How to escape or avoid the new Economic Substance (ES) laws or regulations

The worldwide industry of non-resident, low tax or tax neutral companies is panicking: all the big accounting firms (Deloitte, Ernest and Young, KMPG, and PWC) have been overwhelmed by a wave of recent legislation adopted by many jurisdictions at once.

The call (shot?) has been made by the European Commission in Brussels regarding the non-cooperative tax jurisdictions.

Some people will believe that it targets only small players, and others will believe that it only affects big players. In fact it is targeting every body.

The biggest players affected are Chinese companies incorporated in the British Virgin Islands (BVI). Such companies are listed on publicly traded stock exchange using debt instruments. They have to be incorporated outside of China in order to attract foreign investors in order to avoid the foreign investment restrictions laws of China (Alibaba Group).

The smaller players affected are the small business owners who thought to be protected by registering their trademark or a holding company elsewhere.

As usual, some providers will try to escape to jurisdictions that did not adopt such laws (yet):

  • Liberia
  • Seychelles
  • Dominica
  • Montserrat
  • Vanuatu

Until they are finally cornered and have to stop running away… Regardless of the jurisdiction: business is to be conducted properly.

Of course the developed countries are not affected by all of this:

  • there are no European Union country with such economic substance law (that includes: the UK, Gibraltar, Ireland, Estonia)…
  • Switzerland has none
  • the USA has none
  • Canada has none

However, all of this comes without a surprise for PROMINEE®:

The economic substance test is an American concept which has spread into Europe.
Like any concept of this nature: it has no clear cut rules and metrics, it is more of a collection of business story and facts that give birth to an economic substance.

The easiest and fastest way to escape is (of course) not to fall within a relevant activity.

Who is to say that one staff is not enough to manage 100 trademarks?… Or even 1000 trademarks?…

The process of dividing business activities has clearly shifted towards trustful partners, as opposed to in-house built arrangements. When the trustful partner can be easily identified, is independent, economically self-reliant and low-cost: everything is in order. We are 10 years ahead regarding transparency and compliance. Since 2009, we are providing a Proxy Management Service which clearly outsources the management decisions.

The economic substance rules applies to any income in a relevant category even if the entity has losses during the year. Our subrogation order that forfeits such income to another entity is the fast-track way to restructure easily.

The current landscape will change in the next few years from: many small companies holding Intellectual Property and connected to a group VS a handful of independent Intellectual Property houses.

Non-resident companies will still be used but in a different manner: to lower the administrative burden.

PROMINEE® continues:

We also provide free signature of documents, and that includes free electronic signatures. Within the next few years: management decisions which are electronically dated and signed (and cannot be tampered) will enable decisions to be taken externally by a trustful third-party.