Substantial Activity Requirements Guidelines

Substantial Activity Requirements
Guidelines
FINANCIAL SERVICES AUTHORITY
Bois De Rose Avenue
P.O. Box 991
Victoria
Mahé
Seychelles
Tel: +248 4380800
Fax: +248 4380888
Website: www.fsaseychelles.sc
Email: enquiries@fsaseychelles.sc
Version: 27th December, 2023

Table of Contents
1. Introduction............................................................................................................................3
2. Background.............................................................................................................................3
2.1 BEPS initiative (Base Erosion and Profit Shifting) ...........................................................3
2.2 Action 5 – Forum for Harmful Tax Practices...................................................................3
3. Substantial Activity Requirements .........................................................................................3
3.1. Reasonably adequate number of suitably qualified persons.........................................4
3.2. Adequate amount of operating expenditure .................................................................4
4. Third Party Outsourcing..........................................................................................................4
5. Consideration for Front-Office activities undertaken outside of Seychelles..........................5
6. Claiming the preferential tax rate ..........................................................................................5
Annex 1...................................................................................................................................7
Annex 2...................................................................................................................................9

1. Introduction
These guidelines have been prepared by the Financial Services Authority (“the Authority”) to provide guidance on the substantial activity requirements for relevant licensees under the Securities Act and the Mutual Fund and Hedge Fund Act.
2. Background
2.1 BEPS initiative (Base Erosion and Profit Shifting)
The BEPS project is an international obligation, which Seychelles committed itself to at the request of OECD in 2016, to conform to international standards on tax matters in relation to the implementation of measures against tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. The project includes fifteen (15) Actions, four of which are minimum standards and should be implemented by all countries within a set time. These are Action 5 - countering harmful tax practices more effectively, Action 6 - Preventing Tax treaty abuses, Action 13 - Country by Country Reporting and Action 14 - Mutual Agreement Procedures in relation to disputes on bilateral Double Taxation Avoidance Agreements. Adherence to the BEPS Project involves changes to Seychelles current legislations and implementation of new ones.
2.2 Action 5 – Forum for Harmful Tax Practices
Preferential regimes continue to be a key pressure area in the international arena vis-à-vis standards and best practices. Current concerns are primarily about preferential regimes which can be used for artificial profit shifting and about a lack of transparency in connection with exchange of information. In the context of IP regimes such as patent boxes, the OECD has adopted the “nexus approach” which uses expenditures as a proxy for substantial activity and to ensure that taxpayers can only benefit from IP regimes where they engaged in research and development and incurred actual expenditures on such activities. The same principle can also be applied to other preferential regimes so that such regimes are found to require substantial activity where the taxpayer undertook the core income generating activities. In the area of transparency, a framework has been developed for the compulsory spontaneous exchange of information that could give rise to BEPS concerns in the absence of such exchange. Nevertheless, for the purpose of these guidelines, focus would strictly be on the monitoring of Seychelles commitment in lieu of legislative amendments to conform with Forum on Harmful Tax Practices standards (FHTP).
3. Substantial Activity Requirements
The legislative amendments to the Securities Act (i.e. Securities (Amendment) Act, 2018) and the Mutual Fund and Hedge Fund Act (i.e. Mutual Fund and Hedge Fund (Amendment) Act, 2018) provides that licensees will only be able to benefit from the preferential tax rates accorded under these legislations if the substantial activity requirements are met by these relevant licensees. Hence, where a licensee fails to meet the substantial activity requirements, the preferential tax rate will not apply to the licensee and the licensee will be liable to the general Seychelles’ business tax rate. The Mutual Fund and Hedge Fund (Substantial Activity Requirements) Regulations, 2018 and the Securities (Substantial Activity Requirements) Regulations, 2018 provides the criteria for the

