• Staff

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