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Recently, we have found an increasing interest of our customers in the list of “non-cooperative jurisdictions for tax purposes” by EU Council, even blacklisted, grey-listed or “white”-listed are all big matters of concern. Most of them are considering this as an important factor to determine their best of choice for offshore company formation. A key to mention here is the criterion of “Economic Substance” has been acted as the promised reform applied in many offshore jurisdictions in question, including the premier destination like the Republic of Marshall Islands.

The Marshall Island: Economic Substance Requirements

In the light of this growing demand, we will outline in this blog the ins and outs of How Economic Substance Regime Works through a very typical example of Marshall Islands ESRs. Let’s read below!

1. Where did “Economic Substance Rules” come from?

Economic Substance Rules act as a driving force behind the battle of the EU and the OECD against tax havens.

Economic Substance rules originated since 2017 as the criterion so that the EU Council has adjudicated the tax practices of jurisdictions deemed low or free tax. The presence of ESRs is actually to hinder such favorable tax jurisdictions in their facilitation of growing offshore business structures which do not reflect real economic activity in the jurisdiction.


A year later, the OECD in 2018 also published its Base Erosion and Profit Shifting, aka BEPS, Action 5 for the similar purpose of avoiding substantial activities regarding geographically mobile activities granted for preferential tax treatments within relevant jurisdictions.

Many inclusive countries and territories have steadily introduced legislation regarding economic substance requirements for tax purposes effective from early 2019, namely the BVI, Cayman Island, Jersey, the Isle of Man, etc.

The Marshall Island obviously does not lie beyond this list, but clear guidance to its ESRs has just been brought forward recently. In what follows, we help you clarify Marshall Island Economic Substance related requirements and entities.

2. What is Economic Substance Requirement?

The Marshall Islands Economic Substance Regulations of 2018 (the “Regulations”) mandate that all “relevant entities” carrying out a “relevant activity” in the Marshal Island must satisfy reporting requirements regarding their actual level of economic substance in the jurisdiction.

ESRs published by the Registrar of Corporations came into force on 1st January 2019. It then adopted further amendments on 21 February 2019 and 29 August 2019. The Regulations have effect for financial periods starting on or after 1 January 2019.

3. Who are covered by Marshall Island ESRs?


Covered in the scope of Marshall Island ESRs, as the aforementioned, is “relevant entities” which generate profits from a “relevant activity”.

Relevant entities are defined under the Marshall Island ESRs as including:

Non-resident domestic corporations, partnerships and limited liability companies (Non-resident domestic entities – NRDEs) which are tax resident in the Marshall Islands;

Foreign corporations, partnerships, limited partnerships and limited liability companies, including foreign maritime entities (FMEs) which are centrally managed and controlled in the Marshall Island;

Relevant activities, according to wording of the Regulations, consists of:

  • Distribution and service center business;
  • Financing and leasing business;
  • Fund management business;
  • Headquarter business;
  • Holding company business;
  • Intellectual property (IP) business;
  • Shipping business;

Despite the fact that Banking and Insurance businesses are still falling into the category of “Relevant Activities” under the Marshall Island ESRs, it should be noted that the Marshall Island Associations Law have listed business associating with banking or granting policies of insurance as prohibited business activities applicable to all NRDEs as well as FMEs.

4. Who can be excluded from Marshall Island ESRs?

Any NRDE or FME that can provide objective evidence for the fact that it is NOT tax resident inside of the Marshall Island, will be deemed as Non-Relevant Entity and kept outside the scope of the Marshall Island ESRs. In other word, that entity will not be affected to have economic substance in the Marshall island.

In order to prove the status of tax residency outside of Marshall Island, the Registrar requires the entity to submit sufficient objective evidence as the followings:

  • Tax identification number
  • Tax residence certificate
  • Tax assessment or tax payment proofs

If a portion of total income is derived from a relevant activity, the entity must comply with economic substance requirement only to that portion of its business. And in case a relevant entity does not participate in any relevant activities, it still has to submit an annual report to the Registrar.

5. If my company is a relevant entity conducting a relevant activity in the Marshall Island, how can I demonstrate economic substance?

If you have determined that your company is a relevant entity engaging a relevant activity specified as the above discussion, please take note of preparing for “economic substance test”.

An economic substance test is conducted to guarantee that the relevant entity has sufficient economic substance with regard to relevant activity in the Marshall Island. All in-scope entities, therefore, must satisfy the following requirements:

Directed and managed test
  • Hold board meetings with an adequate frequency in the Republic;
  • Have a quorum of persons physically present at such meetings;
  • Have the minutes to record all relevant decisions during the meeting. Keep all minutes of meetings and records within the Marshall Island, with the Registered Agent if needed;
  • Ensure the governing body of the entity to have the necessary knowledge and expertise to discharge their duties;
Adequate employees and presence test
  • Have an adequate number of qualified employees in the jurisdiction
  • Incur adequate expenditure with the level of activity
  • Have adequate physical presence in the jurisdiction

Note: The determination of “adequate” term here relies heavily upon the level of relevant activity that your entity is conducting.

CIGA testCIGA stands for Core Income-Generating Activities, which are activities carried out in the jurisdiction and significantly contributing to the generation of income to a relevant entity.

As its definition suggests, the entity which wants to satisfy CIGA Test must prove that the entity’s CIGAs are being undertaken in the Marshall Island.