substantial activity requirements. The substantial activity requirements are met if the licensee undertakes the core income generating activities (as specified under the Regulations) in Seychelles:
(a) by employing, either directly or indirectly, a reasonably adequate number of suitably qualified persons to carry out the core income generating activities, and (b) incurs an adequate amount of operating expenditures for such activities. 3.1.Reasonably adequate number of suitably qualified persons When determining what is intended by the term “adequate number of qualified persons”, the assessment will be done on a case by case basis, looking at the specific circumstances of each licensee. Due regard will be given to the employees undertaking the core income generating activities and whether such individuals are resident in Seychelles and are employed by the licensee on a full-time basis. In determining whether the employees are “qualified”, regards will be made on the person’s academic qualification, professional qualifications, training undergone or experience relevant to the person’s duties and the business activities of the licensees so as to ensure that the employees can competently undertake the core income generating activities of the licensee. In determining whether the number of full-time resident employees are “adequate”, regards will be made to the volume or size (i.e. the licensee’s total revenue) and complexity of business being serviced by the licensee and whether the volume and complexity of business is commensurate with the number of full-time resident employees. It is to be noted that all core income generating activities must be undertaken by full-time employees resident in Seychelles only, unless such activities are front-office activities being undertaken outside Seychelles, but has met the relevant conditions provided for under the law (refer to paragraph 5 below). 3.2.Adequate amount of operating expenditures In determining whether the amount of operating expenditures is “adequate”, considerations will be made to the nature of core income generating activities conducted by the licensee, whereby from the total income of the licensee, all costs relating to the regular operations of the business incurred by the licensee in Seychelles in a particular financial year, would be used to determine the adequate amount of operating expenditures. All expenses made should be proportionate to the nature, level, volume, size and complexity of the business activity. In determining the adequacy of operating expenditures, the FSA may refer to information provided through data sources including licensee’s Quarterly Returns (aggregated for the year of assessment), Audited Financial Statements and requests made to the licensee at any given point within the period of time for submission of information such as its management accounts.
4. Third Party Outsourcing
Licensees may elect to outsource any of its core income generating activity to a third party service provider, provided that:

• the licensee is able to demonstrate adequate supervision of the outsourced activity.

• the outsourced activity is conducted in Seychelles where the core income generating activity
  is derived from.

• the substance requirements for third party contractors would not be counted multiple times
  by multiple licensees when evidencing their own substance in Seychelles.
  However, the Regulations provide that a licensee which outsources any of its core income generating activity outside of Seychelles, the substantial activity requirements will be considered not to have been met.

5. Consideration for Front-Office activities undertaken outside of Seychelles
   In cases whereby the front-office activities are undertaken by a licensee outside of the Seychelles, the Authority may consider the substance requirements to be met where the middle-office activities and back-office activities, in relation to a core income generating activities, are undertaken in Seychelles. The definitions of front-office activities, middle-office activities and back-office activities are defined in Regulation 5 of the Securities (Substantial Activity Requirements) Regulations, 2018. For the avoidance of doubt, where a licensee fails to comply with the substantial activity requirements and fails to receive a confirmation from the Authority that the substantial activity requirements have been met, the preferential tax rate shall not apply.
6. Claiming the preferential tax rate
   Only licensees who meet the substantial activity requirements can benefit from the preferential tax rates under the Seventh Schedule of the Business Tax Act. In order to claim the preferential tax rates for a particular financial year, a licensee must obtain the Authority’s written confirmation that the substantial activity requirements have been met for that financial year before submitting its Annual Tax Return to the Seychelles Revenue Commission (“SRC”). It is highly recommended that the request for the confirmation is made by the licensee to the Authority for a financial year by the 31st January of the following year (i.e. tax year). This is to ensure that the Authority has ample time to make an assessment and provide a feedback in a timely manner, which will allow the licensee to meet its deadline for submission of its Annual Tax Return (i.e. in March of the tax year) to the SRC. A request for the Authority’s written confirmation that the substantial activity requirements have been met, must comprise of:

• A covering letter from the licensee
• Self-Declaration Form for Substantial Activity Requirements (Annex 1 for Fund Administrators
  and Annex 2 for licensees under the Securities Act, 2007)
• Establishment list1 and organisational structure clearly encapsulating any changes throughout
  the year being assessed
  Upon receipt of the request, the Authority will verify and ascertain the information provided in the request, and undertake its own assessment (including further onsite reviews if necessary) so as to determine whether the substantial activity requirements have actually been met by the licensee, and thus inform the licensee of its determination. Where the Authority has determined that the licensee has met the substantial activity requirements for that particular financial year, in order to claim the preferential tax rate at the SRC, a copy of the 1 Refers to a list of all employees of the licensee (within this context we are more interested with employees based in Seychelles). The list has the name of the employee, the position/role of the employee (with the relevant department stipulated), the date of employment and resignation (where applicable), geographical location of the employee.

