Marshall Islands Economic Substance Laws Explained for 2023

The Marshall Islands first adopted the Economic Substance Rules for International Business Companies (IBCs) on January 1, 2019. This is a truly significant step if we look at it from a strategic point of view: this way, the country shows that it complies with laws and tries to create a stable, reliable and transparent business framework for entrepreneurs. 

The existence of Economic Substance Rules increases the attractiveness of the jurisdiction for international business, even though it entails additional efforts to ensure that your company complies with laws. Let’s take a more detailed look at the requirements you are expected to satisfy.

Significance of Economic Substance

The existence of laws that set the standards for economic substance is an essential criterion as it means your company will be more acceptable to officials in other countries. The Marshall Islands authorities adopted the economic substance framework 3 years ago to make sure that the jurisdiction would go far beyond any black or grey lists towards becoming a pro-business environment that values compliance with global laws and tight connections with the outer world.

In fact, the jurisdiction made a remarkable step forward on November 14, 2019, when it joined the European Union whitelist. The consequences are hard to overestimate as Marshall Islands companies obtained the right to freely engage in business with all EU business entities and banking institutions. 

But this is not all. On January 7, 2020, Marshall Islands received one more significant appraisal, this time from France: it was deleted from the French blacklist. Why is it so important? Well, France is prone to imposing the most stringent requirements on fiscal paradises among OECD countries. With that in mind, we can make a conclusion that the Marshall Islands made a truly marvelous step forward.

There is no denying that economic substance standards imply more efforts (or costs) for entrepreneurs. On the other hand, far-sighted and optimistic businessmen regard this as a contribution to the jurisdiction’s stability and reliability, and we consider it a good way to look at the economic substance.

Let’s concentrate on the obligatory economic substance requirements stipulated in the Marshall Islands legislation – and review whether any action is required to keep your Marshall Islands entity compliant. Most owners of Marshall Islands IBCs and LLCs will not be affected by these amendments, but those in certain areas of business, defined as “relevant activities” will need to make certain changes.

Economic Substance: The Way It All Began

The Economic Substance Rules were created by the EU and OECD to fight offshore tax evasion. In 2017, the Council of Europe started to apply economic substance criteria to assess the quality of corporate legislation in countries. It was part of the effort made by world organizations to regulate the taxation of international companies that used their offshore structures to reduce the tax burden.

The next step in the fight against tax evasion was the implementation of BEPS (Base Erosion and Profit Shifting) by the OECD. In consequence, the whole offshore sector, including the Marshall Islands, introduced economic substance norms into the business regulations.

Regulatory Framework for Economic Substance in the RMI

The regulation on economic substance in the Marshall Islands was created in 2018, but it took effect later on (in January, 2019). The document was amended twice, on February 21, 2019 and on August 29, 2019.

The regulation describes the fundamental notions of “relevant entities” and “relevant activities“. All business entities which belong to the “relevant” group are supposed to take the necessary steps to meet the economic substance conditions.

“Relevant entities” pertain to: 

• Foreign corporations
• Partnerships
• Limited partnerships
• Limited liability companies, 
• Foreign maritime companies with centralized management that are controlled in the RMI
• Local companies, partnerships or LLCs registered by non-residents that have the Marshall Islands tax residence

IBCs conduct “relevant activities” if they render services in the areas below: 

• Distribution and service centers
• Banking and Insurance
• Business in the intellectual property field
• Shipping business
• Financial and leasing
• Funds management
• Holding company
• Headquarters

It’s important to point out that this list of “relevant activities” is quite short so the vast majority of clients are not affected at all by this regulation. Companies that are trading goods or services, for example, or those used in property holding or family office activities, will not have to fulfill these new requirements. They will simply need to submit a one-page self-declaration form annually confirming that they do not conduct any relevant activities.

Company Types Not Covered by the Economic Substance Rules in the RMI

IBCs opened in the Marshall Islands which can prove that they are not local tax residents are automatically excluded from the class of “relevant entities” and are exempted from the need to take economic substance tests.

You will need to make the following information available to the local registrar to get your IBC deleted from the list of “relevant entities”: 

• Tax ID
• Certificate of tax residence
• Documentary evidence to substantiate the fact that you pay taxes outside the RMI

If your international company in the Marshall Islands has earned some income (even a tiny part) by conducting “relevant activities,” it is expected to fulfill the conditions of economic substance exclusively in this business field. 

If your IBC in the Marshall Islands is a “relevant entity” but it did not exercise a single “relevant activity”, it will still be obliged to present a report to the registrar once a year.

