ECONOMIC SUBSTANCE SOLVED
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SELECT THE JURISDICTION WHERE YOUR ENTITY RESIDES
PROFESSIONAL GUIDANCE
Professional Economic Substance Consulting
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RELEVANT ACTIVITIES
Select the Relevant Activity below for details on how we can assist your entity with a turnkey economic substance solution
DO THE CAYMAN ECONOMIC SUBSTANCE REQUIREMENTS APPLY TO ME?
OVERVIEW
To establish if the Cayman Islands economic substance requirements will apply to your entity in respect of any financial year of the entity commencing in 2019 or later, please answer the questions below. Note: this information is based on the law as at 1 May 2019. It is of a general nature only, it does not take into account specific circumstances and should not be relied upon as legal advice.
Question 1:
IS YOUR ENTITY ANY OF THE FOLLOWING?
a Cayman Islands incorporated company?
a Cayman Islands limited liability company (LLC)?
a registered Cayman Islands limited liability partnership (LLP)?
a company incorporated outside of the Cayman Islands and registered in the Cayman Islands as a foreign company?
Question 2:
IS THE ENTITY NOT ONE OF THE FOLLOWING?
A Domestic company: defined as a company that is: (a) carrying on business in the Cayman Islands and which complies with section 4(1) of the Local Companies (Control) Law (2019 Revision) or section 3(a) of the Trade and Business Licensing Law (2019 Revision); or (b) a company incorporated in the Cayman Islands and limited by guarantee or is a not-for-profit association (referred to respectively in section 9 or 80 of the Companies Law (2018 Revision)).
An Investment fund: meaning an entity whose principal business is the issuing of investment interests to raise funds or pool investor funds with the aim of enabling a holder of such an investment interest to benefit from the profits or gains from the entity's acquisition, holding, management or disposal of investments and includes any entity through which an investment fund directly or indirectly invests or operates (but not an entity that is itself the ultimate investment held), but does not include a person licensed under the Banks and Trust Companies Law (2018 Revision) or the Insurance Law, 2010, or a person registered under the Building Societies Law (2014 Revision) or the Friendly Societies Law (1998 Revision).
An entity whose tax residency is outside the Cayman Islands. An entity is generally tax resident outside of the Cayman Islands if it is subject to tax in another jurisdiction by reason of its domicile, residence or any other criteria.
Question 3:
IS THE ENTITY ENGAGED IN ANY "RELEVANT ACTIVITY"?
Banking business
Insurance business
Fund management business
Finance and leasing business
Headquarters business
Shipping business
Holding business
Intellectual property business
Distribution and service center business
Result:
IF YES TO QUESTIONS 1-3, THEN ECONOMIC SUBSTANCE REQUIREMENTS WILL APPLY
The entity must:
have an adequate number of employees in Cayman to carry out its business;
have adequate premises in Cayman to carry out its business;
manage and direct its business from Cayman;
incur adequate expenditure in Cayman; and
carry on its core income generating activity (CIGA) in Cayman.
Note: pure equity holding companies, are subject to reduced economic substance requirements.
PENALTIES FOR INSUFFICIENT SUBSTANCE
The penalty for failure to satisfy the economic substance test for a Relevant Activity in a financial year is US$12,200. The penalty for failure to satisfy the economic substance test for a Relevant Activity in the subsequent financial year is US$122,000, and in addition application must be made to the Grand Court for an order requiring the Relevant Entity to take such action as is specified, or to be struck off.
RELATED LINKS
OUTSOURCED ECONOMIC SUBSTANCE SERVICES BY RELEVANT ACTIVITY
Core Income Generating Activity (CIGA) Outsourcing
DO THE BVI ECONOMIC SUBSTANCE REQUIREMENTS APPLY TO ME?
HISTORY
Late 2018, the BVI introduced the Economic Substance (Companies and Limited Partnership) Act 2018 in response to the European Union’s Economic Substance requirements, which address alleged concerns of entities generating too much profit and too little substance in low or zero-rate tax jurisdictions. As a result, all BVI entities need to understand their obligations, be compliant and where applicable, demonstrate and report economic substance.
Question 1:
IS YOUR ENTITY ANY OF THE FOLLOWING?
The economic substance requirements only apply to:
companies incorporated in the BVI;
limited partnerships (with legal personality) formed in the BVI;
companies incorporated outside of the BVI that are registered in the BVI a foreign company; and
limited partnerships (with legal personality) formed outside of the BVI that are registered in the BVI as foreign limited partnerships (together "Legal Entities").
