What is economic substance?

Substance économique
WHAT IS ECONOMIC SUBSTANCE?
Economic substance refers to the requirement that a transaction or activity has a real economic purpose beyond simply obtaining a tax advantage, and means that companies must, for example, maintain an adequate presence and/or carry out basic income-generating activities in the jurisdiction where they are resident for tax purposes. REGULATION ON ECONOMIC SUBSTANCES In early 2019, economic substance regulations in the main cross-border jurisdictions in Europe (in or near the European Union) came into force, requiring entities carrying out specific types of activity to demonstrate that they have a recognised economic substance in those jurisdictions. WHAT IS THE BACKGROUND TO ECONOMIC SUBSTANCE LAWS AND REGULATIONS? The Council of the EU adopted a resolution on a Code of Conduct on business taxation, the aim of which was to counteract the effects of zero tax and preferential tax regimes around the world. In 2017, the Code of Conduct Group (Code Group) investigated the tax policies of EU Member States and non-EU countries, assessing: tax transparency, fair taxation, and the implementation of anti-BEPS measures (Base Erosion and Profit Shifting: a project of the Organisation for Economic Co-operation and Development). Following the Code Group’s assessment, each non-EU jurisdiction concerned was required to respond to the Code Group’s concerns regarding economic substance. The governments of each of these jurisdictions worked closely with the Code Group to ensure that these concerns were adequately addressed. As a result of this commitment, new laws and regulations on economic substance have been adopted in each jurisdiction. WHICH ENTITIES ARE SUBJECT TO THE ECONOMIC SUBSTANCE RULES? The precise scope of the economic substance regulation varies somewhat from jurisdiction to jurisdiction. As a general rule, most non-domestic companies fall within the definition of “relevant entity” for the purposes of the economic substance legislation. Again, while the exact mechanisms vary from jurisdiction to jurisdiction, generally speaking, each “relevant entity” will be required to make certain filings under the economic substance legislation and, if a “relevant entity” carries on “relevant activities”, it will need to satisfy the applicable substance test. WHAT IS A RELEVANT ACTIVITY UNDER ECONOMIC SUBSTANCE LEGISLATION? While all relevant entities will be required to file information relating to their activities, an in-scope entity will only be required to satisfy the economic substance test if it is engaged in a “relevant activity”. The precise definition of “relevant activity” varies somewhat from jurisdiction to jurisdiction, but in general terms it is as follows:
  1. banking
  2. insurance
  3. fund management
  4. financing and leasing
  5. delivery
  6. sales of products, services, consultancy, intermediation, manufacturing, distribution, e.commerce, import/export, transport, brokerage
  7. the holding entity, and
  8. intellectual property. Non-exhaustive list
WHAT ARE THE ECONOMIC SUBSTANCE REQUIREMENTS? An entity (other than a holding entity and entities that carry on intellectual property activities, for which there are different criteria) carrying on a relevant activity will satisfy the economic substance requirements if:
  1. it is managed and run in the jurisdiction, Core Income Generating Activities (CIGA) are undertaken in the jurisdiction in relation to the activity concerned,
  2. it has suitable physical premises in the jurisdiction there are sufficient employees in the province or territory with the required qualifications,
  3. there are sufficient expenses incurred in the jurisdiction in connection with the relevant activity; and
  4. it files a confidential economic substance report annually with the relevant authority in its jurisdiction, which will assist in assessing compliance.
The Economic Substance Regulation also defines the circumstances in which the above activities may be outsourced. HOW TO FILE AN ECONOMIC SUBSTANCE NOTIFICATION? The process for filing an Economic Substance Notification (ESN) may vary depending on the jurisdiction in which the entity is located. However, in general, ESNs are usually filed via the relevant regulator’s online portal or by submitting a paper form. Consulting a legal and/or tax professional can help ensure compliance with local regulations and avoid penalties or other legal consequences in the event of subsequent or inaccurate submissions. Source : https://www.applebyglobal.com/sectors/economic-substance/ Economic substance in France: https://cms.law/en/int/expert-guides/cms-expert-guide-on-substance-issues-across-europe/france More on economic substance

Economic substance refers to the requirement that a transaction or activity has a real economic purpose beyond simply obtaining a tax advantage, and means that companies must, for example, maintain an adequate presence and/or carry out basic income-generating activities in the jurisdiction where they are resident for tax purposes. 

