ECONOMIC SUBSTANCE REGULATIONS: WHAT ARE THEY?

The economic substance legislation came into effect in January 2019 in the Crown Dependencies and overseas territories. It is designed to protect the reputation of offshore jurisdictions. It does this by ensuring that income streams from certain activities are based on actual local activity in order to substantiate the use of low tax jurisdictions.

The jurisdictions that have introduced economic substance legislation are Bermuda, British Virgin Islands, Cayman Islands, Guernsey, the Isle of Man, Jersey and Mauritius.

“The underlying purpose of the rules is to stop businesses moving profits into low tax jurisdictions where little activity takes place. Whilst there are subtle differences between the legislation in each jurisdiction, the common principle is that any entity which is tax resident in these jurisdictions must demonstrate compliance where the entity undertakes an activity in a ‘relevant sector’, as defined in each jurisdiction,” says Granville Turner, Director at company formation specialists, Turner Little.

‘Relevant activities’ include insurance, fund management, finance and leasing, headquarters, shipping, intellectual property, distribution and service centres and holding entity.

“The concept of substance is not new, and at Turner little, we have been carefully considering the jurisdictions of structures for a number of years. These substance rules however, serve to reinforce the importance of that process,” adds Granville.

Given the potentially wide application of economic substance rules, it is important that structures in place are continually reviewed. To find out how we can help you review your structures and protect your assets, get in touch today.