All other entities and arrangements (including trusts and limited partnerships without legal personality) should therefore not be in scope. However, partners and trustees of such entities may still be caught by the economic substance requirements, if they are incorporated or formed as a Legal Entity (term defined above).
If yes, continue to question 2
Question 2:
IS THE ENTITY ENGAGED IN ANY "RELEVANT ACTIVITY"?
Banking business
Insurance business
Fund management business
Finance and leasing business
Headquarters business
Shipping business
Holding business
Intellectual property business
Distribution and service center business
If yes, continue to question 3
Question 3:
IS THE ENTITY A TAX RESIDENT IN THE BVI?
An entity will be deemed to be a “non-resident" entity if it is resident for tax purposes in a jurisdiction outside of the BVI, and that jurisdiction is not on Annex 1 to the EU list of non- cooperative jurisdictions for tax purposes (view list here).
An entity, whose only source of income from "Relevant Activities" is subject to tax in a jurisdiction outside the BVI, will be regarded as resident for tax purposes in that jurisdiction.
If yes, see below
Result:
IF YES TO QUESTIONS 1-3, THEN ECONOMIC SUBSTANCE REQUIREMENTS WILL APPLY
The entity must:
have an adequate number of employees in the BVI to carry out its business;
have adequate premises in the BVI to carry out its business;
manage and direct its business from the BVI;
incur adequate expenditure in the BVI; and
carry on its core income generating activity in the BVI.
FAILURE TO COMPLY
The Act outlines a notice process with graduated penalties to be applied for failure to meet economic substance requirements following each subsequent notice. The maximum penalty is USD 400,000 for a high risk IP legal entity and USD 200,000 for all other legal entities.
The BVI International Tax Authority ultimately may recommend that the Financial Services Commission strike the legal entity off the Register of Companies or the Register of Limited Partnerships where either the economic substance requirements are not met after the second notice or it decides there is no realistic possibility of the legal entity meeting the economic substance requirements.
DO THE BERMUDA ECONOMIC SUBSTANCE REQUIREMENTS APPLY TO ME?
OVERVIEW
To establish if the Bermuda economic substance requirements will apply to your entity in respect of any financial year of the entity commencing in 2019 or later, please answer the questions below. Note: this information is based on the law as at 17 July 2019. It is of a general nature only, it does not take into account specific circumstances and should not be relied upon as legal advice.
Question 1:
IS YOUR ENTITY ANY OF THE FOLLOWING?
a company?
a limited liability company?
an exempted partnership with separate legal personality?
an exempted limited partnership with separate legal personality?
an overseas partnership with separate legal personality?
If yes, continue to question 2
Question 2:
IS THE ENTITY A TAX RESIDENT OF BERMUDA?
An entity will be deemed to be a “non-resident" entity if it is resident for tax purposes in a jurisdiction outside of Bermuda, and that jurisdiction is not on Annex 1 to the EU list of non- cooperative jurisdictions for tax purposes (view list here).
An entity is generally tax resident outside of the Bermuda if it is subject to tax in another jurisdiction by reason of its domicile, residence or any other criteria.
If yes, continue to question 3
Question 3:
IS THE ENTITY ENGAGED IN ANY "RELEVANT ACTIVITY"?
Banking business
Insurance business
Fund management business
Finance and leasing business
Headquarters business
Shipping business
Holding business
Intellectual property business
Distribution and service center business
If yes, see below
Result:
IF YES TO QUESTIONS 1-3, THEN ECONOMIC SUBSTANCE REQUIREMENTS WILL APPLY
The entity must:
have an adequate number of employees in Bermuda to carry out its business;
have adequate premises in Bermuda to carry out its business;
manage and direct its business from Bermuda;
incur adequate expenditure in Bermuda; and
carry on its core income generating activity (CIGA) in Bermuda.
Note: pure equity holding companies and local companies are subject to reduced economic substance requirements.
PENALTIES FOR INSUFFICIENT SUBSTANCE
If an entity does not meet the economic substance requirements, a progressive penalty system applies and its information is shared with the relevant EU authorities. Enhanced requirements may apply to certain entities engaging in intellectual property business and such entities may be presumed not to meet the economic substance requirements unless they can demonstrate to the contrary. The Registrar also has certain powers to access entity premises and inspect records, with a person obstructing or failing to assist the Registrar in doing so being potentially guilty of a criminal offence.
