Economic Substance Requirements and Tax Haven Jurisdictions
Not receiving much attention are new economic substance requirements that have recently been enacted in several tax haven jurisdictions, including the Cayman Islands, Bermuda, and the British Virgin Islands.
Tax planning structures often involve the use of corporations and other entities formed in tax haven jurisdictions. To give one example, tax haven companies are often used as blocker holding companies to insulate foreign persons from U.S. estate taxes on their U.S. assets. These new economic substance requirements threaten to complicate such planning structures.
The new requirements are an outgrowth of pressure from the EU and OECD to limit the use of tax haven companies for tax planning and base erosion purposes, especially where the companies have little or no activity. . .