Marshall Islands: A “Classic” Offshore Jurisdiction Today

The Marshall Islands remain one of the few jurisdictions that still retain certain features of a “classic” offshore structure. For this reason, they continue to attract steady interest for international business structuring. At the same time, the Marshall Islands are not standing aside from international transparency standards and global efforts to tackle abusive tax arrangements, and they are gradually incorporating these requirements into their legal framework.

Which Offshore Jurisdictions Are Considered “Classic”?

When people refer to “classic” offshore jurisdictions, they usually mean offshore zones with the following key features:

• a zero-tax regime for companies, provided certain conditions are met;
• no mandatory requirement to prepare and file financial statements with government authorities;
• a high level of confidentiality around company ownership structures; and
• no requirement for the company to have an office or employees in the country of incorporation.

Simple administration and relatively straightforward regulation made offshore jurisdictions a convenient tool for:

• holding assets and property rights;
• setting up subsidiaries in other countries;
• using offshore entities for cross-border payments; and
• carrying out other business activities that are lawful and do not require licensing.

In recent years, however, as international efforts to tackle tax avoidance through classic offshore structures have increased, many jurisdictions have updated their regulatory frameworks to align with the new standards.

Next, we look at how these modern regulatory trends are reflected in the Marshall Islands legal framework and what you should consider when incorporating a company in the Marshall Islands today.

Tax Regime in the Marshall Islands

The Marshall Islands retain the traditional “classic offshore” approach under which companies that do not carry on business in the country and earn income outside it (offshore companies) are not subject to taxation in the Marshall Islands. In particular, such companies are exempt from:

• corporate income tax;
• property tax;
• tax on interest, dividends, and royalties paid by the offshore company to other non-residents (whether individuals or legal entities); and
• other types of local taxation.

In a sense, this tax exemption is replaced by a fixed annual government fee, which offshore companies pay to renew their registration and keep their status active on the register.

At the same time, it is important to understand that this tax advantage applies only to activities carried on outside the Marshall Islands. If a company conducts business within the country, it loses its offshore status and is treated as resident. Different rules then apply. In particular, profits are taxed as follows:

• USD 80 on the first USD 10,000 of income; and
• 3% on income above this threshold.

This reflects the territorial principle of taxation, which is also used in a number of other offshore jurisdictions. For example, similar rules have been introduced for offshore companies incorporated in the Seychelles.

Economic Substance Requirements in the Marshall Islands

Like most offshore jurisdictions, the Marshall Islands have introduced economic substance rules into their legislation. Under the Economic Substance Regulations 2018, the substance requirement is not universal. It is targeted, meaning it applies only to offshore companies carrying on certain “relevant activities”. The list of relevant activities is set out in the Regulations and is exhaustive. It includes:

• distribution and service centre business;
• financing and leasing business;
• fund management business;
• headquarters business;
• holding company business;
• intellectual property business;
• shipping business;
• banking business; and
• insurance business.

Therefore, if an offshore company earns income from any of the activities listed above, it must meet the economic substance requirements in the Marshall Islands for the relevant financial period.

The requirement is treated as satisfied only if all three of the following conditions are met:

• the company is directed and managed in the Marshall Islands;
• the company has an adequate number of employees and suitable premises, and incurs adequate expenditure in the Marshall Islands, taking into account the nature and scale of its activities; and
• the company carries out its core income-generating activities in the Marshall Islands.

Compliance with the economic substance rules is confirmed through an annual report. All offshore companies must file an economic substance declaration stating whether they fall within the substance regime and whether their activities are included in the list of relevant activities. If a company is subject to substance requirements and earned income from relevant activities during the relevant financial period, it must report at least:

• the nature of its activities;
• the type and amount of income earned;
• its expenditure structure and assets;
• the availability of premises;
• the number of employees; and
• evidence that its core income-generating activities are carried out in the Marshall Islands.

Failure to comply with the economic substance requirements may result in sanctions, including the revocation of the company’s certificate of incorporation. At the same time, it is important to note that, in practice, establishing substance can be challenging due to limited local resources in the Marshall Islands, including a shortage of office premises.

