Introduction to Saint Lucia Economic Substance Legislation

INTRODUCTION TO ECONOMIC SUBSTANCE

SAINT LUCIA

The Economic Substance Act of Saint Lucia No. 33 of 2019, Economic Substance (Amendment) Act No. 15 of 2020, the regulations and guidelines promulgated under such law apply to certain entities in Saint Lucia which conduct relevant activity.

The legislation is designed to protect the reputation of Saint Lucia by ensuring the income streams from certain activities are based on local activity, which substantiates the use of Saint Lucia as a Jurisdiction and compliance with the OECD requirements.

The legislation does not apply to all entities in Saint Lucia - rather, it applies to certain ‘relevant entities’ carrying out certain ‘relevant entities’. The majority of affected entities are required to: (i) be managed and directed; (ii) have adequate employees; (iii) have expenditure and physical presence; and (iv) conduct their ‘core income generating activities’ in Saint Lucia.

The importance of compliance with the economic substance legislation cannot be understated given the potential liability for extensive penalties. We at PKF Corporate Services Ltd and our sister Company PKF Professional Services Inc. can help you navigate the complexities of the legislation and ensure that you are meeting the requirements.

HOW CAN PKF CORPORATE SERVICES HELP?

PKF Corporate Services Ltd is a sister company to PKF St. Lucia an independent accounting and advisory firm of PKF International who has significant presence in many of the jurisdictions affected by the implementation of the economic substance legislation, including Saint Lucia. As a result, we are uniquely placed to help you our clients understand and respond accordingly to the new economic substance legislation.

We hereby address the following questions to deal with substance requirements.

1.           Is the entity in question in scope of the new law?

Our team can provide professional (non-legal) advice to help identify relevant entities conducting relevant activities.

2.           Does the entity meet the substance requirements?

We can perform an economic substance test on entities in scope, which may include a request for additional information from clients. The substance requirements differ depending on the type of relevant activity conducted by the entity. Our tests include a gap-analysis of the current measures in place versus the requirements for adequate control, people, facilities and expenditure. Should the substance test not be met, enhanced substance may be required based on the relevant activity conducted by the entity.

3.           How can the entity enhance its substance?

Clients whose activities do not meet the substance requirements will receive a proposal from PKF Corporate Services in collaboration with the competent authority highlighting enhanced substance solutions.

4.           Submissions of notifications and reports

All Saint Lucian entities will be required to register with the Competent Authority.

Entities are required to file an economic substance report. PKF Corporate Services can assist in the preparation and submission of your registration and/or report in the formats required by the Competent Authority.

The economic substance legislation includes specific powers to request additional information in relation to any substance information provided to the Competent Authority in mandatory filings and /or upcoming reports.

PENALTIES FOR NON-COMPLIANCE

Penalties for non-compliance with the economic substance legislation ranges increasing fines, removal from the companies register, through to reporting the beneficial owners jurisdiction of residence in accordance with an international agreement. Penalty particulars include:

Infraction Penalty

 Failure to adhere to a notice to comply

 One thousand dollars for every month or part thereof for which the default continues

Failure to adhere to a notice to comply in a subsequent year

Disclosure of information to partner jurisdictions as applicable

Notification of the Registrar who may strike off the entity.

Avoidance

 Disclosure to a partner jurisdiction of any information related to the relevant entity.

 Issue of notice of penalty that includes a penalty of fifty thousand dollars.

Fraud

 Liable on summary conviction to a sum not exceeding twenty-five thousand dollars (USD25 000.00) or imprisonment for a term not exceeding two (2) years or both.

 Liable on conviction on indictment to a fine not exceeding one hundred thousand dollars (USD100 000.00) or imprisonment for a term not exceeding seven (7) years or both.

Failure to provide information

 Liable on summary conviction to a fine not exceeding ten thousand dollars (USD10 000.00) or imprisonment for a term not exceeding two (2) years or both.

