Economic presence substance

Economic presence substance

Economic presence substance This has become a key factor for international businesses operating across the EU, UK, Switzerland, and the UAE. Banks, tax authorities, and AML departments no longer accept formal structures without management staff and actual business activity.

Jurisprudential helps establish a legal economic presence for international crypto holding companies and investment businesses, taking into account CRS, AML, BEPS, and tax residency requirements.

Consultation cost from 250 euros

Why economic substance has become an essential element of international business

Following the implementation of the OECD BEPS CRS standards and strengthening AML Tax authorities began to analyze not only the company's documents but also the actual location of the business.

Today, economic substance influences:

1. opening corporate accounts
2. obtaining VASP MiCA EMI licenses
3. confirmation of tax residency
4. access to double taxation agreements
5. Compliance checks in banks
6. protection against CFC claims
7. reducing the risk of permanent establishment

The following are checked especially carefully:

1. holding structures
2. cryptocurrency companies
3. fintech projects
4. investment funds
5. trading companies
6. international consulting groups

What does real economic substance mean?

Having a physical office

A virtual address is no longer sufficient for most banks and tax authorities.

Checked:

1. real office
2. workplaces
3. office infrastructure
4. employee access
5. corporate sign
6. internet and telephony
7. utility costs

For regulated businesses, AML compliance is additionally analyzed and KYC procedures.

In many cases, banks request:

1. lease agreement
2. utility bills
3. office photos
4. invoices for service
5. confirmation of access to the business center

Local employees as a key element of substance

Simply registering a company is not enough if all activities are actually conducted from another country.

Checked:

1. employment contracts
2. payroll
3. social contributions
4. real responsibilities of employees
5. team profile
6. participation in operational activities

If a company works with cryptocurrency or financial services, the presence of specialists in AML compliance and risk management is assessed separately.

Managing a company within a jurisdiction

One of the main checks is the place of actual management of the company.

Tax authorities are analyzing:

1. board meetings
2. Corporate Governance
3. place of signing contracts
4. IP addresses of connections
5. access to banking systems
6. location directors
7. storage of corporate documentation

If all decisions are made outside the country of registration, there is a risk of losing tax residency.

What documents confirm economic substance?

Documents for banks and compliance

When opening an account or undergoing a periodic review, banks usually require:

We offer a solution at the level of international standards

1. lease agreement
2. employment contracts
3. corporate structure chart
4. source of funds
5. tax residency certificate
6. invoices from local suppliers
7. website and business email
8. substance explanation letter

For VASP and MiCA structures, the checks are carried out even more thoroughly.

Documents for tax authorities

When confirming tax residency and treaty benefits, the following are used:

1. local accounting
2. annual reports
3. management records
4. proof of operational activity
5. evidence of core income generating activities
6. board resolutions

The relationship between a company's income and domestic activities is also analyzed.

What errors most often lead to problems?

Nominal office without activity

A formal address with no employees or operations is considered high risk.

The following are perceived particularly negatively:

1. shared office without a team
2. lack of local expenses
3. lack of operational activity
4. using a mass registration address

Formal director

Nominee directors are no longer perceived as a sufficient element of substance.

If the director is not involved in the business, risks arise:

1. refusal of banking services
2. tax claims
3. losses treaty benefits
4. CFC rules checks

Lack of economic logic in the structure

If the structure is used solely to reduce the tax burden, this may be considered as aggressive tax planning under BEPS and DAC6.

In which countries are substances tested most strictly?

The strictest controls today are in place in:

1. United Arab Emirates
2. Cyprus
3. Ireland
4. The Netherlands
5. Luxembourg
6. UK
7. Switzerland

Even classic offshore models are required to confirm real economic activity.

How Jurisprudential helps build legal substance

Jurisprudential accompanies international structures at all stages of economic substance formation.

As part of the support, the following are built:

1. substance strategy
2. governance model
3. legal structure
4. tax residency framework
5. AML architecture
6. compliance documentation
7. protection during bank audits
8. preparing for a tax audit

Particular attention is paid to CRS DAC6 CFC and permanent establishment risks.

For whom is it especially important to confirm economic substance?

Proof of economic presence is particularly important for:

1. owners of international companies
2. cryptocurrency projects
3. fintech business
4. investment structures
5. holdings
6. private clients with international assets

A properly constructed substance reduces the risk of account blocking due to tax disputes and claims related to artificial structures.