Expert Insights

Expert Insights

A Brave New World: Economic Substance

With offices in London, Geneva and Zurich, we are well placed to provide integrated advice on the Economic Substance Laws.

The Economic Substance Laws

The Economic Substance Laws are regulations which require ‘Relevant Entities’ carrying on ‘Relevant Activities’ to show economic substance in their jurisdiction of incorporation.

The aim is to counteract the effects of zero tax and preferential tax regimes. The local tax authorities can impose significant fines and the eventual sanction of strike off if a company that is caught by the laws fails to comply.

Who needs to be aware of these laws?

The EU Council’s list of jurisdictions required to introduce substance laws are Anguilla, the Bahamas, Bahrain, Bermuda, the British Virgin Islands (BVI), the Cayman Islands, Guernsey, the Isle of Man, Jersey, the Marshall Islands, Turks and Caicos, the United Arab Emirates, and Vanuatu.

Most entities in these jurisdictions will be caught by the regulations, and have a low-level notification requirement. The more significant obligations arise if the entity is carrying on a ‘Relevant Activity’. The activities are fund management, banking, insurance, finance and leasing, distribution and service centre business, headquarters business, intellectual property business, shipping, and holding company business.

Practical Implications

The implications within Switzerland and the UK are particularly important in relation to offshore trust and corporate structures. Trusts are not caught by the regulations, and our view is that Private Trust Companies (PTCs) would not be conducting a Relevant Activity. However, this does not mean that a PTC would not be affected by the legislation; the underlying companies within PTC structures are likely to be caught.

Key Issues

The economic substance laws went through a period of rapid development. As a result, it is very easy to be left behind as amendments are made, new guidance is released, and industry perspectives change. Some of the key issues include:

  • The application of the Holding Company Business definition, and the differences in approach across the jurisdictions.
  • How the legislation will apply in the long-term to investment funds in the different jurisdictions, in particular Cayman.
  • What options are available to entities incorporated in these jurisdictions.
  • Whether there will be more changes, how wide ranging these will be, and what the approach will be for entities relying on guidance that was published at the time of their reporting.

How can we help?

  • Advising on the differences between the jurisdictions. Careful consideration of the comparisons between jurisdictions can help to establish a sustainable position in your jurisdiction.
  • Helping clients to take a position on the benefits of incorporation in one jurisdiction as opposed to another. We are particularly well placed to advise on these cross jurisdictional issues, with our foreign reach and spread of international offices.
  • Advising as to the classification of a company, providing an analysis and producing reports which apply the legislation to specific entities.
  • Providing guidance on how a relevant entity can comply with the regulations, including advice on obligations and deadlines.
  • Identifying practical solutions for relevant entities that need to comply with economic substance tests.

For more information please contact Dharshi Wijetunga at or on Elinor Boote at or on +44 (0)20 7438 2199.

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