The Economic Substance Regulation of The Marshall Islands

Jul 04, 2022

1. INTRODUCTION

In accordance with the Republic of the Marshall Islands (the “RMI”) Economic Substance Regulations, 2018[1] (the “ESR”), which have been effective as of 1 January 2019, all non-resident domestic entities (the “NRDEs”) and foreign maritime entities (the “FMEs”) are required to file an annual report on their economic substance. In this article, the issues related to requirements for filing the annual economic substance report to the Marshall Islands’ Trade Registry will be outlined and the relevant articles will be examined.

2. THE DEFINITIONS AND THE SCOPE OF ESR

In accordance with the ESR, the NRDEs and FMEs shall be obliged to submit a report which illustrates their economic substance on an annual basis. The definitions of NRDEs and FMEs could be summarized in accordance with the RMI Associations Law, as follows:

1. Non-Resident Domestic Entities (the “NRDEs”):

The definition of the NRDEs could be found in the Business Corporations Act[2] of the Marshall Islands (the “BCA”) and according to § 2/a-(i) of the BCA; a non-resident corporation, partnership, trust, unincorporated association, or other entity means either a domestic corporation or a foreign corporation, partnership, trust, unincorporated association or other entity not doing business in the RMI. Due to the reference of this Article to the ESR, NRDEs are obliged to file the necessary report through the RMI’s secure online portal and this report shall be submitted within 12 months of the anniversary date of the NRDEs.

2. Foreign Maritime Entities (the “FMEs”)

The definition of the FMEs could be found in the Business Corporations Act of the Marshall Islands (the “BCA”) and according to § 2/a-(e) of the BCA; an FME means a foreign entity registered pursuant to the provisions of Division 13 of the BCA. In accordance with § 119/1, a foreign entity whose indenture or instrument of trust, charter, or articles of incorporation, agreement of partnership, or other document recognized by the foreign State of its creation as the basis of its existence, which document directly or by force of the law of the State of creation comprehends the power to own or operate vessels, and which confers or recognizes the capacity under the law of the State of creation to sue and be sued in the name of the entity or its lawful fiduciary or legal representative may apply to the appropriate Registrar or Deputy Registrar of Corporations to be registered as a foreign maritime entity.

3. ECONOMIC SUBSTANCE REPORT

1. Requirements

The economic substance requirements have been regulated in Section 4 of the Economic Substance Regulations, 2018, whereas, a relevant entity must, for each financial period in which it derives income from a relevant activity, have economic substance in the RMI in relation to that relevant activity. The relevant activities could serve various purposes and the below of the following are shall be deemed as relevant activities:

(a) distribution and service center business; (b) financing and leasing business; (c) fund management business; (d) headquarters business; (e) holding company business; (f) intellectual-property business; (g) shipping business; (h) banking business; and (i) insurance business.

According to the above-stated provisions, the economic substance test shall be made if a relevant entity has economic substance in the RMI in relation to a relevant activity if the relevant entity:

(a) is directed and managed in the Republic in relation to that relevant activity; (b) having regard to the level of relevant activity carried out in the Republic; (c) it carries out core income-generating activity in relation to that relevant activity in the RMI.

2. Application

In addition to the above regulations, the RMI has published the Economic Substance Reporting Portal User Guide (the “Guide”).[3] In accordance with the Guide, the technical issues related to the economic substance report have been explained with general user tips. The Guide sets forth that all responses which will be inserted into the ESR system shall be in English. Once submitted, the representative of the NRDEs and/or FMEs will receive a confirmation number along with an electronic ESR Report Confirmation document. Within 72 hours of submission, a Certificate of Economic Substance Reporting Compliance will be sent to the e-mail address of the user submitting the ESR Report. To log in to the system, every entity shall enter their unique pins which will be sent from the RMI Registry per post.

4. FAILURE TO SATISFY THE ECONOMIC SUBSTANCE TEST

Section 7 of the ESR Regulation, 2018 regulates the failure to satisfy the Economic Substance Test. If the Registrar determines that a relevant entity has not met the economic substance test for a financial period, the Registrar shall issue a notice to the relevant entity stating the reasons for its determination, any applicable penalties, and such other information as may be determined by the Registrar. If a relevant entity that has not met the economic substance test for a financial period; shall be liable to a fine not exceeding $50,000 for each relevant such financial period, revocation of its formation documents and dissolution, or both. (b) If, for the financial period following a financial period in which a penalty, other than revocation of its formation documents, was imposed in accordance with the above, the Registrar determines that a relevant entity has not met the economic substance test, the relevant entity shall be liable for a fine not exceeding $100,000, revocation of its formation documents and dissolution, or both.

5. CONCLUSION

The ESR obligation came into force in 2019, and in accordance with the ESR Regulation, 2018 and relevant Guides, all reports shall be filed through the RMI’s secure online portal and must be submitted within 12 months of the anniversary date of the NRDE or FME. Any NRDE or FME that does not meet the filing deadline may be subject to penalties or annulment. 

To submit the aforementioned report shall vary from the form of the incorporation, and therefore, shall be inserted correctly to not to be imposed any sanction or penalty from the RMI Registry.

 

Att. Cemile Yıldıran
Özay Law Firm

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