on actions to take and generally pay significant fines.

  • If the Relevant Entity continues to fail the ES requirements, they may be struck off from the register of companies or partnerships at hand.

  • Under an exchange of information mechanism, tax authorities of the offshore jurisdictions may share information with tax authorities of the jurisdiction(s) where the immediate parent company, the ultimate parent and ultimate beneficial owner(s) of the Relevant Entity are located.

  • If false or misleading information is willfully supplied, it is an offence subject to sanction which generally includes the imposing of a fine or imprisonment of the relevant director(s) in the worst case scenario.

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