How Will The Substance Requirements Affect Your Offshore Company?

Economic Substance Requirements (ESR) require offshore companies to demonstrate genuine economic activity and management presence for transparency and tax compliance, ensuring they contribute meaningfully to the economies where they are registered.
Economic substance legislation imposes three requirements on resident entities engaged in financial businesses, including banking, insurance, wealth management, capital market services, leasing, investment activities, holding companies, intangible property, and distribution and backend service
centers These requirements are: demonstrating management control, core income generation within the jurisdiction, and maintaining adequate resources proportionate to business activity.
THE MANAGEMENT CONTROL
You will need to show from where the business is controlled and operated, when and where the meetings of directors are conducted, where are the higher management functions and
their roles and duties in the host country, do they have hired staff.
THE CORE INCOME GENERATION
You shall confirm what is the real nature of the business is and
whether it is permitted in the offshore jurisdiction, is there the
physical appearance of the company, warehouse, and its
associated establishment that generate income in the offshore
jurisdiction and what are the financial assets of the company in
its jurisdictions.
FULFILMENT OF “ADEQUATE”
The company shall have an adequate number of full-time
employees, and incur adequate operation expenditure in the
jurisdiction proportionate to the level of activity. For example,
the company have a USD 5 million of net profit, however,
the operation expenditure in the jurisdiction is USD10,000. Do
you think the level of profit is proportionate to the level of
activity in its jurisdiction?
Business substance, reflecting the working reality of business structures like office, personnel, sales, and top management decisions, signifies a company’s legitimacy and real economic activity. Maintaining business substance is crucial for offshore entities to mitigate exposure to foreign tax authorities. Without it, companies risk double taxation within a cross-country value chain and face challenges from tax authorities, including audits, penalties, and court cases.
Thinking of starting a company in Labuan but worried about business substance requirements? Contact BBS TRUST for expert guidance!
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