In the world of international structuring, the terms 'Economic Substance' and 'Central Management and Control' are often used interchangeably – sometimes even mistakenly – but they represent two distinct legal frameworks. Understanding their differences as well as their practical overlap, is essential for trustees, directors, and corporate service providers navigating modern compliance and residency challenges.
Defining the Concepts
Central management and control is a concept rooted in common law and primarily used to determine the tax residence of a company. The question at its core is:
"Where is the company actually controlled and directed from?"
This assessment focuses not on day-to-day operations, but on strategic decision-making such as approving budgets, entering into major contracts, or adopting corporate policies. Courts will examine the location and behaviour of directors, the conduct of board meetings, and whether those meetings represent genuine oversight or mere formalities.
By contrast, Economic Substance is a regulatory and compliance framework aimed at ensuring that entities incorporated in low-tax/zero-tax jurisdictions carry out real business activities within those jurisdictions. Originally developed through the OECD's BEPS initiative and later reinforced by the EU's Code of Conduct Group, Economic Substance legislation has been enacted across many international finance centres, including the Isle of Man, Jersey, Guernsey, BVI, and the Cayman Islands.
Economic Substance compliance typically requires that:
- Core Income Generating Activities (CIGAs) be conducted in the jurisdiction;
- the company has adequate premises, employees, and expenditure locally; and
- board meetings take place within the jurisdiction, with local quorum and decision-making evidenced through minutes.
The Critical Differences
| Feature | Central Management and Control | Economic Substance |
| Purpose | Determines tax residency | Ensures compliance with local Economic Substance rules |
| Applies to | Common law jurisdictions e.g., UK, Isle of Man, Jersey | Entities conducting CIGAs in all zero/low-tax jurisdictions with Economic Substance laws |
| Focus | High-level control and strategic direction | Operational presence and activity |
| Legal Basis | Developed through case law | Statutory/regulatory (post-BEPS Action 5) |
| Tests | Where the real control is exercised | Where the business has people, premises, and performs activities |
Where the Overlap Lies
Despite these distinctions, the two concepts frequently intersect in practice, especially for entities that must satisfy both tax residency tests and demonstrate local substance.
For example:
- A company seeking to claim tax residence in the Isle of Man must demonstrate that central management and control is exercised there. This typically involves holding regular board meetings on-island, with directors who are physically present and substantively engaged in decision-making.
- These same requirements form part of Economic Substance compliance, as regulators assess whether the company has genuine operational presence beyond a registered office.
Implications for Directors and Corporate Service Providers
Directors and fiduciaries must therefore be aware that Economic Substance compliance is not a proxy for central management and control, nor is central management and control a guarantee of Economic Substance fulfilment. Each test must be separately considered, evidenced, and documented.
In practical terms, this means:
- Holding board meetings in the correct location, with meaningful participation;
- Ensuring minutes accurately reflect decision-making dynamics;
- Maintaining operational substance in the jurisdiction — including office presence, employees (or adequate outsourcing), and financial commitments; and
- Avoiding "rubber-stamping" behaviour where key decisions are taken elsewhere.
A Co-ordinated Approach
In an era of heightened transparency, cross-border reporting, and evolving global standards, professional directors and corporate service providers must harmonise their central management and control and Economic Substance strategies. Failure to do so risks not only tax exposure, but also reputational harm and regulatory scrutiny.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
