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Economic Substance – an overview and comparison summary of requirements

In the ever changing space of tax compliance, tax transparency and exchange of tax information, the European Union (the EU) and the OECD made a decision in 2016 to adopt criteria looking at tax transparency and fair taxation across the globe in order to curb abusive tax practices known as Base Erosion and Profit Shifting (BEPS).

The major outcome relating to offshore jurisdictions was for the requirement to have “substance” in the country of incorporation / registration. The intention was and is to prevent international businesses from benefitting from countries’ differing tax laws by artificially transferring profits to jurisdictions that impose little or no income tax.

Thus in response to increasing pressure from the EU and the OECD, and to avoid being placed on the EU Council’s list of non-cooperative jurisdictions for tax purposes (or “blacklist”), each of Bermuda, BVI and Cayman have introduced economic substance legislation (ES Legislation) effective 1 January 2019 to satisfy such requirements.

The ES Legislation varies slightly by jurisdiction based on differences between each jurisdiction's economies, legal framework and understanding and interpretation of the EU and OECD’s expectations. In general, under ES Legislation applicable to each jurisdiction, unless an exemption applies, “relevant entities” incorporated or registered in an offshore jurisdiction which carry on a “relevant activity” are required to demonstrate economic substance pursuant to the ES legislation. Such economic substance requirements would include, inter alia, that the relevant entity:

  •       is directed and managed in its jurisdiction; and
  •       conducts core income-generating activity in its jurisdiction; and
  •       has adequate people, premises and expenditure in its jurisdiction.

Whilst very similar, it is important to note that there are some significant differences in the application of the ES Legislation in each of the jurisdictions. Marbury has prepared a brief comparison and overview relating to the similarities and differences in respect of each of Bermuda, BVI and Cayman Islands for your reference.

It must also be noted that there are a number of areas within the ES Legislation that are still being clarified by the relevant authorities in each of Bermuda, BVI and Cayman, with supplementary guidance notes to aid compliance still pending or in the process of being finalised. We will provide further updates once clarification and any amendments have been published at which point we will be contacting clients regarding concrete actions to take.

In the meantime, Marbury advises clients to start the process of reviewing their offshore entities to ensure compliance. If you have any queries about the content of this update or would like assistance in determining whether you are affected and/or to what degree, please contact your usual Marbury adviser or info@marburys.com.

 

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