By Monica Dixie, Tax Director, Equiom Tax Services
Welcome to our second article in the Equiom Guides series, designed to help you understand key topics affecting the sectors in which we operate.
Regulations in key offshore jurisdictions could mean changes for companies (and in some cases partnerships) registered in low tax or no tax jurisdictions across the world. As a provider of company services with a presence in many of the world’s International Financial Centres (IFCs), Equiom has been following the new economic substance rules very closely to determine how we can help businesses comply. In this article, I will provide a reminder of the ‘what’, ‘who’ and ‘next steps’ for economic substance.
What is economic substance?
The concept of economic substance has been around in the tax world for some time but has recently become more of a focus following the Organisation for Economic Co-operation and Development (OECD) and European Union (EU) intentions to address concerns about entities generating substantial profits in low or no tax jurisdictions where they have perceived little or no substance.
In December 2017 the EU Code of Conduct Group compiled two lists of what they classified as ‘non-cooperative jurisdictions’ (the ‘Blacklist’ and ‘Greylist’). The lists were based on criteria including tax transparency, fair taxation and implementation of anti-BEPS standards. Those on the Greylist had made commitments to the EU that they would implement legislation to address the concerns regarding substance. Those on the Blacklist had made no such commitment.
Since then, with some fluctuation, the Blacklist has gone from 17 jurisdictions to 9 and the Greylist has reduced from 47 jurisdictions to 32 following the introduction of substance legislation to many IFCs.
Economic substance legislation is similar across the jurisdictions and generally includes the requirement to demonstrate the following criteria:
- Must be directed and managed in the jurisdiction
- Core income generating activity in the jurisdiction
- Adequate physical presence in the jurisdiction
- Adequate number of qualified employee equivalents in the jurisdiction
- Adequate expenditure in relation to the level of activity in the jurisdiction
However, there are some differences in legislation in each jurisdiction and so careful consideration is required when reviewing substance for each entity.
Who is impacted?
The economic substance rules apply to:
- Locally incorporated/registered companies
- Foreign companies registered in relevant jurisdictions
- Limited partnerships (only in some jurisdictions)
The relevant business sectors include:
- Fund management
- Finance and leasing
- Intellectual property
- Distribution and service centres
- Holding companies
Equiom’s affected jurisdictions include:
- Isle of Man
- United Arab Emirates
However, some of our other offices are affected due to administering structures which include entities established in a jurisdiction where substance legislation has been introduced.
Recommended next steps?
Company directors or partners are required to confirm whether their entity falls ‘in-scope’, or ‘out-of-scope’. Entities falling ‘in-scope’ will need to ensure compliance with the economic substance legislation for their jurisdiction or risk financial penalties and potential removal from the register.
At Equiom Tax Services, we have been working closely with our clients worldwide to undertake the following actions, and these are the steps we suggest all companies should consider:
- Review whether they are receiving income from one of the relevant sector activities and so are in scope of the economic substance legislation
- Understand the relevant substance required for the type of relevant activity undertaken, review the current substance provided and address any gaps in current practice to ensure the substance requirements are met
- Liaise with shareholders to keep them informed of the actions the directors are taking regarding economic substance
- Set up processes to capture the relevant information required to demonstrate substance and to document the oversight of any outsourced activities
- Prepare for reporting of relevant information to the local government through their prescribed mechanism for reporting
Our Tax Services team also provides assistance to entities that are not clients of Equiom, and would be happy to assist the directors or partners of entities registered in the relevant jurisdictions with any support required in understanding this new legislation and its impact on them.
For guidance on any of the above, please contact Monica Dixie from Equiom Tax Services.
This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Equiom to discuss these matters in the context of your particular circumstance. Equiom Group, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.