Increased economic substance requirements in tax haven countries

Several offshore jurisdictions, including the Cayman Islands, British Virgin Islands and Bermuda, have implemented economic substance regulations requiring certain entities to demonstrate an adequate level of operational presence within the jurisdiction. The objective is to ensure that entities established in these jurisdictions carry out genuine business activities, rather than existing solely as paper entities. In this evolving regulatory landscape, businesses are increasingly reviewing their regional holding and financing structures to ensure compliance with economic substance requirements while maintaining commercial efficiency. As a result, many organisations are turning to professional tax services in Singapore for guidance in navigating these regulatory developments and assessing the impact on their cross-border structures.

These measures were introduced to fulfil commitments made to the European Union (EU) and to meet obligations under the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS). As regulatory expectations continue to tighten globally, the importance of tax due diligence has become increasingly significant, particularly for organisations  with cross-border structures that involve  offshore entities.

For corporate groups operating in Asia, these developments may have a significant impact on how Cayman companies are structured, managed and operated. Under the current rules, entities that fall within scope (referred to as “Relevant Entities” carrying on “Relevant Activities”) are required to demonstrate an appropriate level of operational substance that is proportionate to the income-generating activities they perform.

In order to demonstrate economic substance, a company should carry on (1) relevant business activities that are directed and managed in the tax haven countries, (2) have adequate expenditures incurred, and employees employed in the tax haven countries, and (3) have core income generating activities carried on in the tax havens in respect of relevant business activities.

Generally, under the economic substance requirements, companies that are resident of tax havens are required to disclose the above information through their annual reports. Failure to comply with the new laws could result in financial penalties and/or criminal and financial sanctions.

Singapore as an alternative

With the increased scrutiny on tax havens, Singapore is a good alternative for corporations to set up holding companies. Singapore has the lowest corporate tax rate of 17% in the region, with possibility of reducing it further if certain business activities qualifying under a wide array of tax incentives are conducted in Singapore, generally has no capital gains tax, has an attractive offshore income exemption regime (subject to conditions), has a wide tax treaty network with almost 100 countries, strong financial infrastructure and a highly educated workforce.

How Forvis Mazars can help

Forvis Mazars can advise foreign businesses looking to structure investments and holding companies into or through Singapore and the region efficiently, on funding and capital repatriation strategies, explore the application of various tax incentives, on tax compliance and filing requirements, acquire new businesses or set up new companies.