Key Criteria for Economic Substance Reporting Compliance

The Marshall Islands is a popular jurisdiction for offshore company formation, known for its flexibility, privacy, and tax advantages. However, like many other international financial centres, the Marshall Islands has introduced Economic Substance Reporting requirements to comply with global efforts to prevent tax avoidance and ensure that companies are conducting genuine business activities.

If you're considering incorporating in the Marshall Islands or already have a company established there, understanding the Economic Substance requirements is crucial for maintaining compliance. In this blog, we’ll explain the key aspects of Economic Substance Reporting in the Marshall Islands, who is required to file, and what you need to know to stay compliant.

What is Economic Substance Reporting?

Economic Substance Reporting is a regulatory framework that ensures companies incorporated in low-tax or tax-neutral jurisdictions like the Marshall Islands are conducting real business activities, not just benefiting from the jurisdiction's tax regime.

Introduced in response to international pressure from the OECD and the European Union, the Economic Substance rules require companies to demonstrate that they have a substantial presence in the jurisdiction where they are incorporated. This includes showing evidence of employees, offices, and income-generating activities within the Marshall Islands.

Who is Subject to Marshall Islands Economic Substance Requirements?

The Marshall Islands Economic Substance regulations apply to "relevant entities" that are tax residents in the jurisdiction and are engaged in certain "relevant activities."

Entities that fall under this requirement include:

• Banking
• Insurance
• Shipping
• Fund Management
• Finance and Leasing
• Holding Companies
• Headquarters Business
• Intellectual Property Business
• Distribution and Service Centres

If your company is involved in any of these relevant activities, you must comply with the Economic Substance rules. However, companies that do not engage in these activities are still required to submit a declaration stating that the regulations do not apply to them.

Key Criteria for Economic Substance Compliance

To comply with the Marshall Islands Economic Substance Reporting, companies engaged in relevant activities must meet several criteria:

Directed and Managed in the Marshall Islands

Companies must show that they are directed and managed from the Marshall Islands. This often involves having meetings of the board of directors held in the jurisdiction and ensuring that key decisions are made locally.

Core Income-Generating Activities (CIGA)

The company must perform its Core Income-Generating Activities (CIGA) within the Marshall Islands. These are the activities that directly produce the company's income, such as managing assets, handling investments, or providing key services.

Adequate Employees and Premises

The company must have a sufficient number of employees and physical office space in the Marshall Islands to support its business activities. This includes proving that the company is not just a "shell" entity but is actively conducting business operations within the jurisdiction.

Outsourcing of Activities

Some companies may be allowed to outsource their CIGA to local service providers in the Marshall Islands. However, the company must still retain oversight and control over the outsourced activities to remain compliant.

How to File Economic Substance Reports in the Marshall Islands

Compliance with the Economic Substance regulations requires that companies file an annual report through their registered agent. The report includes detailed information about the company's business activities, employees, and presence within the Marshall Islands.

Each company must file their Economic Substance report within a specific timeframe, depending on their fiscal year. It’s essential to ensure timely filing, as failure to do so can result in penalties or other enforcement actions.

Penalties for Non-Compliance

Failing to comply with the Economic Substance requirements in the Marshall Islands can lead to significant penalties. These penalties can range from financial fines to the possibility of the company being struck off the corporate register, which could severely impact its ability to operate.

First offense:

Initial penalties can reach up to $50,000 for non-compliance.

Subsequent offenses:

If the company continues to fail in meeting the requirements, penalties can increase significantly, and the entity may face further legal actions.

Staying Compliant with Economic Substance Requirements

To ensure your Marshall Islands company remains compliant with the Economic Substance Reporting requirements, it’s important to work closely with a trusted service provider like WWincorp. Our team of experts can guide you through the reporting process and ensure that your company meets all regulatory obligations.

At WWincorp, we specialise in offshore company formation and incorporation across multiple jurisdictions, including the Marshall Islands, the British Virgin Islands, and Nevis. With over 25 years of experience, we provide tailored solutions that meet the unique needs of our clients, helping them navigate complex international regulations while optimising their offshore structures for tax efficiency.

Conclusion

The introduction of Economic Substance Reporting in the Marshall Islands reflects the global shift towards transparency and accountability in offshore jurisdictions. By understanding these requirements and taking the necessary steps to comply, you can continue to benefit from the advantages of incorporating in the Marshall Islands while avoiding penalties and maintaining your company's good standing.

If you are considering forming a company in the Marshall Islands or need assistance with Economic Substance Reporting, WWincorp is here to help. Our experienced professionals can provide expert guidance to ensure your offshore business stays compliant with all regulatory requirements.

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