You can never have enough tax or regulatory substance or so the argument goes. This, however, is to misunderstand the point. To more effectively mitigate risk, promoters should focus on constructing something real with clear commercial logic. This will not only save a lot of time and money, but may also avoid accusations of artificiality.
It is generally accepted that businesses have the right to arrange their affairs in a way that makes most commercial sense.
Given the political implications though of establishing foreign vehicles that benefit from better operating environments elsewhere, authorities have sought to minimise any ‘loss’ of business by enacting special anti-abuse provisions and adopting restrictive practices when interpreting domestic laws. These anti-abuse provisions and practices often require that the foreign vehicle demonstrate real substance (as opposed to being simple postal addresses) in order to be recognised as genuine.
Precise substance requirements depend on whether they are regulatory or fiscal in nature (and if fiscal, whether they relate to direct or indirect taxes), but they all relate to demonstrating the existence of a real business presence in a foreign country. A real business presence does not consist though of simply insourcing the same-old administrative processes (as this adds nothing save cost), but rather in creating a real commercial enterprise. The enterprise itself should be value adding by nature and carried-out by those with appropriate experience, authority and discretion to do so. It should not be the disguised proxy of the promoter.
Unfortunately however, ‘demonstrating’ substance is often interpreted in a tick-the-box manner that lends towards artificiality. This is likely to be encouraged abroad, if anything, as it is used to promote local employment and service provision. Paradoxically, this combination of factors can result in promoters constructing exaggerated and inefficient business models that by nature undermine the existence of any credible commercial enterprise in the relevant jurisdiction. Taken too far, this approach could be construed as misrepresentative in an increasingly sensitive environment.
A properly considered and balanced approach should always be taken therefore to establishing foreign vehicles and a tick-the-box approach to substance should be avoided. These vehicles should carry on business independently in a way that is complimentary, efficient and value adding and does not misrepresent the commercial truth.
Aztec Group has developed an operating platform to facilitate business in each jurisdiction in an efficient, scaleable and accountable manner. This platform is totally flexible and includes all the components necessary to facilitate investment enabling our clients to focus on those core value adding processes that they are measured on. It is the valid performance of these processes that determines real substance.
previous comment / Edward Moore
If you would like to discuss outsourcing to the Aztec Group or are considering migrating a fund or SPV, please call James Duffield, Head of Business Development, on +44 20 3818 0250.
Aztec Group Guernsey
Aztec Financial Services (Guernsey) Limited
PO Box 656, East Wing, Trafalgar Court
Les Banques, St Peter Port, Guernsey, GY1 3PP
Telephone: +44 1481 749700
Facsimile: +44 1481 749749
Aztec Group Jersey
Aztec Financial Services (Jersey) Limited
Aztec Group House, PO Box 730
11-15 Seaton Place, St Helier, Jersey, JE4 0QH
Telephone: +44 1534 833000
Facsimile: +44 1534 833033
Aztec Group UK - London
Aztec Financial Services (UK) Limited
2 Throgmorton Avenue
Telephone: +44 20 3818 0250
Aztec Group Luxembourg
Aztec Financial Services (Luxembourg) S.A.
8, rue Lou Hemmer, L-1748, Luxembourg – Findel
Grand-Duché de Luxembourg
Telephone:+352 246 160 6000
Facsimile: +352 246 160 6016
Aztec Group The Netherlands
Aztec Financial Services (Netherlands) BV
Spaces Zuidas, Barbara Strozzilaan 201
1083 HN Amsterdam, The Netherlands
Telephone: +31 20 794 4820
Facsimile: +31 20 794 4821
Aztec Group UK - Southampton
Aztec Financial Services (UK) Limited
Forum 3, Solent Business Park
Parkway South, Whiteley, Fareham, PO15 7FH
Telephone: +44 238 202 2300
Facsimile: +44 238 202 2309