Organization of Economic Substance (real economic presence) for international companies

Modern international business increasingly faces the need to confirm the real economic presence of non-resident companies (Economic Substance) in the country of their registration. A few years ago, to conduct business abroad, it was enough to register a company and open an account. Today, banks, payment systems, tax authorities and counterparties carefully check whether the company actually operates in its jurisdiction or is only a formal "paper" registration.

Our lawyers provide comprehensive support - from analyzing the requirements of a specific jurisdiction and developing an optimal model for organizing a company's real presence, to organizing an office, appointing a resident director, hiring staff, accounting support and preparing the company for banking compliance.

What risks arise from the lack of Economic Substance?

The absence of organization of real presence of companies - a real office, local staff, a resident director or confirmation of company management - can cause serious complications for business, including:

• refusal to open a corporate account or sudden closure of existing accounts;

• refusal to obtain a tax residency certificate;

• inability to apply international agreements to avoid double taxation;

• problems during mandatory KYC and AML procedures;

• additional inspections by foreign and local tax authorities;

• penalty sanctions in jurisdictions where strict requirements for economic presence of non-resident companies are legally in force.

What is substance and why is economic presence needed?

Economic presence of non-resident companies (economic substance) is confirmation that the company is not a formally registered legal entity, but is actually managed and conducts business activities in the country of its registration. The company must prove that key business processes, management decisions and operational activities take place in that jurisdiction where it is registered.

Organization of real presence of companies is a decisive factor when:

• opening corporate bank accounts and accounts in payment systems (EMI);

• undergoing KYC and AML procedures;

• obtaining a tax residency certificate;

• applying international agreements to avoid double taxation;

• confirming the company's tax status to counterparties and partners;

• building international holding structures.

Real economic presence of non-resident companies confirms that the company was created to conduct business, not exclusively to use the tax benefits of the jurisdiction.

Substance requirements: why has this become mandatory?

International corporate law has changed significantly: most countries have joined OECD initiatives within BEPS (Base Erosion and Profit Shifting), aimed at combating aggressive tax planning, shell companies and artificial profit shifting between jurisdictions. It was after the implementation of OECD recommendations and the BEPS plan that most banks began to pay special attention to confirming the real economic presence of international companies and economic presence of the company in the EU.

During compliance checks, financial institutions increasingly request documents confirming the organization of real presence of companies:

Separately for Ukrainian residents: substance and CFC

If the controlling person of a foreign company is a resident of Ukraine, it falls under the rules of CFC (controlled foreign companies) and is required to submit an annual report regardless of whether the profit is exempt from taxation.

The presence of real Economic Substance in the EU is an important confirmation that the foreign company conducts real business activities, not used exclusively as a formal corporate structure. This can be one of the factors considered when assessing the possibility of applying exemption from CFC profit taxation, subject to compliance with other legal requirements, in particular regarding the existence of an international agreement to avoid double taxation, income structure and other established criteria.

What elements does real economic presence include?

1. A real office. Physical premises that correspond to the scale of the company's activities. A legal address or virtual office alone mostly do not meet the requirements of banks and regulatory authorities.

2. Local director (resident director). In many jurisdictions, the resident director who makes key management decisions in the country of registration determines the company's tax status.

3. Hired employees. For certain types of activities, the presence of local staff officially employed in accordance with the labor law of the country is required.

4. Corporate governance. Board meetings, conclusion of key contracts, storage of corporate documents and strategic decisions must be recorded in the relevant jurisdiction.

5. Accounting of an international company. Maintenance of records, submission of reports, payment of taxes and storage of financial documents in accordance with the requirements of local law.

6. Real business activity. Actual cooperation with clients and counterparties, operational expenses for business maintenance, use of a corporate account.

What Economic Substance organization services do we provide?

Depending on the structure of the business, jurisdiction and your goals, we can provide either comprehensive organization of Economic Substance in the EU, or provide a separate solution necessary to confirm the real economic presence of the company.

Maira Consult offers legal support in the following areas:

• organization and rental of physical office in accordance with jurisdiction requirements;

• selection, appointment and legal support of a resident director;

• registration of the company as an employer with state authorities;

• official employment of local employees;

• accounting, tax and payroll support;

• organization of personnel record-keeping and salary calculation;

• obtaining a Tax Residency Certificate;

• support of opening corporate accounts in banks and payment systems;

• corporate and legal support of international companies;

• consultations on compliance with Economic Substance requirements, corporate structuring and international tax planning.

Whether you need to organize a full economic presence of a company in the EU or solve a separate issue - from finding an office to appointing a local director or obtaining a tax residency certificate - our specialists will select the optimal solution in accordance with the requirements of the laws of a specific country and the characteristics of your business.

In which countries do we organize substance?

The Maira Consult team supports the organization of Economic Substance, corporate governance and real economic presence, in particular, in:

• United Arab Emirates (UAE);

• Cyprus;

• Estonia;

• United Kingdom;

• Poland;

• Lithuania;

• Georgia;

• Switzerland;

• Hong Kong;

• other countries in Europe, the Middle East and Asia.

If your jurisdiction is not on the list, we will conduct an individual analysis of the possibility of organizing substance in accordance with local law.

Organize substance with Maira Consult

Properly organized economic presence is not only a matter of compliance with legal requirements, but also a tool for stable operation of international business, opening corporate accounts, obtaining tax residency and successfully passing compliance checks.

Planning to register a company abroad, open a corporate account or confirm real economic presence? Contact Maira Consult specialists.

We will analyze the requirements of a specific jurisdiction, prepare an individual solution and provide complete legal support for the organization of Economic Substance at all stages.