What is substance
Substance is getting more and more important. We witnessed tighter and stricter regulations is the recent years, and we can only expect it to go worse with time.
So what is actually substance?
Well, it means that you have something going on behind your structure.
Traditionally, the most popular place for forming offshore companies was British Virgin Islands (BVI). Realistically, there was no real business ever going on there.
People would just register their company there, and they would have a mailbox at best. There were few hundred businesses registered there, with no actual substance in BVI.
If you have nothing going on in terms of your business there, can you really say that your company is there?
More and more if you want to plan your international taxes legally you will need to have substance in a country. Registration of a company with the bank account will simply not be enough.
There are 2 different ways we can look at substance: substance that works against you and substance that will work in your favor.
What would be substance that works against you?
Well, let’s imagine that you are an Australian, with an offshore company in Seychelles. You live in Australia, so do your employees. In this case, for the tax department it’s clear that your substance is in Australia, they won’t care where your company is. In this case your substance is in the place where it is harmful to you (at least from tax point of view).
What would be the substance that works for you?
Let’s say that you are Australian that co owns company with some people from abroad. None of your employees are in Australia, they are abroad.
In this case you can genuinely say that your company is not in Australia. If you still live in Australia and work from there you might be subject to management and control rules, but we have a different video on this topic.
Another thing that really matters is that banking is becoming harder and harder everywhere. Lots of banks will not be willing to open a corporate bank account for your company if you don’t have any substance in that place. They will look for things like local employees, office space, etc.
When you are thinking where to build, you’re not just thinking about ‘’where do I pay less tax, where is it easy to incorporate, where is it cheaper, where do I have more privacy?’’ This is not enough anymore.
Now you’re also thinking about banking. ‘’Where do I bank?’’ is one of the most important questions when going offshore.
What will help you on the tax side long term? How are you going to be able to get tax residency certificate there? – All of this is coming from substance.
What does all this mean in practice?
Would I ever considering doing business from Vanuatu? Absolutely not!
Internet will be bad, I will not have a good access to talent, infrastructure is not good, maybe the time zone is not right, etc.
This will rule out most of traditional tax heaven islands, it’s simply not practical to run a real business from there.
Now we want to look at where to go so we have a deep talent pool, low wages, people who speak the language, good infrastructure, good internet, good work ethic, etc.
So, this is how the game of going offshore changed today.
Registering abroad for tax reasons is simply not enough anymore, and today we need to go a few more layers deep then ever before.