Do new economic substance laws threaten your offshore tax structure?
28 March 2019
The 1st January 2019 marked the beginning of a new tax era for a number of offshore territories with the introduction of new legal substance requirements. This followed pressure from the EU for these countries to address fairer tax competition and introduce legislation to prevent companies from being used to artificially attract profits that are not commensurate with economic activities and substantial economic presence.
The BVI, Guernsey, Jersey and Isle of Man are among a number of territories that have responded to the specific concerns raised through new legislation that is effective, in most cases, from 1st January 2019.
The EU’s specific concerns relate to companies carrying on geographically-mobile financial and other service activities. For the natural resources sector, this typically applies to holding companies, companies providing group financing or headquarter services and IP holding companies.
Although each offshore territory has introduced its own legislation, the principles are the same: a company that is tax resident in one of these jurisdictions will now be required to have an adequate level of substance in that jurisdiction. The company will be required to demonstrate compliance through data within an annual return. Companies will face financial penalties for failure to comply and the potential threat of being struck off where there is persistent non-compliance.
Each territory will have its own interpretation of an “adequate” level of substance but for most it will require a company to:
- Carry out defined core income generating activities in that territory;
- Be directed and managed in that territory - attend Board meetings in the territory and keep statutory records in the territory; and
- Have adequate people, premises and expenditure in that territory commensurate to the nature and scale of the relevant activity.
Each type of business has a list of core income generating activities that are considered essential and valuable activities. A company is not expected to undertake all the core income generating activities for its type of business. However, any core income generating activities should be undertaken in the country where the company is registered.
For pure equity holding companies the bar may not be set quite as high, as long as they do not provide group financing or other core income generating activities for themselves or the group. Many companies will have to make potentially difficult and costly changes to comply with these rules. Our Natural Resources & Energy team are working with many groups to examine the implications of these changes and whether their current structures still make commercial sense.
If you would like to discuss how the new substance rules may impact your group or business, please get in touch. We will be happy to share our experience and discuss some ideas on how you should respond.