BACKGROUND
The Council of the European Union (EU) adopted a resolution on a Code of Conduct for business taxation, the aim of which was counteracting the effects of zero tax and preferential tax regimes around the world. On 3 December 2017, the EU proposed their list of “non-cooperative” taxation jurisdictions, popularly referred to as the ‘EU Black List’ which will be reviewed at least once a year.
LEGISLATION
Following assessment by the Code of Conduct Group (Group), each non-EU relevant jurisdiction was required to address the Group’s concerns about “economic substance”. Some of the governments, says, Bermuda, the British Virgin Islands and the Cayman Islands, have passed legislation that will require certain legal entities carrying on “relevant activities” to have “economic substance” in the jurisdiction, which includes having adequate employees and premises for carrying out the management as well as certain filing requirements. No action is required if an entity is not carrying on a relevant activity.
RELEVANT ACTIVITIES
An in-scope entity will only be required to meet the economic substance test if it carries on a relevant activity. The relevant activities in each jurisdiction are:
|
l Banking
l Insurance
l Shipping
|
l Fund Management
l Financing & Leasing
l Headquarters
|
l Distribution and Service Centres
l Holding Company
l Intellectual Property
|
PURE EQUITY HOLDING COMPANY
No matter it is a listed company or a private company, a “pure equity holding entity” which only holds equity participations in other entities and only earns dividends and capital gains, will be subject to reduced requirements in meeting the economic substance requirements, which may be satisfied by engaging its registered agent and maintaining a registered office in the jurisdiction.
TAX RESIDENCE
Except the pure equity holding entity mentioned above, an entity that carries on a relevant activity during a reporting period will not need to meet the economic substance requirements during that reporting period if it is resident for tax purposes in another jurisdiction which is not on the EU Black List for the entirety of that reporting period. Entities will be required to report where they are tax resident and to furnish proof of tax residence.
Entities which seek to take advantage of another jurisdiction’s zero or low tax regime, while carrying on their business substantially in another jurisdiction will be required to:
a) ensure that the substance of the relevant activity is carried on within that jurisdiction, or
b) discontinue the activity, or modify it so it no longer falls within the scope of a relevant activity, or
c) demonstrate a tax residence in another jurisdiction which is not on the EU Black List.
The specific provisions on the economic substantive regulations are still being drafted and are subject to further publication by the respective jurisdictions. Individual agents will take different approaches to comply with these new regulations.
NORCOLA COMPANY LIMITED, a member of BM Intelligence Group, provides our clients with a comprehensive range of corporate secretarial services and solutions to fulfil the Economic Substance Requirements. For more information, please contact:-
Name : Ms. Eva Lam
Tel : (852) 2159 5003 / (852) 5175 2662
Email : info@norcola.com.hk