RELEVANT ACTIVITIES
Select the Relevant Activity below for details on how we can assist your entity with a turnkey economic substance solution
BANKING BUSINESS
DISTRIBUTION AND SERVICE CENTRE
FINANCING AND LEASING BUSINESS
FUND MANAGEMENT BUSINESS
HEADQUARTERS BUSINESS
HOLDING BUSINESS
INSURANCE BUSINESS
INTELLECTUAL PROPERTY BUSINESS
SHIPPING
DO THE JERSEY ECONOMIC SUBSTANCE REQUIREMENTS APPLY TO ME?
HISTORY
IN December 2018, Jersey (UK) introduced the Taxation (Companies – Economic Substance) (Jersey) Law 2019 (the "Law"), in response to the European Union’s Economic Substance requirements, which address alleged concerns of entities generating too much profit and too little substance in low or zero-rate tax jurisdictions. As a result, all Jersey registered entities need to understand their obligations, be compliant and where applicable, demonstrate and report economic substance.
Question 1:
IS YOUR ENTITY ANY OF THE FOLLOWING?
The economic substance requirements only apply to:
a Jersey-incorporated company
a non-Jersey equivalent
If yes, proceed to Question 2
Note: As of regulations dated April, 2019, All other entities such as Jersey partnerships and trusts which are pass-through for tax purposes should therefore fall outside of scope, although partners and trustees may still be subject to the test if they are themselves companies. Whether an entity that is incorporated or established outside Jersey is a non-Jersey equivalent requires careful analysis of the particular circumstances of the entity.
Question 2:
IS THAT ENTITY TAX RESIDENT IN JERSEY?
If yes, Proceed to Question 3.
Note: Tax resident in Jersey means that an entity is either:
a company incorporated in Jersey, unless its business is centrally managed and controlled outside Jersey in a country or territory where the highest rate at which any company may be charged to tax on any part of its income is 10% or higher and the company is resident for tax purposes in that country or territory; or
a company (or equivalent) incorporated outside of Jersey if its business is managed and controlled in Jersey.
Companies (or equivalent) that fall outside the above, such as those incorporated in Jersey but tax resident in the UK, should therefore be outside of scope.
A company (or equivalent) falling within the above will be a "resident company" for the purposes of the Law.
Question 3:
IS THE ENTITY ENGAGED IN ANY "RELEVANT ACTIVITY"?
Banking business
Insurance business
Fund management business
Finance and leasing business
Headquarters business
Shipping business
Holding business
Intellectual property business
Distribution and service center business
If yes, Proceed to Question 4
Question 4:
HAS THAT RELEVANT ACTIVITY GENERATED GROSS INCOME IN THE RELEVANT PERIOD?
If yes, see below
Note: the ES Test only applies where the relevant activity generates gross income. Therefore, if no gross income has been generated, the Test should not apply for that relevant period, though the resident company should keep in mind it may apply in future years
Result:
IF YES TO QUESTIONS 1-4, THEN ECONOMIC SUBSTANCE REQUIREMENTS WILL APPLY
The entity must:
have an adequate number of employees in the jurisdiction to carry out its business;
have adequate premises in the jurisdiction to carry out its business;
manage and direct its business from the jurisdiction;
incur adequate expenditure in the jurisdiction; and
carry on its core income generating activity in the jurisdiction.
FAILURE TO COMPLY
If the Comptroller determines that the economic substance test has not been met for a financial period, the Comptroller will issue a notice to the company notifying it:
a) that the Comptroller has determined that the Company does not meet the economic substance test;
b) the reasons for that determination;
c) the amount of any fine imposed and the date on which is due (up to a maximum of £10,000 increasing to £100,000 if the test is not met for consecutive financial periods);
d) what action needs to be taken to ensure that the Company does meet the economic substance test; and
e) the company's right of appeal.
A fine of up to £3,000 is payable if a person fails to provide information to the Comptroller when required. Similarly, a fine of up to £3,000 is payable where inaccurate information is provided where (i) the person knew the information provided was inaccurate at the time it was provided; or (ii) the person subsequently discovers the information is inaccurate and fails to take reasonable steps to inform the Comptroller.
A person who (i) obstructs; or (ii) fails to provide reasonable assistance to the Comptroller or any person authorised by the Comptroller when they enter a business premises to take copies of documents, is guilty of an offence and is liable to a fine and/or imprisonment for up to 6 months.
