Substance requirements in the Marshall Islands

Nothing is as important as economic substance if you want to open a company in the Marshall Islands. This jurisdiction endorsed the economic substance rules for IBCs for the first time on January 1st, 2019. Thus, the country has positioned itself as a reliable jurisdiction in the international arena, complying with regulations and providing a stable business framework. Substance requirements in the Marshall Islands bring this jurisdiction more transparency for the benefit of all businesspeople.

We know what you're probably thinking. Mundo is well aware that substance requirements in the Marshall Islands or any other jurisdiction involve additional efforts so that your company complies with all the rules. However, we promise you it’s worth it because, in the long run, it will help you avoid fines and unnecessary taxation.

About economic substance and its origins

The term economic substance was born in the past decade and the concept represents the bonds of any company with its country of incorporation. In other words, substance was created to avoid incorporations solely for tax purposes.

These rules were set forward by the OECD and the European Union to prevent tax evasion. The European council started to apply substance back in 2017 thus contributing to enhancing the legislation in each of its countries. Such efforts resulted in the substance requirements in the Marshall Islands that are viable today.

International regulators have put forward economic substance to regulate the taxation of IBCs and similar structures that use their advantages to reduce their tax liabilities. Moreover, substance was followed by what is known as BEPS, an acronym for “base erosion and profit shifting”. This helps apply regulations in the Marshall Islands and all major offshore centers.

Substance in the Marshall Islands

Thus, the rules for economic substance for every offshore company in Marshall Islands go back to 2018 and were enforced one year later. The act was amended twice in February and August of 2019. It describes the basis for economic substance by establishing the relevant entities and activities. All structures that fall under these categories are thus subject to substance in the Marshall Islands.

Substance in the Marshall Islands: entities not subject to substance

To be eligible for a non-substance company you have to submit:

• Tax identification
• Tax residency certificate
• Solid proof that you pay taxes outside the Marshall Islands

It's worth noting that a Marshall Islands offshore company that's not a relevant entity must comply with certain requirements if it gets even one part of its income from a relevant activity. The report must be presented on this activity exclusively once a year.

However, the equation cannot be reversed: if your company is a relevant entity it will have to present substance reports even if it doesn't conduct any relevant activity throughout the year.

Ask our experts

Give substance to your Offshore company in Marshall Islands

Here are the criteria you must meet:

Management of your Marshall Islands offshore company

Hold management meetings. Meetings must be held on a regular basis and in the Marshall Islands

• Each must have a minimum quorum
• Register all important decisions on the minutes and store them
• Assign qualified people to every role, especially management

About employees and their presence in the company

• Hire enough personnel and qualified people.
• Have expenses according to the operations of your offshore company in Marshall Islands.
• Have a proper physical presence. Real estate property helps. 
• CIGA test.

CIGA Refers to the basic activities to bring income, in other words, what the IBC does to receive earnings. To pass with flying colors you need to demonstrate that such activities take place in the Marshall Islands.

Special requirements

Shipping companies, portfolio managers, and owners of intellectual property must meet specific requirements.

Portfolio managers are companies that have shares in 3rd party entities. Such entities should not have other sources of income than dividends and capital gains. Thus, they have to comply with less strict requirements:

• Official number of employees and offices
• Payment of taxes and fees on time and reporting
• They don't need to pass the CIGA test

Likewise, owners of intellectual property use and generate income through brands, copyright, and trademarks. If you have an offshore company in Marshall Islands with these characteristics, you'll fall into the category of the highest risk. As a result, you have the strictest substance requirements:

• Prove that the company has the proper control over the asset.
• Provide reasons why you maintain the intellectual property in the Marshall Islands.
  
  

When it comes transportation of people or merchandise by sea or shipping businesses, substance requirements in the Marshall Islands are different. Such companies usually obtain their earnings by conducting activities outside the territory while they continue their journeys to international ports. Due to the specific characteristics of such an activity, companies must follow these guidelines to prove their substance:

• Management of the vessel, the crew, and travel supervisions.
• Comply with all established conditions of the 1990 maritime law and other international rules.

Disclaimer: This article was written with purely informative purposes. The requirements described here are subject to change and depend on the case. Likewise, this article doesn’t replace a formal legal consultation. For accurate information please contact your Mundo expert. 

Open a company in the Marshall Islands and get substance in the process with Mundo 

Substance requirements in the Marshall Islands are challenging but don't have to be a hindrance. Think about substance as an investment that would save you lots of headaches in the future. Anyway, Mundo recommends simpler jurisdictions like the Cayman Islands, Nevis, the BVI, or a US LLC.

If you're ready to take the next step into offshore business, Mundo has your back. Our corporate experts know the legislation in detail and can help you put everything in order. Be sure that economic substance is your friend rather than your enemy.

There's no time like the present for a fresh beginning. Contact your Mundo representative now!

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