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Navigating Economic Substance

As part of an EU initiative, Economic Substance legislation has been developed and introduced in a number of international finance centres including BVI, Cayman, Guernsey, Jersey and Isle of Man. Considerable work has been undertaken by these jurisdictions to ensure they have legislation in place by the end of 2019.

The requirement to show Economic Substance is primarily aimed at preventing what is called “base erosion and profit shifting”. The EU regards this as the artificial shifting of profits to places where there is little or no economic activity or taxation. The Economic Substance regulations impose specific substance requirements on resident companies that undertake and have income from one or more of the following activities referred to by the EU as “geographically mobile”:

  • Banking
  • Financing and leasing
  • Distribution and service centre
  • Fund management
  • Headquartering
  • Intellectual property
  • Holding companies
  • Insurance
  • Shipping
Economic Substance Health Check and Solutions

There are two major areas of consideration when it comes to navigating the Economic Substance landscape. These are:

  • Company classification and action point identification
  • Addressing identified Economic Substance issues

JTC is ideally placed to assist with both using its Economic Substance Health Check, a sophisticated proprietary review tool. Our purpose-built review mechanism works using a two-step process that starts by establishing the fundamental facts that determine whether or not the entity in question is in scope of the new regulations. This is achieved through a series of detailed, cross-referenced questions relating to the specified entity’s:

  • Type or legal status (e.g LLC, domestic, exempt)
  • Tax residence
  • Relevant activities in the jurisdiction

Once this initial fact-finding has established whether or not the entity is in scope, the second stage goes into greater detail based on the identified triggers. From here, we use our in-house expertise to propose the most appropriate solutions for our clients. This can range from simple solutions such as returns, ensuring appropriate board composition and directors’ meetings to our full suite of infrastructure management and JTC Private Office services.


Next Steps

For further information and to find out how JTC can assist, you can download our ‘Navigating Economic Substance’ fact sheet below. Alternatively you can contact either Jodi Hill or Emma Menzies directly.

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