Provision of False information

 Liable upon summary conviction to a fine not exceeding fifty thousand dollars (USD50 000.00).

WHICH ENTITIES ARE AFFECTED?

Relevant entities

The economic substance legislation defines which Saint Lucian entities are relevant entities. Relevant entities means’ an entity that carries on economic activity in a relevant sector; and includes –

(a)         A company incorporated or registered under the Companies Act, Cap. 13.01 or the International Business Companies Act, Cap. 12.14,

(b)         A company that is incorporated outside of Saint Lucia and registered under the Companies Act, Cap. 13.01,

(c)          A limited liability partnership that is registered under the Commercial Code, Cap. 244 o the Revised Laws of Saint Lucia 1957,

(d)         An international trust,

(e)         An entity declared to be a relevant entity under section 9;

WHAT ARE RELEVANT ACTIVITIES?

The economic substance legislation specifies eleven categories of relevant activity that an entity is assessed against, which are:

1.           Banking

2.           Insurance

3.           Shipping

4.           International Mutual Funds business

5.           Financing and leasing

6.           Headquartering

7.           Activities of a company holding tangible assets

8.           Activities of a company holding intangible assets

9.           Activities of a pure equity holding company

10.         Distribution and service centre business

11.         A combination of a business or activity carried on under 1 to 10 above.

It is possible for an entity to conduct multiple relevant activities. If this is the case, the substance requirements will need to be applied to each activity.

A relevant entity that does not conduct a relevant activity is not subject to the requirements of the economic substance test, however this needs to be evidenced in writing and submitted to PKF Corporate Services Ltd in order to satisfy the reporting requirement.

The extent of the substance requirements for those entities which are conducting one or more relevant activities depends on the nature and the scale of each relevant activity.

In order to assist with classifying if an entity is performing a relevant activity, the economic substance legislation has defined some typical core income generating activities that the business should be performing in Saint Lucia.

MEASURING SUBSTANCE

Once it has been determined that an entity is a relevant entity, conducting a relevant activity and has income, it must satisfy the applicable economic substance test.

-                     The substance requirements differ depending on the type of relevant activity conducted by an entity. Generally, an entity that is conducting a relevant activity will meet the substance requirements if:

-                     It conducts core income-generating activities in Saint Lucia;

-                     It is directed and managed in Saint Lucia;

-                     Have an adequate number of qualified employees in Saint Lucia, whether –

(i)           Employed by the relevant entity or another person, or

(ii)          Employed on a temporary or long-term contract;

-                     Have adequate operating expenditure proportionate to the level of activity carried on in Saint Lucia;

-                     Have an adequate physical presence

Once substance is established, the entity must file an economic substance report with the Competent Authority of Saint Lucia.

RELEVANT ACTIVITY DEFINITIONS AND CORE INCOME GENERATING ACTIVITY

Core income generating activities are the key essential and valuable activities that generate the income of the entity. It is not necessary fi the entity to perform all on the cire income generating activities listed in the legislation fir the relevant entity.

The following core incoming generating activities must be carried out in Saint Lucia to demonstrate substance:

RELEVANT ACTIVITY/

SECTOR

SAINT LUCIA CORE INCOME GENERATING ACTIVITY(IES)

Banking Business

has the meaning assigned to it under section 2 of the International Banks Act, Cap. 12.17 banking business means –

(a) the business of receiving funds by—

(i) the acceptance of monetary deposits which are repayable on demand or after notice or any similar operation, or

 (ii) the sale or placement of bonds, certificates, notes or other securities, and the use of the funds, either in whole or in part, for loans or investment for the risk of the customer; and

 (b) any other activities recognised by the Minister as customary banking practice and which a financial institution may additionally be authorised to do,

and a person shall, without prejudice to the generality of the foregoing to be deemed to accept deposits of money if that person advertises for or solicits the deposits from the general public irrespective of any terms or conditions under which deposits or money are solicited or received or whether or not certificates or other instruments are issued in respect of such deposits;

