Anguilla has introduced Economic Substance rules in 2019. These requirements are now imposed on certain business entities that conduct relevant activities in the jurisdiction.
In particular, these entities have to satisfy the economic substance test and file an annual return with the local Registrar.
Table of Contents
1. Introduction to Anguilla Economic Substance Requirements
Many jurisdictions have been assessed as having harmful tax practices by The Code of Conduct Group. As a consequence, they are included in the EU List of Non-Cooperative Jurisdictions for Tax Purposes.
The jurisdictions in this blacklist will be subject to stricter control measures, which will significantly hold back their economies.
Responding to this, Anguilla has amended certain acts to implement economic substance (ES) requirements as an attempt to be excluded from the EU blacklist. These requirements were effective:
- From 1 January 2019 for in-scope new entities; and
- From 1 July 2019 for existing ones.
2. Scope of Anguilla Economic Substance Requirements
The ES requirements are imposed on certain types of business entities in Anguilla that carry out relevant activities.
The business entities include:
- Companies (international business companies and LLCs included), and
- Limited partnership.
The relevant activities include:
- Banking (as defined in the local Banking Act);
- Insurance (as defined in the local Insurance Act);
- Fund management (providing management services to an investment fund);
- Financing and leasing (providing credit facilities, leasing of land excluded);
- Distribution and service center (selling products that are bought from other entities within a group or providing services within a group);
- Shipping (carrying out shipping-related activities);
- Headquarters (providing services for a group or other entities in the group);
- Intellectual property (IP) business (renting or selling intellectual property assets);
- Holding company (holding equity to earn dividends and capital gains).
3. Exemption from Anguilla Economic Substance Requirements
Despite operating the relevant activities, companies and limited partnerships in Anguilla can still be exempted from ES requirements if they satisfy the following conditions:
- They are managed and controlled, or carry out relevant activities in another jurisdiction;
- The corporate tax rate in that jurisdiction is at least 10%; and
- They are the tax resident in that jurisdiction.
These companies and limited partnerships must submit to the local Registrar proof of their tax residency in another jurisdiction (for example, filing a tax return that has already been submitted to the tax authority in another jurisdiction).
4. Anguilla Economic Substance Requirements
Business entities that carry out relevant activities in Anguilla, unless exempt, are required to:
- Satisfy the economic substance test; and
- File an economic substance return with the Registrar.
4.1. Satisfying Economic Substance Test
By satisfying the ES test, companies prove that they are bringing true economic value to the jurisdiction, not utilizing offshore structures to solely optimize profits.
All relevant activities are subject to the general ES test, except holding and high-risk IP activities. The test for holding business is lighter while it is stricter for high-risk IP business.
General economic substance test
An in-scope business entity has to meet 3 conditions below to satisfy the test:
(a) It has enough qualified employees who locally stay in Anguilla, enough operating expenditure, and enough physical assets in the jurisdiction (either rented or owned);
(b) It carries out core income-generating activities (CIGAs). Each relevant activity has a different group of CIGAs. It can outsource these activities to a third party as long as this party has adequate local qualified employees and physical assets in Anguilla; and
(c) Its mind and management are in Anguilla. In particular:
- Directors/partners have adequate qualifications;
- The meetings of the board of directors/partners are conducted in Anguilla at a fair frequency with the participation of enough directors/partners;
- Minutes of all board meetings and records of the company/partnership are kept in Anguilla;
- There is a place in Anguilla (either rented or owned) enough for the management; and
- There is enough supervision in the case of outsourcing CIGAs.
Economic substance test for holding business
A company or limited partnership that only holds equity will satisfy the test when:
(a) It complies with all the statutory filing requirements; and
(b) It has enough human resources and premises in Anguilla to manage the holding activities.
In case it has other types of income (interest, rent, or royalties), the CIGAs are the activities that are related to those types of income, and the company will not be subject to the above test.
Economic substance test for high-risk intellectual property business
An IP business entity that is considered high risk when:
- It acquires an IP asset from an affiliated entity or acquires an IP asset in consideration of funding research and development by another person who stays in another jurisdiction; and
- It grants an affiliated entity license to use the asset, or earn income from the asset through activities performed by an affiliated entity.
A high-risk intellectual property business will satisfy the test when the following conditions are met:
(a) It has a high degree of control over the development, exploitation, maintenance,
enhancement, and protection of intellectual property assets; and
(b) It has full-time qualified employees who permanently stay and take up the relevant activities in Anguilla.
(c) Must file with the Registrar a business plan of holding the high-risk intellectual property asset in Anguilla, details on the qualified employees working in Anguilla, and proof of decisions are being made in Anguilla.
4.2. Filing Economic Substance Return
All companies and limited partnerships in Anguilla are required to file an annual ES return (together with the annual return) to declare whether they operate the relevant activities or not. If they do, they must provide the following information to prove that they have satisfied the ES test (unless exempt):
- The conducted relevant activity;
- The amount and type of relevant income related to the relevant activity;
- The amount and type of expenses incurred to conduct the relevant activity;
- The address of premises and other physical assets in Anguilla used for the relevant activity;
- The number of qualified employees or employees of the outsourced third-party service provider in Anguilla;
- Description of the CIGAs conducted in Anguilla with respect to the relevant activity;
- The evidence that the mind and management take place in Anguilla (as discussed above); and
- A declaration that the entity has satisfied the ES test;
High-risk intellectual property business will further provide these details:
- A detailed business plan that includes the commercial rationale for holding the intellectual property assets in Anguilla;
- Details of the employees, including their contacts, qualifications, experience, and duration of employment; and
- The evidence that the decisions are made in Anguilla in respect of the relevant activity.
Filing method: the ES return shall be filed electronically in a manner specified by the Registrar.
The deadline of filing requirement: the last day of a relevant quarter (the calendar quarter in which the anniversary of the incorporation or continuance falls). For example, the incorporation date is 1 January, then the deadline for filing will be 31 March.
5. Penalties for Non-Compliance
Business entities that fail to comply with the economic substance requirements (ES test and annual return) will be subject to financial penalties. If they keep failing continuously, they are highly likely to be struck off from the Commercial Register.
In circumstances where an entity is engaged in high-risk IP activities or not compliant with the ES requirements, the Anguilla government can share the information with EU member states upon requests, according to the Tax Information Exchange (International Cooperation) Act.
- Companies and limited partnerships in Anguilla conducting relevant activities now must comply with economic substance requirements.
- All in-scope business entities are required to meet the economic substance test and file a report with the local Registrar.
- The test for all relevant activities is quite the same except for equity holding and high-risk intellectual property business.
- Non-compliance may result in financial penalties and business strike-off.
If you have any questions about Anguilla economic substance requirements or need further guidance, contact us now! We are always willing to help!