What does this mean?
These regulations require entities with tax residence and income in impacted jurisdictions to evidence adequate local resources, facilities and control over income generating activities.
Impacted jurisdictions are Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey (and from 2020, Mauritius).
Economic substance legislation applies to certain types of entities carrying out certain relevant activities. Affected companies are required to be managed and directed, to have adequate employees, expenditure, physical presence and to conduct their core income generating activities in the local jurisdiction.
Entities are obliged by law to file annual regulatory or tax reporting returns even where information is deficient. The latter may lead to a penalty levied against the entity.
Penalties for non-compliance
The penalties for failing to comply with the new substance regulations vary from one jurisdiction to another but range from increasing fines, removal from the companies register through to imprisonment.
How can we help?
Estera has a significant presence in jurisdictions affected by economic substance legislation. In addition to our recognised jurisdictional and regulatory expertise, we have extensive experience in gathering and reporting company data. As a result, we are uniquely placed to help you understand and respond to the new legislation.
Substance determination has three stages, and based on the outcome of each stage, we are able to react accordingly. We take the following approach to dealing with substance requirements.
1. IS THE ENTITY IN QUESTION IN SCOPE OF THE NEW LAW?
Our experts can provide professional (non legal) advice to help you identify relevant entities conducting relevant activities.
2. DOES THE ENTITY MEET THE SUBSTANCE REQUIREMENTS?
We will perform a substance test on entities in scope, which may include a request for additional information from clients. The substance requirements differ depending on the type of relevant activity the entity performs. Our tests include a gap-analysis versus the requirements for adequate control, people, facilities and expenditure. Should the substance test not be met, enhanced substance may be required based on the relevant activity the entity performs.
3. HOW CAN THE ENTITY ENHANCE ITS SUBSTANCE?
Clients whose entities don’t meet the substance requirements will receive a proposal from us to add substance to the entity. For standard structures, solutions may be straightforward including additional corporate services or director activities. For more complex structures, we can facilitate the development and implementation of tailor-made solutions, including consideration of functions which could be outsourced to Estera.
4. SUBMISSIONS OF NOTIFICATIONS AND REPORTS
In some jurisdictions entities will be required to submit notifications to confirm if they are in or out of scope. In scope entities are required to file an economic substance report. We can assist in the preparation and submission of your notification and / or report in the format required by the relevant tax authority.
The importance of compliance with the new substance regulations can’t be understated given the potential liability for extensive penalties. Our experts can help you navigate the complexities of the new legislation and ensure that you are meeting the requirements. Please contact us to find out how we can be of assistance.