The UK has introduced new laws in its overseas territories. Today we’re going to explain how the new economic substance legislation is writing off 6 popular offshore jurisdictions.
Do you have a company in the British Virgin Islands?
If so, you’d be interested to know that from the beginning of 2019, new laws have been implemented in various British jurisdictions that will quickly and significantly reduce the number of offshore companies.
The rest of the British overseas territories, including the Cayman Islands and Bermuda, as well as the Isle of Man, Jersey and Guernsey, are not saved either. We’re talking about the new economic substance legislation.
At Librestado we’ve often talked about effective management and business substance in the sense of having a local business establishment or employees.
Remember that the substance helps you avoid the authorities impeding your company being recognised abroad.
You have to bear in mind that if the company does not have the means, the business could be considered as being controlled from the country of residence of the partners, so that it would pay tax in said country of residence (instead of where the company is registered).
And there’s not only the problem of business substance and effective management: in many Western countries and high tax countries we face CFC rules, regulations forcing partners to personally pay tax on the profits of their companies.
In all these cases, to be able to enjoy the advantages of a low or no-tax jurisdiction, a shell company is not enough; you need a local office, a manager and, if possible, local employees and economic interests.
We haven’t yet mentioned that some of the best-known jurisdictions also require compliance with substance requirements for recognition of company.
In this respect, a distinction must be made between what the country of incorporation and what the country of residence may require under international tax laws.
While for the offshore jurisdiction the company is registered in, front-men with a remuneration of just €100 a month are often sufficient, this will hardly be enough to exceed the requirements of tax authorities in countries with strict CFC rules.
In these cases, it is not valid with front-men; the employees must actively participate in the life of the company and must receive a monthly salary according to their functions.
As you can see, there have always been certain requirements to the economic substance that, until now, were used in the most serious countries. Now, Great Britain has developed its new laws on this basis, and its overseas territories and Crown colonies are now obliged to implement them.
From now, both new and old companies (with a grace period of about 6 months) must have operational facilities and local employees. The number of employees and size of the facilities required will depend on the type of business and its turnover.
Pure offshore companies will thus vanish from British jurisdictions, as well as in the popular Virgin Islands.
As we said, the business substance is not new, and there were already some countries where having a local director was mandatory. These include Switzerland, Mauritius and Singapore.
However, as a general rule, having a front-man as an administrator, who appears on the Trade Register and does not have any real power, is enough. Nowadays, in these incorporation countries, it is enough to have a front-man with an approximate annual salary of €2000. Having a commercial establishment is not essential.
The situation is different in some countries in the EU. Many digital nomads do not know what they’re getting themselves into when setting up a company in certain jurisdictions.
There are a number of EU countries where companies are only fully-fledged if they have a physical business establishment on site. In this way, without a rental contract or a utility bill in the company’s name, they cannot be allocated a VAT number or open local bank accounts. This is the case in some of the most popular countries for company registration, such as Cyprus, Romania and Ireland.
This fact should be especially taken into account when setting up a company in Cyprus.
Many people know businessmen and women who live in Cyprus and are happy with the advantages offered by their Cypriot company: perfect as a holding company in the EU because it is free of dividend withholding tax, with tax-exemption from capital gains and a low corporate tax rate. Undoubtedly appealing in many ways.
However, when analysing the situation, do not expect the other entrepreneur to live in Cyprus and therefore automatically have the necessary physical facilities.
If as a non-resident in Cyprus you try to replicate your friend’s success, you’ll be in for a surprise when you discover that you need to have an office in Cyprus for all this to work.
The same goes for Ireland, Romania and ever more EU states.
Of course, you won’t find much information on this on the websites of the company registration agencies in Ireland or whatever country.
You often won’t know until you speak to the agents directly and see that they’re trying to sell you some sort of additional solution.
Economic substance registration and transparency.
The days of Cyprus as an offshore country ended long ago. There are virtually no more shell companies in any European country anymore.
Even a so-called counterexample such as Estonia requires at least a virtual office in the country.
However, it is true that thanks to the Estonian e-residency, the company can be registered and managed online and in addition, in this case we can be sure that the requirements will not get stricter, at least as far as physical facilities are concerned.
In general, the degree of regulation of the economic substance is increasing, especially in low-tax countries.
In high-tax countries, it’ll still be possible to register companies without having an office, although with higher taxation and regulation.
Ultimately, the number of digital nomads and employers working from their laptop is rapidly increasing and forcing them all to have a physical establishment would be unacceptable.
Whether EU countries will tighten substance regulation with the corresponding obligation to appoint local directors remains to be seen.
In UK offshore territories panic has already broken out. Despite Brexit, or precisely because of it, the UK is trying to increase fiscal transparency in its Caribbean territories.
On the other hand, the English will extend the Transparency Register (which is mandatory in the EU until 2021, and that has already been introduced in England) to the rest of its overseas territories, making tax evasion even more difficult.
The Transparency Register (the BOSS Act in the British Virgin Islands) does not show shareholders and directors as is usually the case in trade registers (which in offshore jurisdictions is not public), but the final beneficiary, known as the Ultimate Beneficial Owner (UBO).
