Investor’s Guide: A step ahead of Economic Substance_


As we enter the second quarter of 2021, business individuals are still wondering is it truly a lucky year? The icon for a booming market is a bull which we can somehow relate to the Chinese Zodiac for the year of the Ox. Investors are very wary of fluctuations in the economy and are keeping an eye for the eggs not to crack but hopefully to hatch. The good thing is ‘investment check-ups’ can be done with ease considering the use of high-level technology and innovation. Everything is at a fast pace and whether we like it or not, regulations evolve in the same way our technology evolves. 

We are in the stage where globalization has already been conceived and has slowly been put into place. Countries and markets are moving towards working in unison in terms of compliance and cross-border agreements. The latest move for globalization would be the introduction of Economic Substance which struck various investment hubs and tax havens.

Economic Substance

To put it simply, it is a move for global transparency. It refers to a transaction that has a substantial purpose besides being treated as a reduction to tax liability. Innovation leads to efficiency but it also opens doors to loop-holes, mostly in the third-world and tax shelters or low-tax countries. This concept is used to examine whether such tax shelters have tax laws that are abused. The European Union (EU) has actively imposed economic substance in various jurisdictions. It also included in its list of countries it deems the tax laws are insufficient to show economic substance. Soon, you may wonder what would be the impact of this regulation on your investments once it takes place.

Expect Tighter Regulation

It is already obvious that economic substance will be an additional regulation and new regulations lead to new reportorial requirements depending on your scope as defined. Certain tests will need to be met depending on the industry and nature of your business.

Furthermore, additional information will also have to be provided to authorities such as insight into the business, financial performance and position and information of the owners or investors, to name a few. Of course, there are two sides to the coin — this would only be a problem if you are trying to evade taxes. 

Avoid Penalties 

As much as we hate to hear it, failure to comply with rules and regulations comes with a hefty price which also could lead to either suspension or withdrawal of your company’s trade license. Of course, there will be some degree of scrutiny over the way you operate your business but nonetheless, the nature of the information requested is no more complex than anything required by a licensing authority in any other part of the world. The hard part is you can’t bargain with authorities. 

Investor Takeaway:

Every small decision from hereon will dictate the amount of effort and resources you need to exert once a new regulation takes place. You can either do your normal business routine without batting an eye to what leads ahead or you could start to get all the necessary measures in place. For instance, an investment in accounting now will save you time and money considering the financial information that’ll soon be required. A good safeguard would also mean you revisit the structure of your company. Overall, substantial knowledge of economic substance pays off in the long run. You could also consider outsourcing. 

CRESCO offers tailor-made services depending on the nature and needs of your business – from company structuring to accounting and compliance while making sure that you’ll be Economic Substance ready. For more information about CRESCO you can visit or contact us at [email protected] or Call us +971 4 406 9680. Need legal advise? Contact CRESCO Legal.

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