Following on from the OECD’s BEPS Action plan, in July 2018 the EU’s Code of Conduct Group (Business Taxation) decided that certain Companies/Legal Entities registered in tax havens would, moving forward, be required to show local substance. In short, the tax havens in question (eg the BVI, Cayman Islands, Bermuda, Guernsey, Jersey, the Isle of Man, Bermuda, Vanuatu etc) were threatened with blacklisting by the EU if they failed to pass laws forcing their International Business Companies etc to show economic substance on the ground in the jurisdiction (eg a local/stand-alone office and local staff).
The jurisdictions affected moved promptly to pass laws requiring such Companies to show substance, in particular with respect to the following business types:
- Regulated fund management
- Distribution and service centre
- Intellectual property
- Holding company activities
The argument for requiring businesses such as banking and insurance etc to have a local presence is hard to counter but of far greater concern is the requirement for Holding Companies to show presence on the ground. Given its passive nature, if a Company is just to set up to hold a parcel of shares for example why would it need to have a stand alone office (or staff for that matter)? It is self evidently an absurd requirement.
The good news is that for Holding Companies at least the requirement is easy to get around.
Across the board per the model legislation (eg in the BVI) to fit the definition of a Holding Company the Company in question must just hold shares. If it holds any other asset it doesn’t meet the definition of a “Holding” Company.
Any other asset could (would) include a bank account.
So, if you have a Holding Company in any of the effected jurisdictions – and you want to get around this ridiculous new EU requirement – (if you haven’t done so yet) we’d suggest you take steps NOW to open a bank account for your Company!
And if your current Offshore Company Service Provider (“CSP”) doesn’t believe you when you tell him/her that you shouldn’t be required to set up an office or hire staff refer him/her to this article and tell him/her to read the fine print of the legislation! (and or sack your CSP and change to a Provider who actually knows the fine print eg OCI).
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