What is economic substance?
Demonstrating an economic substance test has become important, not just in the UK but also in a number of British Overseas Territories, including the Cayman and British Virgin Islands, and Crown Dependencies, including Jersey and Guernsey. This new legislation will apply to companies and in some cases, limited liability partnerships.
The purpose of the legislation is to ensure that such entities have sufficient ‘economic substance’ either in the jurisdiction in which they are incorporated, or another jurisdiction where they are tax resident. In other words, tax transparency has become paramount.
The day of just having a ‘brass name plate’ and nominee shareholders and directors to all intent and purposes may soon be over.
Each jurisdiction will have introduced its own legislation that may vary but the overall thrust will be broadly consistent. Rather than the economic substance requirements applying to all entities, they apply to those carrying on certain ‘relevant activities’.
What is a relevant activity?
These include entities carrying on a:
- banking business
- insurance business
- fund management business
- finance and leasing business
- intellectual property business
- holding company business.
Each of these activities is defined and guidance will follow for each jurisdiction.
So what does this mean?
Any entity failing to meet these new requirements will result in substantial fines and/or the company being struck off.
Any entity incorporated in a relevant jurisdiction must demonstrate that it is under control of the local Directors, it has employees, has adequate expenditure and a physical presence in terms of premises or offices.
The difficulty is that guidance is jurisdiction specific and has not been issued in every jurisdiction yet. However, it follows that any entity that does not currently have sufficient substance must either develop more local substance or become tax resident in another jurisdiction.
Whilst this can be achieved for the future, it does not automatically resolve the past. FATCA and the Common Reporting Standard have meant that any past tax irregularity also needs to be addressed.
The wider implications
There is no doubt that tax transparency is here to stay. As such, advisors are on notice that their responsibilities and reporting requirements have become more onerous.
Does this lead on to finally mean the days are numbered for a brass name plate company?
More information on Tax Evasion here.
For help and advice on any tax investigation – get in touch with our specialist team.