Economic Substance

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 is the level of genuine activity a company has in the jurisdiction where it is incorporated or tax resident. That can mean local management, employees, premises, expenditure, decision-making and day-to-day operations on the ground.

Why substance matters

Banks, tax authorities, regulators and service providers now expect companies to show genuine commercial purpose. A structure that looks purely artificial will attract scrutiny.

Which companies may be affected?

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

Common substance indicators

Typical indicators include board meetings in the jurisdiction, local directors, proper records and local expenditure. Regulators also look for qualified personnel, premises and evidence that key decisions are made there rather than elsewhere.

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

Substance rules are real, but the practical test is whether the company can show genuine activity, local decision-making and a credible commercial rationale. That matters to banks and tax authorities alike.