Following initial work by the Organisation for Economic Co-operation and Development (OECD) under Action 5 of the Base Erosion and Profit Shifting (BEPS) project, an investigation by the European Union (EU) Code of Conduct Group (COCG) into certain low or no corporate income tax regimes has resulted in such jurisdictions being required to put in place laws to address economic substance matters by the end of 2018 to avoid being placed back on an EU Blacklist of non-cooperative jurisdictions. The introduction of these rules adds another facet to consider in establishing substance and should be considered alongside other tax substance requirements in the OECD/EU as well as local regulatory requirements.
Clearly, the imposition of such requirements is an important matter for any financial services group which carries out activities in any of the relevant jurisdictions. Many of the affected jurisdictions (including the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man and Jersey) responded to the EU’s mandate as set out, among other places, in the COCG’s “scoping paper” published in June 2018, by enacting economic substance legislation effective from 1 January 2019.
The new substance requirements apply only to those companies that perform certain activities, described as either “relevant activities” or operating in a “relevant sector.” The business activities involved include banking, insurance, fund management and holding companies but also included are financing and leasing, distribution and service centers, headquarter companies and intellectual property businesses. Each jurisdiction must address what constitutes relevant activities, and then identify which specific activities within those constitute “core income generating activities” (CIGA), which must in general be carried out in the same jurisdiction. It is possible to outsource CIGA activities (with the exception of “high risk” intellectual property) to both related and unrelated parties but the activities of those parties must still be located in the relevant jurisdiction. Those activities must also be carried out with adequate economic substance with regard to people, expenditure and premises. Finally, rules are provided for enforcement, in most cases through a combination of financial sanctions for noncompliance with transparency and information exchange provisions and other corporate law mechanisms addressing corporate governance.
As noted above, legislation was enacted in all of the jurisdictions referred to above with effect from 1 January 2019, although in some jurisdictions there is a six-month window before compliance is required. Although most of the enacted law is similar across the board, given the need to address EU requirements, differences exist between jurisdictions to address local differences in law or industry focus.
Although legislation is already in place in the affected jurisdictions, the situation remains unsettled. Further detailed regulations and guidance are expected in many locations and it is very possible that the existing law may change and guidance may be amended as the process continues, especially when and if the EU updates its “blacklist” of jurisdictions deemed to be non-cooperative in February/March 2019. It is likely that guidance will provide more detail on interpreting exactly which activities are considered CIGA and must be conducted onshore, and what is an “adequate” level of employees, expenditure and premises and other such terms.
EYG no. 012878-18Gbl
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