A person who intentionally alters, suppresses or destroys any business document that has been requested by the Comptroller pursuant to the Draft Law is also guilty of an offence and liable for a fine and/or imprisonment for up to 2 years.
DO ISLE OF MAN ECONOMIC SUBSTANCE REQUIREMENTS APPLY TO ME?
HISTORY
On 11 December 2018 Tynwald approved the Income Tax (Substance Requirements) Order 2018. This legislation introduces substance requirements for certain Isle of Man (IOM) companies and comes as a response to concerns raised by the EU about the lack of legal substance requirements for companies in the Isle of Man. which address alleged concerns of entities generating too much profit and too little substance in low or zero-rate tax jurisdictions. As a result, all Isle of Man entities need to understand their obligations, be compliant and where applicable, demonstrate and report economic substance.
Question 1:
IS YOUR ENTITY ANY OF THE FOLLOWING?
The economic substance requirements only apply to:
companies incorporated in IOM, continued or re-registered under Companies Act 1931-2004;
companies incorporated in IOM, continued or re-registered under Companies Act 2006
If yes, the Q2
Question 2:
IS YOUR IOM ENTITY A TAX RESIDENT OF THE ISLE OF MAN?
An IOM entity, whose only source of income from "Relevant Activities" is subject to tax in a jurisdiction outside IOM, will be regarded as resident for tax purposes in that jurisdiction.
If Yes, Continue to Q3
Question 3:
IS THE ENTITY ENGAGED IN ANY "RELEVANT ACTIVITY"?
Banking business
Insurance business
Fund management business
Finance and leasing business
Headquarters business
Shipping business
Holding business
Intellectual property business
Distribution and service centre business
Result:
IF YES TO QUESTIONS 1-3, THEN ECONOMIC SUBSTANCE REQUIREMENTS WILL APPLY
The entity must:
have an adequate number of employees in IOM to carry out its business;
have adequate premises in IOM to carry out its business;
manage and direct its business from IOM;
incur adequate expenditure in the IOM; and
carry on its core income generating activity in the BVI.
FAILURE TO COMPLY
A range of sanctions will be enforced by the Income Tax Division where they consider that a company is not meeting the substance requirements. These include fines as high as £100,000, exchange of information with appropriate tax authorities and ultimately, the company being struck off the Isle of Man register.
DO THE BAHAMAS ECONOMIC SUBSTANCE REQUIREMENTS APPLY TO ME?
OVERVIEW
To establish if the Bahamas economic substance requirements will apply to your entity in respect of any financial year of the entity commencing in 2019 or later, please answer the questions below. Note: this information is based on the law as at 17 July 2019. It is of a general nature only, it does not take into account specific circumstances and should not be relied upon as legal advice.
Question 1:
IS YOUR ENTITY ANY OF THE FOLLOWING?
A “commercial entity”, company or partnership that was incorporated, registered or continued under the:
Companies Act
International Business Companies Act
Partnership Act
Partnership Limited Liability Act
Exempted Limited Partnership Act
If yes, continue to question 2
Question 2:
IS THE ENTITY A TAX RESIDENT OF BAHAMAS?
Note: An entity is generally tax resident outside of Bermuda if it is subject to tax in another jurisdiction by reason of its domicile, residence or any other criteria.
If yes, continue to question 3
Question 3:
IS THE ENTITY ENGAGED IN ANY "RELEVANT ACTIVITY"?
Banking business
Insurance business
Fund management business
Finance and leasing business
Headquarters business
Shipping business
Holding business
Commercial use of intellectual property
Distribution and service center business
as a holding company engaged in one of the activities listed in the above bullet points (or if a subsidiary of the holding company is engaged in one of the activities
If yes, see below.
Result:
IF YES TO QUESTIONS 1-3, THEN ECONOMIC SUBSTANCE REQUIREMENTS WILL APPLY
An included entity carrying on a relevant activity must demonstrate economic substance in the Bahamas by satisfying a two-pronged test:
1. Its core income generating activities (“CIGA”) must take place in the Bahamas.
This means that the included entity will need to have, within the Bahamas, adequate:
amounts of annual operating expenditure
levels of qualified full-time employees
physical offices
levels of board management and control.
Note: The CIGA may be outsourced to a service provider in the Bahamas if the included entity is able to demonstrate supervision and control of the outsourcing service provider in respect of the outsourced CIGA.