Authority’s determination must be attached with the licensee’s relevant Annual Tax Return. Generally, and depending on the completeness of the application, the FSA would within 20 working days upon the receipt of the request by the licensee to provide its determination to the licensee. It is therefore crucial that all request for confirmation of substance are submitted in the manner prescribed by the Authority in order to avoid delays. In summary, in line with Regulation 3 of the Securities (Substantial Activity Requirements) Regulations, 2018, the substantial activity requirements are met where the licensee is able to demonstrate that the core income generating activities are being performed at the licensee’s business premise or office in Seychelles and, depending on the size, volume and nature of the business, with suitably qualified full-time employees (employed either directly or indirectly). In addition, the licensee must annually declare and be able to demonstrate the operating expenditures commensurate with the level of its business operation. The core income generating activities required to be undertaken in Seychelles by the different license categories are outlined in Regulation 4 of the Securities (Substantial Activity Requirements) Regulations, 2018.

Annex 1
Self-Declaration Form for Substantial Activity Requirements Fund Administrators Name of Fund Administrator: (………………………………………………………) Financial Year End: (…………………………………………….…) I/We the undersigned declare to the best of my/our knowledge that the abovementioned Fund Administrator has complied with the Substantial Activity Requirements as prescribed within the Mutual Fund and Hedge Fund (Substantial Activity Requirements) Regulations for the financial year ending specified above and therefore the Fund Administrator is entitled to the tax concessions specified in the Seventh Schedule of the Business Tax Act. Core Income Generating Activity Name of individual(s) undertaking the activity Has the individual been assessed by the Authority? Yes/ No Is the individual’s role full time? Yes/ No Details of any front office activity undertaken outside Seychelles Administration services with respect to the operations of a mutual fund or hedge fund, including accounting, valuation or reporting services The management of a mutual fund or hedge fund, including the controlling of the assets of a mutual fund or hedge fund

Details of any Core Income
Generating Activity outsourced in
Seychelles
Details of any Core Income
Generating Activity outsourced outside Seychelles Level of Income for the Financial Year Level of Expenditure for the Financial Year I/We the undersigned understand that pursuant to Section 27(1)(a)(x) of the Financial Services Authority Act, the Authority may take enforcement action against a licensee if the licensee has provided the Authority with false, inaccurate or misleading information. Director 1 Director 2 Signature: _________________________ Signature: _________________________ Name: _________________________ Name: _________________________ Date: _________________________ Date: _________________________

Annex 2
Self-Declaration Form for Substantial Activity Requirements For Licensees under the Securities Act Name of Licensee: (…………………...……………………………………...) Type of License: (…...................................……………...….) Financial Year End: (…………………………...…) I/We the undersigned declare to the best of my/our knowledge that the abovementioned licensee has complied with the Substantial Activity Requirements as prescribed within the Securities (Substantial Activity Requirements) Regulations for the financial year ending specified above and therefore the licensee is entitled to the tax concessions specified in the Seventh Schedule of the Business Tax Act. Core Income Generating Activity3 Name of individual(s) undertaking the activity Has the individual been assessed by the Authority? Yes/ No Is the individual’s role full time? Yes/ No Details of any front office activity undertaken outside Seychelles 3 As define under Regulation 4 for of the Securities (Substantial Activity Requirements) Regulations, 2018.

Details of any Core Income
Generating Activity outsourced outside Seychelles Level of Income for the Financial Year Level of Expenditure for the Financial Year I/We the undersigned understand that pursuant to Section 27(1)(a)(x) of the Financial Services Authority Act, the Authority may take enforcement action against a licensee if the licensee has provided the Authority with false, inaccurate or misleading information. Director 1 Director 2 Signature: _________________________ Signature: _________________________ Name: _________________________ Name: _________________________ Date: _________________________ Date: _________________________