-         Raising funds

-         Managing risk including credit, currency and interest risk,

-         Taking hedging positions,

-         Providing loans, credit or other financial services to customers,

-         Accepting monetary deposits, holding assets on behalf of customers and providing similar financial services’

-         Managing regulatory capital, and

-         Preparing regulatory reports and returns

Insurance business

Has the meaning assigned to it under section 2 of the International Insurance Act, Cap. 12.15 insurance business” includes—

(a)  the business of effecting and carrying out contracts—

(i)   protecting persons against loss or liability to loss in respect of risks to which such persons may be exposed, or

(ii)  to pay a sum of money or render money’s worth upon the happening of an event; and

(b) re-insurance business;

-         Predicting and calculating risk,

-         Insuring or re-insuring against risk,

-         Providing client services, and

-         Preparing regulatory reports and returns.

Shipping busines

(a) means the operation of a ship in international traffic for income for the transport of passengers or cargo;

(b) includes –

1.     operations directly connected with, or ancillary to an operation under (a) above.

2.     Any of the following activities –

(i)     The rental on a charter basis of a ship;

(ii)    The sale of tickets or similar documents and the provision of services connected with the sale of tickets or similar documents, for the enterprise or any other enterprise;

(iii)   The use, maintenance or rental of containers, including trailers and related equipment for the transport of containers, used for the transport of goods or merchandise; and

(iv)   The management of the crew of a ship.

-         Managing crew, including hiring, paying, and overseeing crew members,

-         Hauling and maintaining ships,

-         Overseeing and tracking deliveries,

-         Determining the goods to order and when to deliver the goods, and

-         Organizing and overseeing voyages.

International mutual funds business

means a class of regulated activity undertaken by a person in accordance with a licence issued under the International Mutual Funds Act, Cap. 12.16

-         Taking decisions on the holding and selling of investments,

-         Calculating risks and reserves,

-         Taking decisions on currency or interest fluctuations and hedging positions, and

-         Preparing relevant regulatory or other reports for government authorities and investors.

Financing and leasing business

(a) means providing a credit facility for consideration, including consideration –

1.           by way of interest,

2.           by the provision of credit by way of installments for which a separate charge is made and disclosed to the customer in connection with –

(i)   the supply of goods by hire purchase,

(ii)  financial leasing, excluding land and interests in land; or

(iii) conditional sale or credit sale, and

3.           where an advance or credit repayable by a customer is assigned to another person, to that other person;

(b) does not include a banking business, an insurance business or an international mutual fund business.

-         In the case of leasing, identifying and acquiring assets to be leased,

-         Agreeing funding terms,

-         Setting the terms and duration of any financing, leasing or hire-purchase agreement,

-         Monitoring and revising agreements, and

-         Managing risks.

Headquartering business

(a) means the provision of services to a foreign group entity

that are material for decision-making in that foreign group entity;

(b) does not include —

(i)       shipping,

(ii)    insurance business,

(iii)   banking business,

(iv)   international mutual funds business,

(v)    financing and leasing,

(vi)   distribution and service centre business,

(vii)  activities of a company holding tangible assets;

(viii) activities of a company holding intangible assets,

        or

(ix)   activities of a pure equity holding company;

-         making management decisions on behalf of a foreign group entity,

-         taking decisions that are material for decision-making in a foreign group entity,

-         incurring expenditure on behalf of a group entity, and

-         coordinating group activities

Activities of a company holdings tangible assets business

means a company with no operations of its own but owns a controlling interest in other companies or assets.

in the case of a relevant entity with income from holding tangible assets –

-         taking strategic decisions, managing ad bearing principal risks relating to the development and subsequent exploitation of the tangible asset,

-         taking strategic decisions, managing, and bearing principal risks relating to the third party acquisition and subsequent exploitations of the tangible asset, and

-         carrying on the underlying trading activities through which the tangible asset is exploited and leads to the generation of revenue from third parties.

