In the first quarter of 2019, Nigeria recorded an increase of about 216% in foreign capital and investments when compared to the previous quarter.1 For tax optimization, a number of these investments are made via Holding Companies (HoldCos) established in tax-friendly jurisdictions. Due to the structure of Nigerian tax laws, Nigerian businesses also set up HoldCos in these tax-friendly offshore jurisdictions to hold their assets and investments in Nigeria.

In 2015, the Organisation for Economic Co-operation and Development (OECD) introduced the Base Erosion and Profit Shifting (BEPS) framework, which is aimed at tackling international tax avoidance, among other things. Tax avoidance schemes are typically facilitated through arrangements to shift profits from high tax-paying jurisdictions to low tax-paying jurisdictions or tax friendly jurisdictions.

As part of the BEPS Project, the OECD periodically identifies tax regimes, which have features that can facilitate BEPS, and have the potential to unfairly impact the tax base of other jurisdictions. Such features are referred to as "harmful tax practices". In line with this initiative, the OECD made a number of recommendations to countries with harmful tax practices. The OECD also introduced the Multilateral Convention to Implement Tax Treaty Related Measures to prevent BEPS (MLI), which a number of countries have become signatory to. These countries have also begun to adopt the OECD recommendations and introduce changes to tackle harmful tax practices in their respective jurisdictions.2

Some of these changes include the introduction of economic substance requirements, which ensures that companies have substantial activities in a jurisdiction before they can enjoy certain tax benefits. Given the changing global tax landscape, the choice of an appropriate HoldCo jurisdiction has become more critical with respect to investment decisions.

This Newsletter discusses the increasing requirements for economic substance across various jurisdictions, the implications for existing HoldCo investment structures and the need for companies to be mindful of such requirements in their tax planning activities.



2. Mauritius introduced additional substance requirements for companies seeking to take advantage of its partial exemption tax regime. These substance requirements include that the core income generating activities of the company must be carried out in Mauritius and the Company must have a minimum expenditure proportionate to its level of activities. In 2018, the Netherlands introduced a requirement that a HoldCo must incur an annual wage cost of €100,000 and must have real an office space for at least 24 months in its country of residence before it can qualify for the Dutch participation exemption regime.

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