Economic SubstanceRegulations
ESR Rules
- What it is
- National rules requiring companies to evidence their economic substance
- What is required
- Passing the substance test and filing regular reports
- Who they apply to
- Companies carrying on certain kinds of relevant activity
- What is checked
- Staff, expenses, premises, management, alignment of activity
- Consequences
- Penalties, exchange of information with other countries and, in serious cases, striking off the register
In plain words
Economic Substance Regulations are national rules requiring companies to evidence real economic substance in their jurisdiction of registration. They were introduced by a number of countries, above all low-tax ones, under pressure from international transparency requirements — as an alternative to being placed on lists of non-cooperative jurisdictions.
The rules apply not to all companies but to those carrying on so-called relevant activities: certain categories such as holding, finance, insurance, leasing, intellectual property, distribution and service centres. Each category has its own substance criteria.
The practical mechanism has two parts: passing the substance test — having sufficient staff, expenses and premises and conducting management in the jurisdiction — and filing reports regularly. Non-compliance results in penalties, and information on such companies is passed to the tax authorities of other countries, including the owner’s country. That is why empty companies in such jurisdictions have ceased to be a workable tool.
Who it concerns
What needs to be ensured
- A sufficient number
- The right qualifications
- In the company’s jurisdiction
- Board meetings held locally
- Decisions taken in the jurisdiction
- Minutes and documents
- Operating expenses in the country
- Premises
- Proportionate to the activity
- Regular filing
- Timelines
- Accuracy of the information
How to comply
- 01Establish whether the activity is relevant
- 02Assess the substance requirements
- 03Provide staff and expenses
- 04Conduct management locally
- 05File reports on time
What you need to know
- The rules concern certain kinds of activity
- Substance criteria differ by category
- Reports are filed regularly and on time
- Information is passed to the tax authorities of other countries
- Penalties for non-compliance are significant
Common mistakes
- Assuming the rules do not concern your company
- Not filing reports because there was no activity
- Ensuring substance formally, on paper
- Ignoring the transfer of information to the owner’s country
- Leaving old structures unreviewed
What this means for a BRIDGES client
We check old structures in low-tax jurisdictions first: whether they comply with the substance rules and whether reports are being filed. They are what most often raise questions both at the bank and in due diligence.
Frequently asked questions
01 /What is ESR?
National rules requiring companies to evidence real economic substance in their jurisdiction of registration.
02 /Who do they concern?
Companies carrying on relevant activities: holding, finance, insurance, leasing, intellectual property and a number of others.
03 /What needs to be done?
Pass the substance test — staff, expenses, premises and management in the jurisdiction — and file reports regularly.
04 /What if there was no activity?
A report is still filed. The absence of transactions does not exempt the company from reporting on its status.
05 /Where does the information go?
It is passed to the tax authorities of other countries, including the owner’s country of tax residence.
06 /What happens in the event of non-compliance?
Significant penalties, exchange of information with other jurisdictions and, for systematic breaches, up to striking the company off the register.
See also
Read next
This material has undergone editorial review by BRIDGES.
Have companies in preferential jurisdictions?
We will check compliance with the substance rules and the reporting — before you apply for the programme.