OECD Now Requires All Zero-tax Countries to Apply Substance Criteria

The Organization of Economic Cooperation and Development (OECD) has put a spotlight on the privileged tax regimes of all zero and low tax jurisdictions. In order to level the playing field between jurisdictions in a context where taxpayers can easily relocate their mobile activities in response to tax considerations or with the intent to evade applicable substantial activity requirements, OECD aim to impose substance criteria on zero and nominal tax jurisdictions and provide guidance on their implementation. The OECD’s substance criteria is mainly grounded in minimum operations requirements and transparency of information.

Whom it applies to (OECD, 2018):

  1. Jurisdictions that do not impose a corporate income tax.
  2. Jurisdictions that impose only nominal corporate income tax to avoid the requirements.
  3. NOT jurisdictions that have been reviewed on the basis of the preferential regimes they offer (unless they undertook reforms that abolish their corporate income tax altogether).

The business activities that are subject to the substance criteria fall into the categories of headquarters, distribution centers, service centers, financing, leasing, fund management, banking, insurance, shipping, holding companies and the provision of intangibles (OECD, 2018).

The requirements (OECD, 2018):

  1. Define the core income generating activities for each relevant business sector.
  2. Ensure that core income generating activities relevant to the type of activity are undertaken by the entity and are undertaken in the jurisdiction.
  3. Require the entity to have an adequate number of full time employees with necessary qualifications and incurring an adequate amount of operating expenditures to undertake such activities.
  4. Have a transparent mechanism to ensure compliance and provide an effective enforcement mechanism if these core income generating activities are not undertaken by the entity or do not occur within the jurisdiction.

Note: OECD's report points do not automatically bind any entity until legislation has been enacted for the purpose of complying with these requirements; therefore, it is important to observe the precise laws Saudi Arabia and other jurisdictions will introduce in this regard.

For more information regarding OECD’s substantial activity requirement please contact Kenan Nagshabandi at:

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