The result has seen a number of territories forced to issue guidance notes to help firms interpret the legislation, according to Colin Bird, partner at advisory and family office firm Maitland.
What are the rules?
They were introduced in 2017 and are aimed at jurisdictions with tax regimes that facilitate artificial offshore structures without requiring any real economic activity.
The requirements apply to entities that generate profits without any physical presence in the jurisdiction.
The EU forced these territories to introduce economic substance rules into domestic law.
Jersey, Guernsey and the Isle of Man have already passed the requirements, which came into effect on 1 January 2019.
Others like the British Virgin Islands (BVI), Cayman, Bermuda and the Bahamas followed suit shortly after.
Guidance “remains incomplete in many cases, remaining a challenge for both authorities and practitioners to know how to implement it”, Bird added.
That is because legislation differs across jurisdictions.
For instance, the BVI has ruled that funds will not fall under economic substance requirements.
Bird said: “The temptation is to go ‘jurisdiction-shopping’ but we advise clients not to make hasty decisions, as we expect that discrepancies between jurisdictions in the guidance will be ironed out, probably starting with the meeting of the EU Code of Conduct Group in late June.
“The practical aim is to ensure that a company is not ‘caught’ in the reporting net of more than one jurisdiction. In the long run the most cost-effective route may be to consolidate one’s offshore structure to a single credible offshore jurisdiction.”
Global offshore law firm Harneys introduced its BVI Economic Substance Classification Solution, which provides legal advice to clients on how to comply with the newly introduced legislation.
Clients will be able to access the solution through an online platform “at a flat fee”, the firm said.
The service will provide a questionnaire divided into five sections – user, entity, relevant activity, tax residency, and submission.
The summary will show how the client can comply with economic substance requirements.
The service is not available as of yet, since the firm said it is waiting for the BVI code to be finalised before rolling it out.