Offshore Economic Substance
EU regulations are requiring businesses registered offshore to have ‘economic substance’ within the offshore jurisdiction to benefit from the tax regime in the jurisdiction. Offshore economic substance is the necessity to have human assets and an element of business profit generated offshore.
The new rules will impact;
- The Cayman Islands
- The British Virgin Islands
- The Channel Islands
The OECD is observing the changes to the law to ensure so called ‘harmful tax practices’ are controlled. These changes could be a game changer for the offshore business community.
At this early stage no one can say what level or type of activity is necessary to meet the requirements but changes to operational and corporate practice will most definitely be needed.
For example businesses in the Cayman Islands of type;
- Limited Partnerships; and
- Foreign Registered/Exempt Companies
will need to show they meet the new requirements. The below is not legal advice but a guide to consider what will be necessary to meet the change.
- The level of substance requirements with regards to the income derived from the relevant activity carried out;
- The necessary amount of operating expenditure incurred;
- What is considered a sufficient physical presence;
- The number of full-time employees; and
- Whether outsourcing of “core income generating activities” within the jurisdiction is permitted and can count towards satisfying the substance requirements.
In summary, all businesses using offshore jurisdictions need to review the impact of the relevant law.
It cannot be ignored.
This will therefore require businesses and other investors to:
- Review their organisational structures to determine why a particular entity is being used and whether it still makes sense in light of recent developments;
- Consider the level of substance and whether substance needs to be created specifically for the company or whether the substance can be outsourced (having regard to the internal efforts required to manage the outsourced substance); and
- Consider the costs and benefits of maintaining the entity in the offshore jurisdiction versus migrating the residence or otherwise transferring the trade and assets of the entity to somewhere like Hong Kong or another ‘mid-shore’ jurisdiction.
CYW Solutions will help with;
- Staffing and outsourcing functions;
- Resident director level registration;
- Call centre
- Business routing activities;
- Business premises; and
- Ongoing operational activity.
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