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Offshore jurisdictions introduce strict requirements for tax residents

Dec 20, 2018

Due to pressing demands from the EU, well-known offshore jurisdictions will legally require tax residents to open physical offices and hire employees within their territories. Tax residents of popular offshore jurisdictions such as the Cayman Islands, Bermuda, the Isle of Man, Guernsey and Jersey will be required to open "real" offices and hire employees starting from 2019. Earlier this year, in November, Peter Tarn, partner of the Harneys law firm, stated the following:

“This is the most significant threat to the existence of offshore industry since the late 1990s”,

Similar laws, that require physical presence of the employees, were introduced by the UK Crown Dependencies and Overseas territories: i.e. the Bermuda Parliament is currently considering the respective bill in its second reading on December 17. Before the end of December, the same acts should be adopted by governmental authorities of BVI and other Overseas territories.

In December of last year, the Council of European Union published a “gray” list of more than 40 tax regimes that do not fully comply with the principles of fair and transparent taxation. Some of the countries were included as it was possible for offshore companies (structures) to generate a profit without "real" economic activity. These are Anguilla, Bahamas, Bahrain, Bermuda, British Virgin Islands, Caymans, Guernsey, Maine, Jersey, Marshall Islands, Turks and Caicos, UAE and Vanuatu. EU threatened to "blacklist" the above-mentioned territories if they fail to implement additional requirements for their tax residents. In response to that, authorized persons and/or organizations of the aforesaid countries pledged to carry out reforms til the end of 2018.

It is worth to note that the above-mentioned requirements will not apply to all registered organizations. The new requirements will apply mainly to the tax residents in the sphere of finance, banking, insurance, and leasing. For newly created companies, the requirements will take effect as of January 1, 2019. Currently registered companies will need to open offices and hire employees before July 1, 2019. Violation of these requirements will bear strict sanctions - from fines to exclusion from the register of companies.

A lot of criteria remain unclear, the corresponding Jersey draft of regulation implies the need for an “adequate” and “sufficient” number of employees physically present on the island, an “adequate” amount of expenses and physical assets, the Bermuda regulations have similar wording, where sufficiency will be determined by the local regulator. Analyzing the above we might confidently say that all fees and prices related to offshore issues will see a significant increase.

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