Due to the introduction of a European Union (EU) blacklist of non-cooperative jurisdictions, and wider changes in the global tax environment, many low and nil tax jurisdictions have been forced to implement economic substance requirements.
Jurisdictions, where substance compliance is required from 2019, include Bermuda, British Virgin Islands, Cayman Islands, Guernsey, and Jersey.
Entities in these jurisdictions may need to increase local presence, activities, local expenditure, and recruit local employees in order to comply.
There are local variations in the requirements, and this alert broadly summarises key considerations for UAE businesses with entities in these jurisdictions.
We have used the Cayman Islands rules as a baseline.
What are the economic substance requirements?
- The entity must undertake its key business activities, “core income-generating activities” (CIGA) locally.
- The entity must be directed and managed locally.
- The entity’s activities must be carried out with adequate local “economic substance” i.e.:
- Full-time employees
- There may also be local filing requirements to evidence compliance.
- Entities organized in the Cayman Islands prior to 1 January 2019 are required to start complying with the regulations from 1 July 2019. Failure to comply with the economic substance requirements can be subject to penalties ($10,000 in year one, and $100,000 in year two) and to a possible “strike off” of the Cayman entity for continued failures.
Which entities are in scope?
- Body corporate entities such as limited companies, LLCs and LLPs. Entities that are tax-resident in another jurisdiction may be out of scope.
- The entity should undertake “relevant activities”. These constitute a broad range covering the majority of activities likely to be performed by entities resident in these jurisdictions e.g. financial services, holding companies, distribution & service centers, shipping, etc.
- Guidance is emerging on the application of the requirements, and available exemptions, to various industries as a result of public feedback. For example, the Cayman Islands has introduced exemptions for investment funds.
What should UAE businesses do?
Groups with entities in these jurisdictions should:
- Undertake an impact assessment to understand if any entities are in scope.
- Perform a gap analysis on impacted entities considering current substance versus the requirements. This will require “adequate” economic substance for each entity to be identified.
- Where gaps are identified, the cost/benefit of additional compliance should be considered versus potentially changing the legal/holding/financing/operating structures of the group.
Please reach out to the contacts for further details on the requirements and how we can support you in assessing the impact on your operations.