Recently, all parties have interpreted the economic substance bills introduced by Cayman and BVI. Some have only made detailed interpretations from the content of the Cayman and BVI bills themselves. Some exaggeratedly believe that the economic substance bills of Cayman and BVI will lead to

The end of offshore architecture.

We believe that those who believe that the Cayman and BVI Economic Substance Bill will lead to the end of offshore structures are selling anxiety, but they completely ignore the Cayman and BVI Economic Substance Bill and think that it is just a tax haven to cope with the tax transparency and tax transparency of the OECD and the United States.

The view that the anti-tax base erosion requirements will not be implemented seriously is also an ostrich strategy and the risk is very high.

What Chinese companies need to do now is to have a clear understanding of the overall international anti-tax avoidance situation, interpret the Cayman and BVI Economic Substance Acts realistically, re-examine and adjust the existing overseas structure, and find the optimal compliance solution.

Of course, these things can only be done well with the full cooperation of domestic finance and taxation professionals, overseas offshore lawyers, overseas accountants, and overseas secretarial companies.

1. The era of low-cost offshore structures has come to an end. By comparing the contents of the economic substance laws of Cayman and BVI, the basic provisions are completely consistent.

Some other tax havens will introduce similar economic substance bills in the future. Therefore, we believe that with the promulgation of the Cayman and BVI economic substance bills, the era of low-cost offshore structures has come to an end. This should be a relatively certain conclusion.

The general background of the promulgation of the Cayman and BVI Economic Substance Act is as stated in the Cayman Economic Substance Act Guidelines, which mainly implements the OECD anti-harmful tax competition reporting requirements, the global implementation of the BEPS action plan and the implementation of CRS.

As mentioned in the OECD Anti-Harmful Tax Competition Report, what kind of tax system a country implements, what tax structure it implements and what tax rate it sets are a country’s tax sovereignty.

However, the country's tax system cannot be used to engage in harmful tax competition and harm the tax interests of other countries.

Therefore, transparency is an important requirement in international anti-tax avoidance agreements.

After all, many multinational companies set up commercial entities in Cayman and BVI not entirely for tax avoidance. Some are based on legal systems, foreign exchange controls, information confidentiality and other reasonable business purposes.

Therefore, the promulgation of the Cayman and BVI Economic Substance Act will not lead to the complete end of the offshore structure, but the Economic Substance Act has increased the transparency requirements of offshore companies, which will certainly increase the establishment of offshore companies to a certain extent.

and ongoing operating costs.

Thus, the era of low-cost offshore infrastructure is over.

Now, the first thing facing many Chinese companies is to review their past overseas structures based on different purposes based on the latest economic substance laws of Cayman and BVI to see if there is any need to continue to exist and make timely adjustments.

2. How to view the requirements of the Economic Substance Act? What is economic substance?

To put it bluntly, once you establish a commercial entity (including a company, partnership, and fund), you are going to do business.

Since you are in business, you have to tell me what kind of business you are in, where you are doing business, who is your actual manager, where is your actual management organization, and what functions and responsibilities they perform.

What kind of risk.

If you don’t say anything, it’s just like when you registered in Cayman or BVI before and didn’t report anything every year. This opaque state will lead to money laundering and tax avoidance problems on the one hand, and it will be unable to meet the current CRS and FATCA intelligence requirements on the other.

Exchange requirements.

In other words, the Cayman and BVI Economic Substance Act is not intended to end offshore structures. After all, many offshore structures have other reasonable business purposes to consider. Its purpose is to implement the tax transparency requirements in the OECD Anti-Harmful Tax Competition Report.

After understanding the above point, we know that not all Cayman and BVI companies need to apply the requirements of the latest Economic Substance Act. The following companies do not need to: 1. Cayman and BVI domestic (or local) companies (

Domestic Company); 2. Investment funds or entities engaged in investment fund business (Investment Fund) 3. Tax residents in other tax jurisdictions are the first to understand, that is, if you are a local company related to Cayman and BVI

For local companies registered under the Act, our understanding is that the registration conditions for such local companies set requirements for local personnel and business locations. These companies directly meet the economic substance requirements in the registration conditions.

The Economic Substance Act does not apply.

The second one is investment funds. Regarding investment funds, Cayman and BVI have clearly stated that investment funds registered in accordance with their relevant investment funds laws do not need to apply the Economic Substance Act, which shows that these two places still welcome the registration of investment funds.

of.

The investment fund mentioned here refers to an entity that is mainly engaged in issuing investment equity units to raise funds and pooling these funds for investment to create income for the holders of equity units.

Equity units here include shares, trust shares, partnership shares or other equity units that can participate in investment income sharing.