In a nutshell: as of 1 July 2021, offshore companies incorporated under the laws of the Marshall Islands and so-called foreign maritime entities registered in the Marshall Islands face the deadline for filing the annual Marshall Islands Economic Substance Report. However, special regulations apply to companies that own a sea-going vessel. If you haven’t already prepared and filed the report, it is now time to take action.

Background

OECD and EU have been working towards requiring companies incorporated in offshore jurisdictions to demonstrate, among other things, economic substance in those jurisdictions in order to take advantage of the tax exemption that exists.

Annual reporting requirement

For offshore companies incorporated under Marshall Islands law and for foreign maritime entities registered on the Marshall Islands (“FME”), the following applies in this context:

Generally, offshore companies and FMEs must file an annual report with the Marshall Islands Registry of Commerce, the Trust Company. The report must indicate the following:

• Is the company a Relevant Entity? In simple terms, Relevant Entities are all non-resident domestic corporations organized under the laws of the Marshall Islands and FME unless its business is centrally managed and controlled outside the Marshall Islands and it is tax resident outside the Marshall Islands.

• If yes: does this Relevant Entity generate income from a Relevant Activity?

• If yes: more detailed information must be supplied about the business activity, e.g. turnover, cost structure, business premises and number of employees.

Companies that do not comply with this obligation to provide evidence and that do not fulfil these conditions face fines of up to USD 100,000 as well as compulsory deletion.

Solution for shipping companies

For offshore companies and FMEs that own a sea-going vessel, a different, more pragmatic solution has been found. It is true that the companies concerned are obliged to prove economic substance in the Marshall Islands. However, for these companies, the concept of economic substance has been modified and expanded to the extent that the requirements are met if the company complies with the Marshall Islands flag state regulations applicable to the vessel and the requirements of the IMO.

The Trust Company has prepared an online portal through which the ESR Report can be submitted to the Trust Company. The link can be found here. The International Registries, Inc. website also has instructions for preparing the ESR Report.

We support you

We are happy to provide further information and advice on the preparation of annual ESR reports to the Trust Company. Dr. Stefan Rindfleisch and Dr. Klaus Dimigen have both been licensed to practice law in the Marshall Islands for 15 years.