Several jurisdictions, including these in most offshore jurisdictions such as the BVI, the Cayman Islands, Jersey, Isle of Man, Guernsey, Hong Kong, have introduced legislation concerning the economic substance, which took effect in 2019.
What are the economic substance rules and regulations?
There are a variety of different interpretations reading the full scale of the economic substance, but the common principle remains the same which is an entity claiming to be tax domiciled in an offshore jurisdiction must demonstrate evidence of the economic substance which ultimates decides that company undertakes in the relevant business activity, as defined by the law in each jurisdiction.
The core elements of the economic substances are the following:
1.Is “directed and managed” in a concerned offshore jurisdiction which means that considerations of board meetings and relevant documentation and the residence of each company’s directors can be taken into account, however, the actual interpretation varies from one jurisdiction to the other.
2.Is “undertaking income-generated business activities” in the concerned jurisdiction which means that most of each company’s business revenue must derive from that offshore jurisdiction, however, the actual interpretation varies from one jurisdiction to the other.
3. Is”having adequate people, premises and business expenditures” in the concerned jurisdiction which means that you will need to hire staff and spend money on the daily operations of your offshore company, however, the actual interpretation varies from one jurisdiction to the other.
The economic substance concerning the Cayman Islands
When when you are conducting a relevant business activity, you are potentially applicable to the scope of making an economic substance return, these relevant activities are in the Cayman Islands; banking business, distribution and service centre business, financial and leasing business, fund management business, headquarters business, holding company business, insurance business, intellectual property business and shipping business.
Firstly, the economic substance return is different to the economic substance notification, which is required annually and is filed by all entities along with the annual return to renew your Cayman entity.
Secondly, it is worth noting that a holding company that only holds equity in other entities and only earns dividends and capital gains, then that company falls outside the scope of the economic substance.
Lastly, investment funds registered in the Cayman Islands are currently out of scope for the purpose of declaring the economic substance.
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