Activities of a company holdings intangible assets business

means a company with no operations of its own but owns a controlling interest in other companies or assets.

In the case of a relevant entity with income from holding intangible assets –

-         conducting research and development without acquiring or outsourcing research and development,

-         taking strategic decisions, managing and bearing principal risks relating to –

(i)   the development and subsequent exploitation of the intangible asset; and

(ii)  the third party acquisition and subsequent exploitation of the intangible asset,

-            carrying on the underlying trading activities through which the intangible asset is exploited for the generation of revenue from third parties.

Activities of a pure equity holding company business 

means a company which only holds equity participations on other entities from which the only form of income derived are dividends and capital gains and which –

(a) holds voting rights in another company,

(b) has the right to appoint or remove a majority of the board of directors of that other company; or

(c)  controls alone, under an arrangement with other members, a majority of the voting rights on that other company.

A relevant entity that is only carrying on an activity in a relevant sector that is the business of a pure equity holding company is subject to reduced economic substance requirements which is satisfied if the relevant entity confirms that –

(a) it has complied with the applicable filing requirements under the Companies Act, Cap. 13.01, the International Business Companies Act, Cap. 12.14 and the Income Tax Act. Cap. 15.02;

(b) it has adequate human resource and premises in Saint Lucia for holding and managing equity interests or shares in another company.

Distribution and service centre business

means a business where the only or main activity is –

(a)         the purchase of raw materials and finished products from a foreign group entity and the resale of the materials for a profit; or

(b)         the provision of services to a foreign group entity.

The relevant entity is this sector will show proof of

-         transporting and storing of goods

-         managing stocks and processing orders, and

-         providing consultation or administrative services.

DEFINITION OF DIRECTED AND MANAGED

“Directed and Managed in Saint Lucia” means –

(a)         The company’s board of directors meets in Saint Lucia at an adequate frequency given the level f decision-making required;

(b)         During each meeting of the board of directors, there is a quorum of directors physically present;

(c)          Strategic decisions of the company are set at meetings of the board of directors and minutes of the meetings reflect strategic decisions;

(d)         The board of directors as a whole, has the necessary knowledge and expertise to discharge its duties as a board; and

(e)         The minutes of the board meetings and the company records are kept in Saint Lucia.

The directed and managed assessment is designed to ensure that there are an adequate number of director meetings held and attended in Saint Lucia, although it is not necessary for all meetings to be held in Saint Lucia.

Quorum in this context will be determined in accordance with economic substance legislation and the entity’s constitutional documents.

What constitutes an adequate number of meetings in Saint Lucia will be dependent on the relevant activities conducted by the entity. Although, it is also expected that even for entities with a minimal level of activity, there will be at least one meeting of its board held in Saint Lucia in each year.

The requirement also looks to ensure that the board of directors is the decision-making body, in that it has the necessary knowledge and experience, and is not simply giving effect to decisions taken outside of Saint Lucia whether taken by the board or others.

It is unlikely to be accepted that the directors are making the strategic decisions if there is evidence that substantive decision making is taking place in any forums, or by any persons, without reference to or the oversight to the board of directors.

The minutes of the board of director meetings should refer to all the relevant decisions taken, even where the board considers courses of action and rejects them.

Entity records expected to be maintained and physically reside, or be electronically available, in Saint Lucia and consist of: certificates of incorporation; articles of association; memorandum of association; financial statements; all relevant certifications to operate; and major funding documentation; and in accordance with section 111 of the International Business Companies Act, Cap. 12.14 and states as follows –

(1)         An international business company shall keep records for a period of six years from the date-

(a) Of completing a transaction to which the records relate; or

(b) The company terminates the business relationship to which the records relate.

(2)         Records kept pursuant to subsection (1) must –

(a)         Show and correctly explain a transaction;

(b)         Enable the preparation of financial statements;

(c)          Enable the financial position of the international business company to be determined, with reasonable accuracy, at any point in time.