How an IBC Can Prove Economic Substance in the RMI

Any international company that corresponds to the “relevant entity” criteria is expected to comply with a number of conditions to pass an economic substance test. It integrates 3 parts: 

1. Directed and managed test

You will pass it on the condition that your company satisfies the following criteria: 

• holds regular meetings of IBC management bodies in the RMI
• satisfies the requirement for the physical presence of the board majority at such meetings (the presence of a quorum)
• records all crucial decisions in the minutes of the meeting
• keeps all the minutes in the RMI
• recruits the experts to the company’s management board with the knowledge and experience sufficient to perform their duties 

2. Adequate employees and presence test

The following criteria are expected to be met: 

• hire a sufficient number of qualified staff to conduct business
• bear adequate expenses commensurate with IBC’s activity
• ensure an adequate physical presence in the Marshall Islands (real estate/property)

3. CIGA Test

Core Income-Generating Activities (CIGAs) are the operations held in the RMI for your IBC to receive profit. To successfully pass the test, you will need to prove that your CIGAs are carried out in the territory of the jurisdiction.

Special Requirements for Shipping Companies, Holding Companies, and Intellectual Property Owners

IBCs created in the Marshall Islands and focused on operations in one of the above fields will have to meet special economic substance requirements.

“Holding companies” pertain to IBCs that hold shares (interests) in third-party entities and have no other source of income than dividends and capital gains. Such companies need to adhere to economic substance rules that are much less tough: 

• a sufficient number of employees and office premises in the Marshall Islands
• observation of RMI business laws in reference to submission of reports, payment of all taxes and other mandatory fees on schedule

Holding companies registered in the Marshall Islands do not need to go through a directed and managed test, or CIGA test. If you want to meet these lowered requirements with minimum hassle involved, hire a local registered agent.

IP holding companies keep, use and generate income from intangible intellectual property (copyrights, trademarks, brands). These entities fall under a high-risk category and consequently have to satisfy tighter requirements to prove economic substance in the country.

Such companies will be requested to make available the proofs below: 

• evidence of adequate control over the development, operation, maintenance, improvement and protection of the intellectual asset by qualified employees that work in the Marshall Islands
• documentary evidence of the reasons for keeping intellectual property in the RMI, such as a business plan or information on the staff

Shipping companies get their income from either transportation of people or goods by sea or ship-related activities, including owning, financing, managing the crew, chartering the ship, and so on.

Shipping companies usually earn their profits by conducting activities outside the territory of the Marshall Islands, while in transit to international seaports. Based on the specific character of this business, the regulatory documents set the following criteria to be met as proof of economic substance: 

• management of the ship’s activities, including crew management, ship maintenance, voyage supervision, and so on
• fulfillment of all criteria set forth in the local Associations Law, 1990 Maritime Act, International Labor Organization Standards, and other associated legislative acts.

It has to be noted that private ownership, operation or management of vessels, ships, yachts or boats, etc. do not pertain to “relevant activities”, so these Marshall Islands entities do not need to comply with any economic substance rules.

Documents that Prove Compliance of Marshall Islands IBCs with Economic Substance Rules

The report on each activity that IBCs present to the registrar should provide the following details.

First of all, state whether: 

• your IBC falls under the category of “relevant entities”
• the activity falls under the category of “relevant activities”
• your IBC earns any profits from the said activity

Second, please reveal the details below: 

• type of business activity
• gross income: amount and type
• expenditure and assets: amount and type
• premises in which IBC’s business operations are carried out
• number of employees, including full-time staff
• proof of CIGAs in the Marshall Islands

The registrar is entitled to ask for supplementary records to support the above information.

All reports and statements you file should provide information on a particular financial period. You will submit your reporting to prove the economic substance of your IBC created in the Marshall Islands using the Registrar’s website.

Penalties for Non-Adherence to the Economic Substance Rules

The legislation of the Marshall Islands provides for the fines listed below if you are in breach of the Economic Substance Rules: 

• failure to adhere to the reporting rules or pass an economic substance test for the required interval implies a fine of $50,000 or IBC deletion from the business register
• if the company fails to pass the economic substance test for 2 consecutive financial periods, the fine reaches $100,000 or the entity receives a liquidation order

Long Live the Marshall Islands

Let’s emphasize again that the Economic Substance Rules adopted in the RMI are not in the slightest supposed to make the business transactions more challenging. Adherence to them does require some effort, but this is a part of strategic investment in a reliable jurisdiction that shows every sign of its intention to be stable and law-abiding.

If you want to set up your business in the Marshall Islands, please contact us at info@offshore-pro.info. The Offshore Pro Group experts can assist with company formation to make the whole procedure hassle-free and arrange for its high-quality management to prevent violation of laws or payment of penalties.