Business Substance

The concept of substance is vital for companies that want to establish themselves abroad. It provides a tangible connection between the company and the country, giving legitimacy to the company’s operations and activities.

Without substance, it can be challenging to establish trust with customers, suppliers, or government agencies in the foreign country and can create taxation problems.

OCED Business Substance requirements

OECD business substance requirements, stemming from the Base Erosion and Profit Shifting (BEPS) project, aim to ensure that companies with operations in low-tax jurisdictions have a genuine economic presence there, rather than simply being paper entities designed to avoid taxes. These requirements necessitate that core income-generating activities are actually carried out within the jurisdiction, supported by adequate staffing and expenditure, and that the jurisdiction enforces compliance.

Key Aspects of OECD Business Substance:

Core Income-Generating Activities: A company must demonstrate that it is actually performing its main business activities within the country where it claims to be located, not just in a different location or country.
Adequate Staff and Expenditure: The number of employees and the level of operating expenditure should be proportionate to the nature and scale of the business being conducted.
Local Presence: Having a physical office, directors, employees and bank account in the jurisdiction is a strong indicator of substance. Board meetings in the country of operations are to be held at least annually, ideally more frequently.
Management and Control: While some functions can be outsourced, core activities should ideally be managed and controlled from within the jurisdiction.

Companies that fail to meet substance requirements may lose access to tax benefits, such as those offered by tax treaties or preferential tax regimes.

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