Offshore Economic Substance

Offshore Economic Substance

Offshore Economic Regulations

New 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 the businesses profit generated from within the jurisdiction.

The new rules will impact;

  • The Cayman Islands
  • The British Virgin Islands
  • Bermuda
  • The Channel Islands

The OECD is observing the changes to the law to ensure so called ‘harmful tax practices’ are controlled. These changes are widely believed to be a game changer for the offshore business community.

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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;

  • LLC;
  • Limited Partnerships;
  • Foreign Registered 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.

Level of economic activity
Level of economic activity
  • The level of substance requirements with regards to the income derived from the relevant activity carried out in the Cayman Islands;
  • The necessary amount of operating expenditure that must be incurred in the Cayman Islands;
  • What is considered a sufficient physical presence (including maintaining a place of business or plant, property and equipment) in the Cayman Islands;
  • The number of full-time employees or other personnel with appropriate qualifications needed in the Cayman Islands; and
  • Whether outsourcing of “core income generating activities” within the jurisdiction is permitted and can count towards satisfying the substance requirements, provided the entity can monitor and control the carrying out of that activity by any delegate.

In summary, all groups using offshore jurisdictions need to review the impact of the relevant law. It cannot be ignored. This will therefore require corporates and other investors to:

Offshore Economic Activity
Offshore Economic Activity
  • 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 can assist for those corporates and businesses that want to remain tax efficient in the Cayman Islands. We will provide a service that transfers legitimate business activity to the Islands. We will include, were needed;

Staffing and outsourcing
Staffing and outsourcing
  • Staffing and outsourcing functions;
  • Resident director level registration;
  • Call centre
  • Business routing activities;
  • Business premises; and
  • Ongoing operational activity.

The functions above will be led by a Cayman resident director from the UK qualified with MBA, Six Sigma Black Belt, CAMS and 20 years of Leadership experience. Our own business is structured exactly like this.

Contact us for a FREE assessment of how we can help you keep your business offshore.

Economic Substance Free Assessment
Economic Substance Free Assessment

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