(3)         The underlying documentation must show the details of –

(a)         Sums of money received and expended and the matters in respect of which the expenditure takes place;

(b)         Sales, purchases and other transactions by the international business company; or

(c)          Assets and liabilities of the international business company.

REPORTING SUBSTANCE

An Economic Substance Return must be submitted three months after the year-end of all relevant entities. However, entities will be given a year to file their first returns. As such, all entities formed after December 31, 2018 will commence filing in 2021 while grandfathered entities will commence in 2022. This grace period does not mean that the entities are not required to have substance. It should however be deemed as a time for preparation. The CA will continue to gather required substance information regarding entities during the grace period in order to meet the requirements of the OECD. Monitoring may also occur during this period based on information already provided to the Competent Authority.

The return is to be submitted electronically. An entity is to submit a report on all activities carried out in relevant sectors on the return. The elements of the economic substance return are provided in Table 2 below.

Elements of Economic Substance Return

ü  The address and location of its registered office and place of operation, whether leased, rented or owned, in and outside of Saint Lucia.

ü  The name and jurisdiction of residence of the beneficial owners.

ü  The number of full-time employees or other personnel with appropriate qualifications, including contracted third parties, who are in Saint Lucia. (Double counting in not permitted)

ü  The amount and type of income earned by the entity in respect of each relevant sector

ü  The amount and type of expenses incurred and assets held by the entity in respect of each relevant sector

ü  A detailed description of its core-income generating activities undertaken in Saint Lucia, whether or not they have been outsourced.

The CA will continue working with all entities to ensure compliance with the requirements of the Act. The CA will continue to monitor the implementation of the legislation to ensure effectiveness.

SANCTIONS

Forfeiture of Foreign Source Income (FSI) Exemption

Pursuant to Section 14 (2) of the ESA, the Competent Authority will notify the Comptroller of Inland Revenue when a relevant entity fails to qualify for the exemption of income that accrues from a source outside of Saint Lucia (foreign source income). This therefore means that failure to meet economic substance requirements will lead to taxation of foreign source income at the prevailing corporate tax rate.

Foreign Source Income Exemption

 The Income Tax (Amendment) Act No.12 of 2018 introduced a territorial tax system to Saint Lucia. This system exempts resident companies from corporate tax foreign source income (FSI), which is any income that is earned outside of Saint Lucia. Section 8(3) of the ITA as amended now provides that:

 “Where a company is a resident, the assessable income of that company shall not include income accrued from a source outside Saint Lucia in accordance with section 10A of the Income Tax Act Cap. 15.02.”

 Section 10A goes on to delineate income that is considered to be derived from a source outside of Saint Lucia or FSI, as follows:

 “(a) profits derived from -

(i) a permanent establishment outside Saint Lucia,

(ii) immovable property situated outside Saint Lucia;

(b) interest that is not specified under section 10(1)(c);

(c) income derived from investments in securities, such as, mutual funds, stocks and interest bearing instruments, issued by a person outside Saint Lucia;

(d) management charges paid by a non-resident from a source outside Saint Lucia where the costs are not attributable to a permanent establishment in Saint Lucia;

(e) royalty payments received from a non-resident permanent establishment to a resident permanent establishment;

(f) a source of income which is deemed to accrue from a source outside Saint Lucia pursuant to an international agreement made under section 60.”.         

In determining whether the income qualifies as FSI income consideration must be given to the Economic Substance Act. Before awarding an exemption pursuant to Section 10A, it must be determine whether:

1.           The FSI has been subject to tax in the jurisdiction where the income arose;

2.           If the income is exempt under a programme by a government in the jurisdiction where it arose and is derived from substantive economic activity.

3.           The income was moved from one jurisdiction, where taxes were paid then moved to a second jurisdiction where it was reinvested but no taxes were paid. The income as a result of coming from the second country shall not be exempt. 

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Tel.: 758- 450-7777

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