Marshall Islands (RMI) have followed the other offshore jurisdictions with the introduction of economic substance regulations (the “ESRs”) which were entered into force on 1 January 2019 and were further amended on 21 February 2019 and 29 August 2019. They are applicable to all “relevant entities” engaged in a “relevant activity.” Compliance with the ESRs is required for financial periods commencing on or after 1 January 2019, with reporting requirements commencing in 2020.

As from 1 July 2020, the Republic of the Marshall Islands Economic Substance Regulations, 2018 (ESR) Reporting Portal is open for reporting and the legal entities NRDEs (non-resident domestic entities  and FME (foreign maritime entities ) will have 12 months to file their ESR report with which they will declare if relevant activity is carried out from which income is derived and economic substance is required.

Relevant activities

Relevant activities are limited to:

(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.

Economic Substance Requirements

1. A relevant entity must, for each financial period in which it derives income from a relevant activity, have economic substance in the Republic in relation to that relevant activity.
2. Economic substance test. A relevant entity has economic substance in the Republic 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:A has an adequate number of qualified employees in the Republic (whether or not employed by the relevant entity or by another entity and whether on temporary or long-term contracts);

• has an adequate physical presence in the Republic; and

• has an adequate amount of expenditure incurred in the Republic; and

C. it carries out core income-generating activity in relation to that relevant activity in the Republic as set forth in Section 5 of these Regulations.

3. Directed and managed test. The test in paragraph (2)(a) is met if:

• the relevant entity's governing body meets in the Republic at an adequate frequency given the level of decision-making required of the body;
• at meetings described in sub-paragraph (a), there is a quorum physically present in the Republic;
• the minutes of meetings described in sub-paragraph (a) record the making of strategic decisions of the relevant entity at the meeting;
• the governing body of the relevant entity, as a whole, has appropriate knowledge and expertise to discharge its duties as a governing body; and
• the minutes of all governing body meetings and appropriate records of the relevant entity are kept in the Republic.

4. A relevant entity satisfies the test in paragraph (2)(c) in relation to a relevant activity if its core income-generating activities in relation to that relevant activity are conducted by any other person only if:

• the relevant entity is able to monitor and control from the Republic the carrying out of the core income-generating activity by the other person;
• the core income-generating activity is carried out in the Republic; and
• the economic substance of the other person will not be counted multiple times by multiple relevant entities when evidencing their own substance in the Republic.

5. Pure equity holding companies. A pure equity holding company is subject to a reduced economic substance test which is satisfied if the relevant entity confirms that it:

• complies with its statutory obligations under the Business Corporations Act, Revised Partnership Act, Limited Partnership Act, or Limited Liability Companies Act, as appropriate; and
• has adequate human resources and premises in the Republic for holding and managing equity participations in other entities.

6. High risk IP business. In relation to a high risk IP business, the test in paragraph (2)(c) is presumed not to be met during a fiscal period unless the relevant entity provides sufficient evidence to rebut this presumption as provided in Section 6 of these Regulations.

7. The Registrar may issue guidance on how the economic substance test may be met.

8. The Registrar may determine that a relevant entity has not met the economic substance test during any financial period of the entity starting on or after 1 January 2019.

Core Income-Generating Activities

For purposes of these Regulations, "core income-generating activities" means activities of central importance to a relevant entity in terms of generating income and that are being carried out in the Republic including:

(a) in relation to distribution and service center business:

1. transporting and storing goods, components, and materials;
2. managing stocks;
3. taking orders; or
4. providing consulting or other administrative services;

(b) in relation to finance and leasing business:

1. agreeing funding terms;
2. identifying and acquiring assets to be leased (in the case of leasing);
3. setting the terms and duration of any financing or leasing;
4. monitoring and revising any agreements; or
5. managing any risks;

(c)  in relation to fund management business:

1. taking decisions on the holding and selling of investments;
2. calculating risk and reserves;
3. taking decisions on currency or interest fluctuations and hedging positions; or
4. preparing relevant regulatory or other reports for government authorities and investors;

(d) in relation to headquarters business:

1. taking relevant management decisions;
2. incurring expenditures on behalf of Group entities; or
3. coordinating Group activities;

(e) in relation to holding company business, all activities related to that business;

(f) in relation to IP business:

1. where the intellectual property asset is a:

• patent or an asset similar to a patent, research and development; or
• non-trade intangible (including a trademark), branding, marketing and distribution

       2. in exceptional cases, except if the relevant activity is a high risk intellectual property business, other core income-generating activities relevant to the business and the intellectual property assets, which may include:

• taking strategic decisions and managing (as well as bearing) the principal risks related to development and subsequent exploitation of the intangible asset generating income;
• taking the strategic decisions and managing (as well as bearing) the principal risks relating to acquisition by third parties and subsequent exploitation and protection of the intangible asset; or
• carrying on the underlying trading activities through which the intangible assets are exploited leading to the generation of income from third parties;

(g) in relation to shipping business:

• managing crew (including hiring, paying and overseeing crew members);
• overhauling and maintaining ships;
• overseeing and tracking deliveries;
• determining what goods to order and when to deliver them; or
• organizing, and overseeing voyages;

(h) in relation to banking business:

• raising funds;
• managing risk including credit, currency and interest risk;
• taking hedging positions;
• providing loans, credit or other financial services to customers;
• managing regulatory capital; or
• preparing regulatory reports and returns; and

(i) in relation to insurance business:

• predicting and calculating risk;
• insuring or reinsuring against risk; or
• providing client services.

Failure to Satisfy the Economic Substance Test

(1) Notice. If the Registrar determines that a relevant entity has not met the economic substance test as required 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.

(2) Penalties.

• A relevant entity that has not met the economic substance test as required under Section 4 of these Regulations 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.
• If, for the financial period following a financial period in which a penalty, other than revocation of its formation documents, was imposed under subsection (a), 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.

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