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Industry Updates

Republic of the Marshall Islands Update: Economic Substance Regulations 2018, As Amended

03 Dec 2020

The Republic of the Marshall Islands ("Marshall Islands") Economic Substance Regulations, 2018 (the "ESR") promulgated by the Registrar of Corporations responsible for non-resident domestic entities (the "Registrar") pursuant to the authority granted under section 129.5(2) of the Business Corporations Act, Part 1 of Title 52 of the Marshall Islands Revised Code (the "BCA") entered into force on 1 January 2019 and have effect for financial periods commencing on or after 1 January 2019.

On 26 February 2019, the Cabinet of the Marshall Islands approved the Amendment to the Economic Substance Regulations 2018 pursuant to section 129.5 of the BCA, which amendments (to the original ESR which came into force on 1 January 2019) took effect on their approval on 21 February 2019 and were further amended on 29 August 2019.

The Registrar published the Guidance and Frequently Asked Questions on Economic Substance on 17 October 2019, most recently updated in January 2020 (the "Guidance").

As for other jurisdictions, the ESR is responsive to global OECD Base Erosion and Profit Shifting ("BEPS") standards regarding geographically mobile activities.  Requirements of this type have been implemented rapidly on a level playing field basis by all OECD-compliant 'no or only nominal tax' jurisdictions.

The Guidance provides certain important aspects of the ESR's economic substance requirements and their practical implementation.

The ESR and the Guidance reflect both the Marshall Islands' ongoing adherence to global standards as one of over 135 countries and jurisdictions committed to the OECD's Inclusive Framework on BEPS.

Executive Summary

The ESR contains certain reporting and economic substance requirements for 'relevant entities' conducting 'relevant activities'.

In summary, a relevant entity is defined as:

  • a non-resident domestic entity formed in the Marshall Islands, i.e. a corporation, partnership, limited partnership or limited liability company formed under the BCA, Revised Partnership Act, Limited Partnership Act or Limited Liability Company Act respectively (each an "NRDE"); or
  • a foreign company registered in the Marshall Islands as a foreign maritime entity (a "FME").

A resident domestic corporation, partnership, limited partnership, or limited liability company is not a relevant entity - nor is an NRDE a relevant entity if its business is "centrally managed and controlled outside the Marshall Islands" and it is 'tax resident' outside of the Marshall Islands for the purposes of the ESR - and an FME whose business is centrally managed and controlled in the Marshall Islands is not a relevant entity if it is tax resident outside of the Marshall Islands.

The relevant activities definition under the Guidance1 are:

  • Distribution and service centre business
  • Financing and leasing business
  • Fund management business
  • Headquarters business
  • Holding company business
  • Intellectual property business
  • Shipping business
  • Banking business*
  • Insurance business*

*NB: NRDEs and FMEs are prohibited from these business activities, in any case.

The ESR and Guidance contain the full definitions of, and practical guidance in relation to, the terms used above.

Key Points and Notification Requirements

The Guidance includes sector specific guidance with respect to each relevant activity.  This includes examples of what it means to be "doing business in the Marshall Islands" and clear commentary to determine whether a relevant entity is carrying on a relevant activity (or not) and whether they satisfy ESR requirements if they are a relevant entity undertaking a relevant activity. 

All NRDEs and FMEs (as described above) are required to file an annual Economic Substance Report (the "Report") via the Registrar's (web-based) Economic Substance Reporting Portal (the "Portal") and the Registrar has published an Economic Substance Reporting Portal User Guide to facilitate the notification and reporting process.  Once the Report has been electronically submitted through the Portal, a Receipt and Verification of a Certificate of Economic Substance Reporting Compliance (or 'CESRC' for short) will be sent to the individual who submitted the Report (by email) within 72 hours of submission (and will be available on the Portal for retrieval thereafter).  The Portal has an online function for verifying a CESRC.

Each NRDE and FME will have 12 months from their next anniversary date falling after 1 July 2020 to complete their first Report; thereafter, the deadline will be 12 months from that entity's anniversary date.  The Registrar will notify reporting periods and deadline (plus the unique identifier / PIN to gain access to the Portal) with each entity's annual fees invoice. 

Any person authorised to act for an entity will have access rights to the Portal (having provided certain information prior to their first submission). 

The Report must be completed for the immediate past financial period (the financial period closing prior to completing and submitting the Report), beginning with the financial period which ends in 2020.  There is a fee for each submission.

A webcast on the topic has been released. To listen, click below.  Please note that this webcast is available worldwide and On Demand.

Click here. 


[1] https://www.register-iri.com/wp-content/uploads/Republic-of-the-Marshall-Islands-GUIDANCE-AND-FREQUENTLY-ASKED-QUESTIONS-ON-ECONOMIC-SUBSTANCE-051520-A4.pdf 

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