Economic Substance

Economic substance is an important consideration for international companies, offshore structures and cross-border planning. It refers to whether a company has genuine activity, management and presence in the jurisdiction where it is established or tax resident.

What is economic substance?

Economic substance refers to the level of genuine activity a company has in the jurisdiction where it is incorporated or tax resident. This may include local management, employees, premises, expenditure, decision-making and operational activity.

Why substance matters

Substance is important because banks, tax authorities, regulators and service providers increasingly expect companies to show that their structure has a genuine commercial purpose and is not purely artificial.

Which companies may be affected?

Substance rules commonly affect companies involved in activities such as holding company business, headquarters business, financing and leasing, intellectual property, distribution, service centres, intellectual property and fund management.

Common substance indicators

Typical indicators include board meetings held in the jurisdiction, local directors, proper records, local expenditure, qualified personnel, premises and evidence that key decisions are made locally.

Banking and compliance impact

Even where formal substance rules do not apply, banks and compliance teams may still ask for evidence of activity, source of funds, ownership, control and commercial rationale before onboarding or maintaining a relationship.

Planning considerations

Substance should be considered before forming or restructuring a company. The right approach depends on the jurisdiction, business activity, tax position, ownership structure and long-term objectives.

Key point

Economic substance is not just a regulatory box to tick. Banks, tax authorities and service providers increasingly expect genuine activity, local decision-making and a credible commercial rationale behind international structures.