2. The direction and management of the included entity must be within the Bahamas.
To satisfy this requirement, the entity must ensure that:
an adequate number of meetings of the Board of Directors is conducted in the Bahamas, given the level of decision making required
a quorum of the Board of Directors is physically present in the Bahamas during meetings
strategic decisions made at the meetings of the Board of Directors are recorded in minutes
records and meeting minutes are kept in the Bahamas
the Board of Directors has the necessary knowledge and expertise to discharge its duties.
Note: pure equity holding companies and local companies are subject to reduced economic substance requirements.
PENALTIES FOR INSUFFICIENT SUBSTANCE
The Act provides for administrative penalties up to $150,000 to be applied where an included entity has been found to be non-compliant with the applicable substance requirements.
Summary conviction of an offence under CESRA carries penalties of up to $10,000 and/or six (6) months’ imprisonment. In addition, if an entity fails to comply with the Act, the Minister of Finance may request onsite inspection and an audit at the expense of the company.
Failure to comply with the substance requirements could also lead to the entity being struck off the Companies Register in the Bahamas.
DO THE MAURITIUS ECONOMIC SUBSTANCE REQUIREMENTS APPLY TO ME?
HISTORY
On 16 August 2019, the Mauritius Government issued the Income Tax (Amendment No. 2) Regulations 2019 (the Regulations). The Regulations set forth provisions on the following:
Substance requirements insofar as it concerns the partial exemption regime (PER) introduced by section 35 (bc)(ii)(V) and (VII) of the Finance (Miscellaneous Provisions) Act 2018 (FMPA 2018) and section 26 (ac)(ii)(B)(IV) of the Finance (Miscellaneous Provisions) Act 2019 regarding certain income streams
The computation of the income attributed to a Controlled Foreign Company (CFC)
Substance requirements for a freeport operator or developer to benefit from the preferential tax rate of 3%
The Regulations are effective as from 1 July 2019.
Question 1:
IS YOUR ENTITY ANY OF THE FOLLOWING?
The economic substance requirements only apply to:
companies incorporated in the Mauritius;
limited partnerships (with legal personality) formed in the Mauritius;
companies incorporated outside of Mauritius that are registered in Mauritius as a foreign company; and
limited partnerships (with legal personality) formed outside of Mauritius that are registered in Mauritius as foreign limited partnerships (together "Legal Entities").
All other entities and arrangements (including trusts and limited partnerships without legal personality) should therefore not be in scope. However, partners and trustees of such entities may still be caught by the economic substance requirements, if they are incorporated or formed as a Legal Entity (term defined above).
If yes, continue to question 2
Question 2:
IS THE ENTITY ENGAGED IN ANY "RELEVANT ACTIVITY"?
Banking business
Insurance business
Fund management business
Finance and leasing business
Headquarters business
Shipping business
Holding business
Intellectual property business
Distribution and service center business
If yes, continue to question 3
Question 3:
IS THE ENTITY A TAX RESIDENT IN MAURITIUS?
An entity will be deemed to be a “non-resident" entity if it is resident for tax purposes in a jurisdiction outside of Mauritius, and that jurisdiction is not on Annex 1 to the EU list of non- cooperative jurisdictions for tax purposes (view list here).
An entity, whose only source of income from "Relevant Activities" is subject to tax in a jurisdiction outside Mauritius, will be regarded as resident for tax purposes in that jurisdiction.
If yes, see below
Result:
IF YES TO QUESTIONS 1-3, THEN ECONOMIC SUBSTANCE REQUIREMENTS WILL APPLY
To satisfy ES Requirements, the entity must:
a. carry on its core income generating activities (CIGA) in Mauritius.
b. Employ, directly or indirectly, at least five (5) suitably qualified persons to conduct its CIGA.
c. Incur a minimum expenditure (ME) proportionate to its level of activities with a minimum yearly expenditure of at least Rs3,500,000 (roughly $50,000 USD)
FAILURE TO COMPLY
The Act outlines a notice process with graduated penalties to be applied for failure to meet economic substance requirements following each subsequent notice. The maximum penalty is USD 400,000 for a high risk IP legal entity and USD 200,000 for all other legal entities.
The Local Authority ultimately may strike the legal entity off the Register of Companies or the Register of Limited Partnerships where either the economic substance requirements are not met after the second notice or it decides there is no realistic possibility of the legal entity meeting the economic substance requirements.