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Impact on clients

Despite these variations, for many of the jurisdictions with substance legislation, the regulations have been bedding into the consciousness of practitioners and clients for some time, with first reporting now taking place.

Nonetheless, says Carey, ‘The challenges brought about by economic substance are primarily in the form of additional compliance hurdles and the costs associated with them, which can be extensive and time-consuming.’

She adds, ‘For those entities that have determined they will not meet the new requirements, further steps in order to do so will be required, also at great cost and inconvenience if the entities have not previously had strong connections with the jurisdiction [in which they are proving economic substance].’

Indeed, experts have speculated that requirements may lead to companies migrating between jurisdictions as businesses are looking to which jurisdiction is the easiest in which to demonstrate substance, given their operations, their directors’ geographical locations and their intellectual property assets.

Brown also notes the cost of the additional compliance burden, but comments that there is a further challenge in the very basis of economic substance requirements itself.

‘In my opinion, two of the largest challenges are the somewhat antiquated views of how businesses operate and what constitutes substance,’ he says. ‘At a time of increasing globalisation and virtualisation of business, it is perverse to introduce measures based on bricks and mortar or physical staff locations as the sole arbiter of substance.’

Compliance during COVID-19

These issues have, however, recently paled in comparison with the major hurdle of 2020: the COVID-19 pandemic. Especially in terms of providing evidence of physical presence in a particular jurisdiction, many businesses have been hampered by global travel restrictions resulting from the health crisis, which has seen months of an almost-global lockdown...