Economic Substance Requirements: A Global Overview for Multi-Jurisdiction Businesses
Economic substance rules now apply in most offshore and low-tax jurisdictions. Here is what they require, where they apply, and how to stay compliant.
What economic substance means
Economic substance requirements force companies to demonstrate that they have real operations, real employees, real expenditure, and real decision-making in the jurisdiction where they are incorporated. The days of incorporating a shell company in a zero-tax jurisdiction, appointing nominee directors, and routing profits through it are effectively over.
These rules emerged from the OECD's Base Erosion and Profit Shifting (BEPS) project and the EU's list of non-cooperative tax jurisdictions. Jurisdictions that failed to implement substance requirements faced blacklisting, with all the reputational and practical consequences that entails.
Where substance rules apply
Nearly every traditional offshore and low-tax jurisdiction now has economic substance legislation:
| Jurisdiction | Effective date | Relevant activities |
|---|---|---|
| Cayman Islands | 1 January 2019 | 9 categories |
| BVI | 1 January 2019 | 9 categories |
| Bermuda | 1 January 2019 | 9 categories |
| Jersey | 1 January 2019 | 9 categories |
| Guernsey | 1 January 2019 | 9 categories |
| Isle of Man | 1 January 2019 | Banking, insurance, fund management, finance/leasing, HQ |
| UAE | 1 January 2019 | 9 categories |
| Bahrain | 1 January 2019 | 9 categories |
| Mauritius | 1 January 2019 | Global business licence holders |
| Seychelles | 1 January 2019 | International business companies |
The nine relevant activities
Most jurisdictions follow the same framework. Companies carrying on any of these activities must meet substance requirements:
- Banking
- Insurance
- Fund management
- Finance and leasing
- Headquarters
- Shipping
- Holding company (reduced requirements)
- Intellectual property
- Distribution and service centre
Pure holding companies (those that only hold equity participations and earn dividends/capital gains) face reduced requirements: adequate employees and premises to manage the holding, and compliance with corporate governance obligations.
IP companies face the strictest requirements, reflecting the OECD's particular concern about profit shifting through intellectual property.
What substance looks like in practice
To satisfy substance requirements, a company must generally demonstrate:
- Directed and managed in the jurisdiction (board meetings held locally, minutes kept)
- Adequate employees with appropriate qualifications (not just nominee directors)
- Adequate expenditure incurred in the jurisdiction
- Core income-generating activities (CIGA) performed in or from the jurisdiction
- Physical presence (office premises, not just a registered agent address)
The standard varies by activity type. A holding company needs less substance than a fund management company. An IP company needs substantially more than either.
Penalties for non-compliance
| Jurisdiction | First offence | Repeat offence |
|---|---|---|
| Cayman Islands | Up to CI$100,000 (US$122,000) | Up to CI$100,000 + strike-off |
| BVI | US$20,000 | US$75,000 + strike-off |
| Bermuda | Up to BD$250,000 | Up to BD$250,000 + strike-off |
| Jersey | Up to £10,000 | Up to £100,000 |
| UAE | AED 50,000 | AED 400,000 + licence revocation |
Strike-off means the jurisdiction can forcibly dissolve your company. For entities holding valuable assets, contracts, or intellectual property, this is catastrophic.
Annual reporting
Most jurisdictions require annual economic substance declarations or reports. These are separate from annual returns and tax filings. Missing an economic substance filing can result in penalties even if you meet the substance test.
How CompCal helps
CompCal tracks economic substance filing deadlines alongside your other compliance obligations. For entities in jurisdictions with substance requirements, the system alerts you to the additional filings and provides lead-time notifications.