Requirements for Bookkeeping and Financial Reporting

Marshall Islands legislation, in particular the Business Corporations Act 1990 (as amended), requires companies to keep accounting records and retain supporting documents sufficient to explain and substantiate the company’s financial transactions.

At the same time, the rules on financial reporting and record-keeping are relatively light-touch, which is reflected in the following:

Requirement	Comment
Keeping accounting records	Offshore companies may keep accounting records anywhere, including outside the Marshall Islands. However, if requested by a competent authority, the records must be provided through the company’s registered agent. By comparison, Seychelles offshore companies must keep the relevant records at the registered agent’s office in the Seychelles or provide them to the registered agent every six months. In addition to accounting records, Marshall Islands offshore companies must also keep: minutes of directors’ meetings and shareholders’ meetings; and registers of shareholders.
Preparation and filing of financial statements	There is no standalone requirement to prepare and file financial statements. Marshall Islands law only requires the company to keep full and proper accounting records so that financial statements can be prepared if required. Some other offshore jurisdictions have introduced additional requirements in this area. For example, BVI offshore companies must submit an annual return to their registered agent containing summary financial information.
Audit	There is no audit requirement for Marshall Islands offshore companies.

Disclosure of Beneficial Ownership Information

In recent years, many offshore jurisdictions have revisited the traditional approach of keeping beneficial ownership information confidential.

In this area, the Marshall Islands follow the global trend, although the rules remain relatively moderate. At present, Marshall Islands offshore companies must:

• collect information about their beneficial owners, including their names and addresses;
• review and update this information at least once a year;
• ensure that the information is retained in the Marshall Islands or elsewhere for at least five years; and
• provide the relevant information to the registered agent upon request within 60 days.

Unlike the BVI or Seychelles, where centralised beneficial ownership databases are being maintained, Marshall Islands legislation does not require beneficial owner information to be submitted automatically to a government authority and does not provide for a centralised database. This helps keep the information closed to the general public.

Use of Bearer Shares

For many years, the ability to issue bearer shares, meaning shares that do not state the name or other details of the owner, was one of the key features of “classic” offshore jurisdictions. Today, in line with recommendations from various international bodies, bearer shares are being phased out, and many offshore jurisdictions have expressly prohibited their issuance.

Unlike most offshore jurisdictions, the Marshall Islands do not expressly prohibit bearer shares. However, they impose a number of conditions on the use of this instrument.

A company that issues bearer shares must take reasonable steps to keep up-to-date information on all holders and beneficial owners of such shares, as well as on any subsequent transfers. To preserve the validity of bearer shares and the rights attached to them, information on their issuance and transfer must be registered with the company’s registered agent in the Marshall Islands.

In practice, however, bearer shares are used very rarely in international structuring, as they tend to raise additional questions from banks, payment service providers, and counterparties. For this reason, registered (named) shares are generally preferred.

General Ongoing Obligations for Marshall Islands Offshore Companies

To summarise, the key ongoing obligations for offshore companies in the Marshall Islands include:

• paying the annual government fee to keep the company active on the register;
• maintaining accounting records and retaining supporting documentation;
• where records are kept outside the Marshall Islands, providing them to the registered agent upon request;
• keeping other corporate records and documents;
• meeting the requirements related to beneficial ownership information;
• filing economic substance declarations, with enhanced reporting requirements for certain companies;
• promptly informing the registered agent about any material changes in the company’s structure or activities.

Conclusion

The Marshall Islands continue to retain the key features of a classic offshore jurisdiction, in particular:

• no taxation of income earned outside the Marshall Islands;
• no requirement to prepare and file financial statements or to undergo an audit;
• no central register of beneficial owners;
• a targeted approach to economic substance requirements; and
• the ability to issue bearer shares.

However, despite the relatively moderate corporate regulatory framework, keeping a Marshall Islands offshore company in good standing still requires compliance with a number of established administrative procedures.