6. When and What documents should relevant entities prepare for complying with ESRs?


Starting from the mid-2020, all NRDEs and FMEs as relevant entities under the Marshall Island ESRs are required to prepare and file an annual Economic Substance Declaration to Registrar within 12 months from the anniversary date of the entity. The declaration must be completed through the Registrar’s online portal which is predicted to open soon in the upcoming time.


What documents

In addition to clarifying whether it is a relevant entity, whether it has any income derived from the relevant activity, the in-scope entity should entail required information in the report for each relevant activity as below:

  • Business type;
  • Amount and type of gross income;
  • Amount and type of expenses and assets;
  • Business premises;
  • Number of employees inclusive of those working full-time;
  • Relevant proof of CIGAs to be carried out within the RMI.

It is worth noting that all required reports, return or relevant information for the submission to the Registrar should be in respect of the corresponding financial period. Additional documents may reasonably be required by the Registrar, depending on what relevant activity NRDEs and FMEs engage.

7. What happens if relevant entities fail to satisfy ESRs?

Non-compliance or failure to economic substance requirements in Marshall Island can result in certain penalties:

  • A relevant entity fails to comply with the reporting requirements or not meeting the economic substance test for a financial period as required shall be fined up to $50,000, or lead to revocation and dissolution.
  • If for the next financial period, the in-scope entity still does not pass the economic substance test, as determined by the Registrar, then the financial penalty can be added up to $100,000, or lead to revocation and dissolution.

Under Section 7, the Marshall Island Economic Substance Regulations, 2018 clearly stated that the Registrar will deliver a notice to the entity for the determination, clarification of reasons why the entity has not satisfied the economic substance requirements, and applicable penalties together with other relevant information.

8. What are requirements for holding business, IP business and shipping business?

Take a look into the Economic Substance Regulations, you will recognize that holding business and shipping business entities may be subject to a slightly different regime:


Pure equity holding companies: refers to the company owning equity participations (i.e., equitable interest or shares) in other entities. The company is not allowed to conduct any commercial activity and its income derives from only dividends and capital gains.

Under Section 4 (5) of the Marshal Island ESRs 2018, a pure equity holding company may suffer less complicated requirements of economic substance test as below:

  • Have adequate employees and premises in the Marshall Island; and
  • Maintain compliance with all filing requirements as prescribed in the Business Corporations Act, Revised Partnership Act, Limited Partnership Act, or LLC Act, not exclusive paying all applicable fees;

Note: A pure equity holding company does not need to adhere to the directed and managed test, nor the requirement of carrying out CIGA in the Marshal Island. It can satisfy these reduced substance requirements by maintaining a registered agent in the Republic.

Intellectual property holding business: refers to businesses that hold, exploit and generate income from their intangible IP assets such as trademarks, copyright, patents, brand or technical know-how.

It is noted that IP holding business in a manner defined as “High Risk” will be subject to some heightened requirements so that it is sufficient to show economic substance in the Marshall Island. Accordingly, added requirements for a high-risk IP business include:

  • Concrete evidence that a high degree of control over the development, exploitation, maintenance, enhancement and protection of the asset has been used by full-time skilled employees who permanently locate and perform their core function inside of the Marshall Island;
  • Supporting evidence like a detailed business plan showing its commercial rationale of holding the IP asset in the Marshall Island or particulars of employees.

Shipping business refers to ships business in international traffic for earnings from the transports of passengers, cargo or Marshall Islands-flagged ship related activities such as owning, financing, managing the crew, chartering the ship and many others prescribed under the Marshall Island ESRs, 2018.

Recognizing unique character of shipping business performing most of its core income-generating activities in transit outside of the Republic, a shipping business is considered to satisfy the economic substance by evaluating on following aspects:

  • The relevant entity operates the vessels business in international traffic including crew management, ship maintenance, overseeing voyages and other related activities;
  • The relevant entity maintains compliance with all obligations under the Marshall Island Associations Law and Maritime Act 1990, International Labor Organization regulations and other related applicable laws.

Note: Private yacht lies outside the scope of the abovementioned “shipping business”; therefore, the ownership, operation or management of a private yacht is not considered as a relevant activity under the Marshall Island ESRs. As a result, the private yacht relevant entity will be exempted from the economic substance test.

9. Key Takeaways

To summarize, please bear in mind keynotes regarding the Marshall Island economic substance requirements:

  • A relevant entity engaging in a relevant activity in the Marshall Island must be subject to economic substance requirements under the Marshall Island ESRs unless it is a tax resident outside of the jurisdiction.
  • Relevant entities under the Marshall Island ESRs include non-resident domestic entities and foreign maritime entities.
  • Relevant activities under the Marshall Island ESRs include distribution and service center business, financing and leasing business, find management business, headquarter business, holding company business, IP business and shipping business.
  • Economic substance test comprises three requirements that all in-scope entities must comply with economic substance in the Marshall Island. They include Directed and Managed Test, Adequate Test and CIGA Test.  
  • All relevant entities, beginning from mid-2020, are required to submit an annual Economic Substance Declaration to the Registrar within 12 months since their anniversary date. The declaration should entail specific documents as required and must be done through the secure web portal.
  • Holding business and shipping business entities may be subject to different requirements to demonstrate economic substance under the Marshal Island ESRs. Please be fully aware and alert for the Regulations to take appropriate actions if you are an RMI based entity engaging into these specific groups.

Any further concerns about the economic substance requirements in the Republic of Marshall Island, feel free to contact us via!

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