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Turks and Caicos Economic Substance legislation to have significant effect on TCI entities

What’s this all about?

The European Union (“EU”) has long been concerned at loss of tax revenue to its member states through the use of companies and other entities in low or zero-tax jurisdictions that occurs by enabling profits to be shifted to the low tax jurisdiction, from the EU member state in which they were generated.  As a result of this, the EU believes that its member states are losing very significant tax revenue.  This new economic substance legislation is its solution: the Turks and Caicos Islands (TCI) version came into effect on January 1 and is called The Companies and Limited Partnerships (Economic Substance) Ordinance 2018.

Why does this affect TCI? After all, it’s not part of the EU.

Correct: TCI is not part of the EU.  However, the EU, like the USA, has a huge economy and therefore has major international clout.  Just like the USA with its FATCA legislation in recent years and the international club of rich nations, the OECD, with its “Common Reporting Standard”, the EU is projecting its soft power by requiring low and zero tax jurisdictions around the world to comply with its economic substance policies for resident entities.  Any jurisdiction that doesn’t comply will be blacklisted by the EU. The consequences of being on an EU blacklist are too awful to contemplate and so pretty well all zero and low tax jurisdictions are falling into line, almost all with effect from 1st January 2019.  The TCI legislation has counterparts in Cayman, BVI, Isle of Man, Jersey, Guernsey and similar jurisdictions. 

In the TCI context, what entities does the new law affect?

The new law affects all TCI companies, TCI limited partnerships and foreign companies registered in TCI, unless they are tax resident in a country outside TCI which is not on the EU list of non-cooperative jurisdictions for tax purposes.

So it affects all TCI entities, then?

Not quite. Firstly, many TCI entities are producer-owned-reinsurance companies (PORCs), that will not be captured by the law because PORCs are usually tax resident in the US, even though incorporated in TCI.

In addition, the most significant provisions of the new law, the economic substance requirements, apply only to resident TCI entities that carry out a “relevant activity”.

What is a “relevant activity?”

There are nine categories of relevant activity, namely:

  • Banking business

  • Distribution and service centre business

  • Finance and leasing business

  • Fund management business

  • Headquarters business

  • Holding entity business

  • Insurance business

  • Intellectual property holding business

  • Shipping business

A resident entity that does not carry out any of those businesses during any given accounting period need not concern itself with the new law, other than its modest reporting requirements (see below).

And what about a TCI resident entity that does carry out a “relevant activity”?

Any such entity is required to ensure that during any accounting period concerned, it satisfies certain economic substance requirements as follows:-

  1. It is directed and managed in TCI in relation to the relevant activity;

  2. It conducts core income-generating activity in TCI; and

  3. Proportionate to the level of relevant activity carried on in TC:

  • It has adequate number of appropriately experienced staff in TCI;

  • It has an adequate level of operating expenditure in TCI;

  • It has adequate physical assets or physical presence in TCI;

What are “core income-generating activities”?

These vary depending on the type of relevant activity concerned and it is beyond the scope of this note to list them.  However, it is possible to outsource core-income-generating activity in TCI in certain circumstances

The substance requirements are least onerous for pure equity holding entities.  On the other hand, the substance requirements are more onerous for what are called high-risk IP entities.

I am concerned that my TCI entity may be captured by this. What do I need to do?

You will need to carry out an internal review to determine what measures, if any, your entity needs to take in order to achieve compliance and you should consult your legal professional in that respect.

Is there any filing required?

Yes, there is but we do not know its form yet.  Each TCI entity will have to submit to the TCI authorities an annual return to enable the authorities to determine whether the entity is a resident entity and whether it needs to comply with the  substance requirements.

Are there any sanctions?

If the TCI authorities determine that a resident entity carrying on relevant activity has not satisfied the economic substance requirements during a particular accounting period, they may impose a penalty up to $25,000.00 for the first period of default.  That penalty increases to up to $150,000.00 for a default for a second consecutive such period.  Also if there is a second consecutive such default, the authorities may apply to the Court for an order directing that the entity concerned be struck off the register of companies or that it be put into liquidation or dissolved.

Is there any exchange of information with outside (non-TCI) authorities?

If a TCI entity claims to be tax resident outside TCI, then the TCI authorities will disclose that information to the relevant authorities in the country concerned.  In addition information about entities in breach of the economic substance requirements will be disclosed by the TCI authorities to relevant authorities in the jurisdiction where the parent or beneficial owner resides.

I own a TCI company that owns TCI real estate but does nothing else. Is that entity affected?

Owning TCI real estate is not a “relevant activity” for the purposes of the new law.  Like all TCI entities, your entity will have to make a report in its annual return that will enable the TCI authorities to determine whether the substance laws apply to it but, on the basis they will not, nothing more than that annual filing will arise.


In short, this new economic substance law is a highly significant development that may affect you if you own, operate or otherwise are involved in a TCI company or TCI limited partnership or a foreign company that is registered in TCI. Contact Economic Substance Solutions to learn how to easily and affordably provide a turnkey substance outsourcing solution in the TCI.

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