This means that although front-men continue to appear on the trade register of these jurisdictions, the owner will no longer be anonymous.
Between this Transparency Register and the CRS at banking level (automatic exchange of information), the only option left is to use reliable people, i.e. front-men with all the powers.
However, in these cases there is no type of control, this person decides freely on company and accounts, and does so to such an extent that he could run away with impunity taking everything with him.
It is unclear when and to what extent this will happen in other offshore jurisdictions. However, the regulation on economic substances is a victory for the OECD, whose BEPS project recommended this approach.
Other low-tax countries will probably end up buckling under the pressure from the OECD and will introduce similar laws.
In fact, there is already pressure on non-EU countries to achieve this very thing. So, for example, to be able to use PayPal in Panama, the UAE or Hong Kong, you must present a utility bill in the company’s name .
Those most affected by the recent changes are, without a doubt, the owners of companies in the British Virgin Islands. These islands were one of the most popular offshore jurisdictions, as company registration was quick and easy.
The other overseas regions, Bermuda and the Cayman Islands, for example, were already top-tier locations and largely met these requirements, as were the Isle of Man and the Channel Islands.
Existing companies have a 6-month grace period to meet these requirements.
The detailed description on economic substance legislation is here available:
The legislation is generally unclear on the exact definition of substance. Terms like ‘suitable’ are used to determine the quality of the substance in function with the company’s size and activity.
However, it highly likely that the minimum requirement is the existence of company premises and employees. In the case of intellectual property rights, the source must be there. Pure holding companies remain exempt in certain cases.
Of course, it also includes effective management: decisions must be made on site, Management Board meetings must be held there, and primary income must come from activities developed in these countries.
British offshore jurisdictions are certainly no longer suitable for typical online businesses running from anywhere in the world using a laptop.
Solution: redomiciling your offshore company
However, owners of companies in the Virgin Islands or other affected jurisdictions have, if they don’t want to acquire permanent facilities and an onsite manager, an easy way out.
You can move your offshore company to another jurisdiction where there isn’t this new legislation; you can move your company domicile.
This is possible for all British jurisdictions we have mentioned, although with varying degrees of complexity.
Redomiciliation is a technical term in the offshore industry for the easy relocation of shell companies.
Many offshore jurisdictions explicitly include the possibility that any offshore company registered there can move to another jurisdiction relatively easily.
After all, the regulations for IBCs (International Business Company) differ very little from one jurisdiction to another.
In cases of redomiciliation, the company keeps its name and, if the bank cooperates, even its bank account, but severs all ties with the previous country and only appears as registered in the new domicile.
One of the best options for company redomiciliation is the Marshall Islands. In the future, this small independent protectorate of the US, located far away from everything, will continue to be one of the safest jurisdictions. Moreover, redomiciliation in this case is extremely quick and easy.
The agency we collaborate with can also redomicile companies to Belize and other jurisdictions. You’ll have to examine each case to compare the requirements and prices.
In any case, when compared to the cost of closing a company and the registration of a new one, redomiciliation is usually much cheaper and allows the existing structure to be maintained without any problems. As we said, often even the company bank account can be kept.
Amongst other things, when redomiciling from a jurisdiction (discontinuation), all shareholders must agree that the company will pay the debts, notify all creditors and submit a letter from a law firm of the new address confirming the legality of the redomiciliation.
So if you do not want to open an office or hire some employee in the Virgin Islands (or any other affected British jurisdiction), get in touch with us for an explanation on how you can redomicile to offshore countries with greater guarantees, such as the Marshall Islands.
The Marshall Islands are a small island state far away from everything, whose infrastructure would in no way permit the development of an economic substance.
Under US protection, they are probably the offshore country that will be able to withstand pressure from the OECD for the longest time.
At the same time, they have introduced some innovations, such as the ‘Sovereign’, a cryptocurrency of this island state, the world’s first decentralised fiduciary currency of a sovereign currency.
A Marshall Islands company’s costs are only €1,050.
As for the rest, it only remains to say that if this trend introduced by the OECD continues its course, in the long run you will have to accept that, while your activity is 100% online and you do not need any kind of physical premises to work, you’ll have to rent an office somewhere in the world.
Unfortunately, this is only a small part of the increasingly sharp regulatory spiral which is quickly changing the world in general and, specifically, offshore industry.
Of course, there will always be options, at least for those who can afford them.
As for British jurisdictions affected by the new legislation on economic substance, I suppose they have mixed feelings towards it.
On one hand they know that many people will close down or move their companies to other jurisdictions, but on the other they also expect many business owners to decide to create the necessary substance. In this way, the housing and job markets will get a boost.
Let’s not forget that, in any case, fiscally speaking, the Virgin Islands, Cayman Islands, Bermuda, the Isle of Man or the Channel Islands are still very interesting places for those who do not struggle to meet the new legislation on economic substance.
All that remains now is to wait and see how events unfold in the near future, how other jurisdictions respond to pressure and change.