Comprehensive Guide to Marshall Islands Economic Substance Laws and Their Impact on Companies

Welcome to our comprehensive guide on Marshall Islands Economic Substance Laws for the year 2023. In this guide, we will delve into the intricacies of the Economic Substance Rules for International Business Companies (IBCs) in the Marshall Islands and explore their significance, requirements, and effects on businesses operating within this jurisdiction.

Understanding Economic Substance in the Marshall Islands

The adoption of Economic Substance Rules by the Marshall Islands on January 1, 2019, marked a significant strategic move. By implementing these rules, the country aimed to demonstrate compliance with international laws and establish a transparent and reliable business framework that appeals to entrepreneurs. While adhering to these rules demands additional efforts from businesses, they enhance the attractiveness of the jurisdiction to the global business community.

The presence of Economic Substance Rules not only underscores a jurisdiction's commitment to transparency but also makes it more favorable to officials in other countries. This move aligns the Marshall Islands with international standards and signifies its dedication to a pro-business environment that values compliance with global laws.

The Impact of Economic Substance Rules

The implementation of Economic Substance Rules has propelled the Marshall Islands into a more reputable position on the global stage. Notably, on November 14, 2019, the Marshall Islands joined the European Union whitelist, granting its companies the privilege to engage in business with EU entities and banking institutions. Furthermore, the removal of the Marshall Islands from the French blacklist on January 7, 2020, holds immense significance. Given France's stringent requirements for fiscal paradises, this removal signifies a remarkable stride forward.

The adoption of Economic Substance Rules requires additional efforts and costs from entrepreneurs. However, forward-thinking business leaders view this as a contribution to the jurisdiction's stability and reliability. This perspective highlights the positive side of adhering to economic substance standards.

Navigating the Economic Substance Requirements

Marshall Islands' Economic Substance Laws entail specific requirements that businesses need to fulfill. These requirements primarily apply to "relevant activities" and "relevant entities." The following are key points to consider:

- Relevant Entities: These encompass foreign corporations, partnerships, limited partnerships, limited liability companies, foreign maritime companies with centralized management controlled in the Marshall Islands, and local companies, partnerships, or LLCs registered by non-residents with Marshall Islands tax residence.

- Relevant Activities: Activities falling under distribution and service centers, banking and insurance, intellectual property, shipping, financial and leasing, funds management, holding companies, and headquarters.

However, the majority of clients engaged in trading goods, offering services, property holding, or family office activities are largely unaffected by these regulations. Such businesses are only required to submit an annual self-declaration form confirming that they do not conduct relevant activities.

Compliance with Economic Substance Rules

For IBCs that fall under the "relevant entities" category and engage in "relevant activities," adherence to economic substance tests is essential. The compliance process comprises three main parts:

1. Directed and Managed Test: This test requires IBCs to hold regular management meetings in the Marshall Islands, ensure physical presence of the board majority, record decisions, and retain minutes in the jurisdiction.

2. Adequate Employees and Presence Test: This test mandates hiring qualified staff, bearing expenses proportional to business activity, and maintaining a physical presence in the Marshall Islands.

3. CIGA Test: Core Income-Generating Activities (CIGAs) must be carried out within the Marshall Islands to demonstrate substantial economic substance.

Special Requirements for Specific Business Types

Certain business types have unique economic substance requirements:

- Holding Companies: These entities holding shares in third-party entities need fewer stringent requirements, including maintaining a sufficient number of employees and office premises in the Marshall Islands.

- IP Holding Companies: Intellectual Property (IP) holding companies need to demonstrate control over IP assets, reasons for keeping IP in the jurisdiction, and adherence to business laws.

- Shipping Companies: Companies involved in shipping activities must manage ship activities, fulfill specific regulatory criteria, and abide by associated legislative acts.

Compliance Documentation and Reporting

Compliance reports should detail whether the IBC falls under the "relevant entities" and "relevant activities" categories, as well as the income generated. Reports should include:

- Type of business activity

- Gross income details

- Expenditure and assets breakdown

- Premises for business operations

- Employee count

- Proof of CIGAs

Reports should cover a specific financial period and be submitted to the Registrar's website, with supplementary records available if required.

Consequences of Non-Compliance

Failure to adhere to Economic Substance Rules can lead to fines. Breaches include failing to follow reporting rules or passing economic substance tests, resulting in fines or IBC deletion from the business register. Companies not passing the test for two consecutive financial periods could face higher fines or even liquidation orders.

Embracing Economic Substance for a Stronger Future

The adoption of Economic Substance Rules by the Marshall Islands underscores its commitment to creating a robust and reliable business environment. While compliance does entail effort, it aligns businesses with international standards and enhances the jurisdiction's appeal. If you're considering establishing a business in the Marshall Islands, our experts at G.O.C can assist with seamless company formation and high-quality management to ensure compliance and avoid penalties. For more information, contact us at info@globaloffshorecompany.com. Your business's success in the Marshall Islands awaits.

Disclaimer: This guide serves as a reference tool and should not substitute legal advice. For tailored guidance, consult G.O.C's customer services.