WHAT IS "SUBSTANCE" AND WHY IS IT IMPORTANT?

In recent years, due to money laundering and fictitious transactions in international taxation, one of the fundamental factors of the company's activities has become its economic location in the jurisdiction. International regulators are demanding transparency in business conduct, all transactions and the company's ownership structure, which leads to a heightened regulation.

As a consequence, the laws on the mandatory real presence of companies in such jurisdictions as the British Virgin Islands, Belize, Bermuda, Fr. Jersey, oh. Maine and others are adopted. The list of such countries is increasing every year, which confirms the importance of having a substance for all international companies in the future.

Real economic presence ("substense") is a set of criteria or factors that guarantee the actual, real location of a company under the jurisdiction of a particular state.

Photo 1 - Organization of the real presence of companies (substance services)

REQUIREMENTS FOR A REAL PRESENCE

The main factors that confirm the presence of "substance":

confirmation of the actual (real) financial, economic and operational activities of the company in this jurisdiction;
full-time employees;
a resident director of the company;
a real office of the company;
opening a company bank account;
an official website of the company.

All these factors in conjunction will prove the legality of the business, create a full-fledged company structure and confirm your presence in the country of registration.

THE FOLLOWING STEPS ARE NEEDED FOR SUBSTANCE IMPLEMENTATION:

To rent an office	It is necessary to provide not only the legal address of the company, but to find and rent a real office in the jurisdiction from which the company will be managed.
To appoint the resident director of the company	The main condition for a company to be considered resident, is that the director of the company must be a resident. That is why it is necessary to move a member of the company's board (and his entire family) to the required jurisdiction with further registration of a residence permit or hire a local resident to actually manage the company's activities.
To obtain the employer status	In order to hire employees of a company, it is required to obtain employer status. To do this, the company has to be registered in the local social and pension authorities.
Vat registration	In order to pay salaries to employees, as well as to conduct economic activity, the company needs to obtain the status of a VAT payer and pay other social contributions. Such registration does not increase the tax burden, but significantly improves the status of the company.
To hire employees	It is also necessary to select and hire a few employees. The number of employees depends on the company's turnover.
To carry out payroll to employees	The director’s and employees’ official salaries need to be calculated and payed., It is desirable to pay not a minimal salary for the director of the company, but close to the real one, based on the company’s activity and its annual turnover. For full-time employees, the minimum wage is sufficient.
Maintenance of accounting records	Accounting and transport documentation must be kept in the office.
To connect local phone	For the real activity of the company, it is required to connect a local contact telephone. Thus it would be possible to answer the simplest questions about the activities and services of the company.
To establish a company’s website	A full-fledged company website also confirms the real existence of the company (all banks and counterparties pay attention to this), so its creation is necessary. At the same time, the company's website must be created on an international or local domain, indicating the real office address, local contact phone numbers and a full list of services provided.
To open a bank account	Official salary payments, office rent and other expenses must go through its bank account, so it is recommended to open a corporate account with a local bank.
To work with local contractors	For many banks and other financial institutions, an important indicator of a company's residence is its domestic activity. Therefore, it is necessary to offer the company's services to local counterparties and to carry out at least minimal sales within the country and to third unrelated parties.
Obtain a tax residency certificate	A certificate of tax residency of the company is a final confirmation of a real presence in the country. Therefore, if the company complies with all above mentioned requirements, it will be able to receive this document annually.

Photo 2 - Organization of the real presence of companies (substance services)

ADVANTAGES OF HAVING A REAL PRESENCE:

trust in the company from international jurisdictions and banks;
ecognition as a tax resident of the country;
it is easier for a company with a real presence to open a bank account;
the validity of the use of local tax incentives and the application of the terms of international agreements;
confirmation of the legality of the business before the tax and monitoring services.

TRANSITION FROM "SHELL-COMPANY" TO REAL BUSINESS

If earlier, 5 or more years ago, it was advantageous to register the "shell-company" (companies without real location, employees, with nominee directors) in order to receive tax benefits and bonuses with minimal costs, now, in the context of global deoffshorization, obtaining such benefits turned into the opposite since economic sanctions are imposed and financial institutions refuse to cooperate with such companies.

Banks give preference to the companies that have an economic substance and a real presence in the country of registration, and not just act as a transit instrument. Thus, in order to have the opportunity to enjoy all the privileges of taxation and international cooperation we recommend to organize a real presence of the company.

This is an urgent and even necessary step in connection with the adoption in Ukraine of the Law on Controlled Foreign Companies, for which the substance and management of the company from the country of registration may be needed to exempt the controlling person from paying Controlled Foreign Companies taxes in Ukraine.

In order to assist in complying with all the requirements of economic presence in the required jurisdiction, Campio Group has prepared a package of necessary “substance” services for international companies, which allow to continue the company's activities on the most favorable tax terms and not fall under the suspicion of tax authorities. The transition from a "shell-company" to a real business together with our specialists will deprive you of all legal and organizational concerns, and will also help to maximize profit.