REGULATION ON ECONOMIC SUBSTANCES
In early 2019, economic substance regulations in the main cross-border jurisdictions in Europe (in or near the European Union) came into force, requiring entities carrying out specific types of activity to demonstrate that they have a recognised economic substance in those jurisdictions.

WHAT IS THE BACKGROUND TO ECONOMIC SUBSTANCE LAWS AND REGULATIONS?

The Council of the EU adopted a resolution on a Code of Conduct on business taxation, the aim of which was to counteract the effects of zero tax and preferential tax regimes around the world.

In 2017, the Code of Conduct Group (Code Group) investigated the tax policies of EU Member States and non-EU countries, assessing:

tax transparency,
fair taxation, and
the implementation of anti-BEPS measures (Base Erosion and Profit Shifting: a project of the Organisation for Economic Co-operation and Development).

Following the Code Group’s assessment, each non-EU jurisdiction concerned was required to respond to the Code Group’s concerns regarding economic substance.

The governments of each of these jurisdictions worked closely with the Code Group to ensure that these concerns were adequately addressed. As a result of this commitment, new laws and regulations on economic substance have been adopted in each jurisdiction.

WHICH ENTITIES ARE SUBJECT TO THE ECONOMIC SUBSTANCE RULES?

The precise scope of the economic substance regulation varies somewhat from jurisdiction to jurisdiction. As a general rule, most non-domestic companies fall within the definition of “relevant entity” for the purposes of the economic substance legislation. Again, while the exact mechanisms vary from jurisdiction to jurisdiction, generally speaking, each “relevant entity” will be required to make certain filings under the economic substance legislation and, if a “relevant entity” carries on “relevant activities”, it will need to satisfy the applicable substance test.

WHAT IS A RELEVANT ACTIVITY UNDER ECONOMIC SUBSTANCE LEGISLATION?

While all relevant entities will be required to file information relating to their activities, an in-scope entity will only be required to satisfy the economic substance test if it is engaged in a “relevant activity”. The precise definition of “relevant activity” varies somewhat from jurisdiction to jurisdiction, but in general terms it is as follows:

  1. activité bancaire
  2. assurance
  3. gestion de fonds
  4. le financement et le crédit-bail
  5. livraison
  6. ventes de produits, de services, de conseils, d’intermédiation, fabrication, distribution, e.commerce, import/export, transport, courtage, négoce, brokerage,…
  7. l’entité holding, et
  8. propriété intellectuelle.
    Liste non exhaustive

QUELLES SONT LES EXIGENCES EN MATIÈRE DE SUBSTANCE ÉCONOMIQUE ?

Une entité (autre qu’une entité détentrice et des entités qui exercent des activités de propriété intellectuelle, pour lesquelles il existe des critères différents) exerçant une activité pertinente satisfera aux exigences relatives à la substance économique si :

  1. elle est gérée et dirigée dans la juridiction,
  2. les activités génératrices de revenus de base (Core Income Generating Activities (CIGA) sont entreprises dans la province ou le territoire en lien avec l’activité concernée,
  3. elle dispose de locaux physiques adaptés dans la juridiction,
  4. il y a suffisamment d’employés dans la province ou le territoire qui possèdent les qualifications requises,
  5. il y a des dépenses suffisantes engagées dans la juridiction en relation avec l’activité concernée; et
  6. elle dépose chaque année un rapport confidentiel sur la substance économique auprès de l’autorité compétente de sa juridiction, ce qui l’aidera à évaluer la conformité.

Le règlement sur la substance économique définit également les circonstances dans lesquelles les activités susmentionnées peuvent être externalisées.

COMMENT DÉPOSER UNE DÉCLARATION DE SUBSTANCE ÉCONOMIQUE ?

Le processus de dépôt d’une déclaration de substance économique (Economic Substance Notification (ESN) peut varier en fonction de la juridiction dans laquelle l’entité est située.
Cependant, en général, les ESN sont généralement déposées via le portail en ligne de l’autorité de réglementation compétente ou en soumettant un formulaire papier. La consultation d’un professionnel du droit et ou de la fiscalité peut aider à assurer la conformité aux réglementations locales et à éviter des pénalités ou d’autres conséquences juridiques en cas de soumission d’informations ultérieures ou inexactes.
Source : https://www.applebyglobal.com/sectors/economic-substance/

La substance économique en France : https://cms.law/en/int/expert-guides/cms-expert-guide-on-substance-issues-across-europe/france

More on economic substance