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Economic Substance Doctrine: Complying With U.S., European Union, Cayman Islands, Nevis, and BVI Guidelines

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Tuesday, May 30, 2023

Recorded event now available

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This webinar will review the economic substance doctrine from the perspective of the U.S., EU, and offshore jurisdictions. Our panel of global tax attorneys will explain how to comply with the U.S. economic substance rules, European directives, and similar requirements of other offshore locations, including the British Virgin Islands, Cayman Islands and Nevis.


Codified in 2010, IRC Section 7701(o), the economic substance doctrine continues to be a critical element of international tax planning. What constitutes economic substance, however, remains primarily defined by case law which purports, "Whether we respect a taxpayer's characterization of a transaction depends upon whether the characterization represents and is supported by a bona fide transaction with economic substance, … and not shaped solely or primarily by tax avoidance features… .” Frank Lyon Co. v. U.S.

Transactions not having economic substance and not disclosed could be subjected to a 40 percent penalty in the U.S. if reasonable cause and good faith do not exist. The penalty can be reduced if the transaction is disclosed on Form 8275, Disclosure Statement, and the position has at least a reasonable basis. A reasonable cause exception is not a viable defense from these penalties.

In addition to the U.S., other countries have their own directives concerning the substance of transactions. In 2016, members of the EU adopted the Anti-Tax Avoidance Directive to coordinate and harmonize taxation and to meet OECD recommendations. The directive includes rules concerning CFCs, hybrid mismatches, exit taxes, and more. Tax advisers working with multinational taxpayers must consider the potential impact of the economic substance doctrine abroad and in the U.S.

Listen as our panel of international tax lawyers from the U.S. and abroad discusses complying with the economic substance doctrine for businesses operating in the U.S. and overseas.



  1. Economic substance: introduction
    1. U.S. rules on economic substance
    2. Evolution and codification
    3. Case law
  2. European directives
    1. Danish cases
    2. Noncooperative jurisdictions
    3. Anti-Tax Avoidance Directive (ATAD)
    4. DAC 6
    5. The Unshell Directive
  3. Offshore economic substance
    1. Cayman Islands
    2. Nevis
    3. British Virgin Islands


The panel will cover these and other critical issues:

  • Pertinent U.S. case law relative to the economic substance doctrine
  • The two prong compliance test for economic substance
  • European directives including The Unshell Directive and ATAD
  • Complying with economic substance guidelines in the Cayman Islands and BVI
  • Best practices to meet economic substance guidelines in the U.S. and abroad


Heyvaert, Werner
Werner Heyvaert

Partner, Tax

Mr. Heyvaert is a partner at AKD and has 35 years of experience in Belgian and international tax law and specialises in...  |  Read More

Payne, David
David Payne

Global Head of Governance
Bolder Group

Mr. Payne has been working in the corporate, fiduciary, legal, trust, financial and alternative financial services...  |  Read More

Ruchelman, Stanley
Stanley C. Ruchelman


Mr. Ruchelman concentrates his practice in the area of tax planning for transactional business operations, with...  |  Read More

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