Tax substance is becoming a major issue for tax advisors and business consultants. To protect themselves, entrepreneurs have to develop an armada of measures and this in a fast evolving environment of laws and regulations.
Sanction : Bank account opening rejection
First, if your operations don’t have substance, if the business and financial flows aren’t pragmatically aligned, the sanction will be a bank account opening rejection or a bank account termination. With hefty fines on banks by regulators for money laundering the banks will reject or terminate the relationship with a company or an individual suspected of potential tax evasion.
Tax substance is THE solution
Then if you managed to open and maintain your bank account by patiently explaining your business model to your banker you will surely have to do the same with local tax authorities.
- The tax substance of your company was for years defined by its location and the seamlessly operational activities conducted at its location.
- Nowadays the location of your clients and suppliers is becoming as important as this “fix” part of the activities.
Tax substance is a key element for a good tax optimization process
The economic and operational justification of the presence of a company in a favorable tax environment is always challenged by high tax countries.
Hong Kong, Singapore and other financial centers tax authorities became reluctant to issue tax residence certificates to special purpose vehicles (SPV) such as holdings and licensing companies , why this ?
- Most of the offshore locations signed double tax treaty with numerous countries, they have to pay attention to tax avoidance, not be the accomplices of such, so to keep enormous advantages to attract incoming businesses.
- Pressure is on low tax countries to clean up years of poor compliance work
How to react?
The best optimizations strategies are always based on a true operational situation, adapting the business flows require creativity and pragmatism.