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Substance for a foreign bank: what it is and why it is so important to get it

2021-01-06
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Substance for a foreign bank is essential. Without it, opening an account can become problematic. Failure to register an account with a financial institution can result in not being able to conduct business, especially if it is international.

The concept of Substance

This term refers to the actual presence of a business in the country. Usually, this term is applied if the business is located in the jurisdiction where it is registered. For example, if a firm is open in Latvia and conducts actual business activities, managed from that country, it can be assumed that it has a real presence.

If the company is registered in Seychelles and has only a mailing address and no actual work, it can be suspected that the company was created for illegal tax optimization.

Why is it important to get a Substance for a foreign bank? This is due to the fact that an account without the presence of the firm in the country of registration will not be opened. Servicing of such companies can turn out to be sanctions and inspections for banks. Thus, to open the account of a foreign company, especially in offshore one, it is required to prove that the firm actually conducts activities and is not hollow.

Peculiarities of real presence

Different financial institutions and payment systems have different requirements in respect of real presence. What should be taken into consideration to ensure real presence:

  • Having a company Web site on the Internet - the page is considered the face of the company. It must be of high quality. Provision of company information on the site is required. There must be information about the management and the existence of permits to operate;
  • Office - it can be own or rented. A mailbox is not enough;
  • Employees with experience - one person or an entire team may be required;
  • The company is managed from the country of incorporation;
  • Reporting is provided by the firm;
  • A resident is present in the structure of the company - he or she can be the owner or director.

Opening an account without a real presence is problematic, it makes no sense. Withdrawal of funds can become difficult. Substance requirements are gradually gaining  relevance in almost all countries.

Lack of actual presence can lead to problems with tax officials, lawsuits and fines, as well as loss of tax benefits. Different jurisdictions apply penalties based on the legislation. To clarify the nuances of company registration with substance, contact our experts at IT-OFFSHORE.

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