Substance is the economic presence of a company in a jurisdiction. Legal entities that meet the requirements for substance can take advantage of benefits for residents, special taxation regimes, and other benefits. The requirements for economic presence in different countries are different. As a rule, they include the presence of a physical or virtual office, registration with local regulatory authorities, a local website, email domain, telephone line, etc.
Since the OECD introduced the BEPS Plan, company owners are faced with the requirements of their business presence in a particular country, in other words, the substance. The concept of substance was included in the national legislation of many offshore countries in 2019, which thereby confirmed their determination to combat tax evasion and deoffshorization. In order to confirm the company's presence in the country, it is necessary to meet two criteria - physical and economic substance:
Thus, if a company complies with the requirements of substance, it automatically confirms its tax residence in a particular country.
In order to fully conduct activities and establish business processes, it is necessary to comply with the requirements of substance. When familiarizing themselves with a company’s profile, financial institutions and government bodies somehow pay attention to substance, they can even check whether a company has its own official website in a jurisdiction, fax or phone. The substance should not be formal. If a company is a tax resident of a certain country and shows the real presence of its business in that country, such a company will have undeniable competitive advantages in all areas, especially when opening bank accounts or interacting with counterparties.
Regulators, including international ones, tighten requirements every year. Therefore, in some cases, without substance, conducting activities in a jurisdiction will simply be impossible.
Law & Trust provides counseling and legal support to clients in various jurisdictions.
We offer clients assistance in the provision of substance services in the countries of the EU, Asia, America, island states:
