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Seychelles Economic Substance Requirements: Who Is Caught
Seychelles economic substance rules apply to IBCs in multinational groups: the passive income test, people and premises in Seychelles, and what failing costs.
Licensed auditor & chartered accountant · 6 years of experience in offshore accounting
Seychelles economic substance rules decide whether a company has to show real activity in Seychelles to keep its foreign passive income untaxed. For most standalone IBCs, the answer is no. For an IBC in a multinational group, it can be yes. In this post, we’ll walk you through who is caught, what the test asks, how the exemption is claimed and what failing it costs.
Quick Summary
Seychelles has no stand-alone substance law of the BVI or Cayman kind: its tax test sits in the Business Tax Act and decides how group companies’ foreign passive income is taxed.
Since mid-September 2021, the test has covered companies of any size in a multinational group, which on the law’s wording leaves out an IBC owned by individuals with no subsidiaries or branch abroad.
For a group company, foreign dividends, interest, rents, royalties and gains on shares are taxed in Seychelles unless the company has adequate substance there.
To pass, a company needs its filings up to date and adequate staff and premises in Seychelles, and unless it is a pure equity or real estate holding company, it must also take the strategic decisions, manage the principal risks in Seychelles and spend adequately.
A group company’s foreign trading income is taxed unless it is earned through a permanent establishment outside Seychelles, whatever its substance.
The exemption is claimed on the business tax return, due 31 March for a calendar year, and income that fails the test is taxed at the ordinary 15% on the first SCR 1 million and 25% above.
What Economic Substance Rules Are
Economic substance rules tie a tax benefit to real activity: a company keeps the benefit only where the people, premises and work that earn its income are actually in the country granting it.
Seychelles ties its test to one benefit, the exemption for foreign-source income, so it belongs to Seychelles company tax, not company law: the IBC Act sets no substance requirement. For a company outside a group, that exemption is one of the main tax benefits of a Seychelles company. For a company in a multinational group, it holds only where the conditions below are met.
Unlike the British Virgin Islands and Cayman, Seychelles has no separate substance act: it is not among the 11 no-or-nominal-tax jurisdictions whose substance laws the OECD’s harmful tax practices review covers.
Which Seychelles Companies Are Caught
Since mid-September 2021, section 5(1A) and the Eleventh Schedule of the Business Tax Act, added by the Business Tax (Amendment) Act 2020, have covered “an enterprise, that is a member of a multinational group” (SI 79 of 2021). A group is a set of enterprises linked by ownership or control that must prepare consolidated accounts, or would have to if their shares were listed. It is multinational when its members are tax resident in two or more countries, or when one member is taxed on a permanent establishment in another country.
Size does not matter: the Revenue Commission says multinational businesses “may include medium-sized or even small businesses” (Public Ruling 2025-1). In practice:
Owned by a foreign parent company that consolidates it: caught, as the IBC and its parent are tax resident in different countries within one group.
Owned by individuals, with no subsidiaries or branch abroad: outside the rules on the definition’s wording, since individual shareholders are not enterprises that consolidate.
Owned by individuals, holding foreign subsidiaries: possibly caught, as the IBC and its subsidiaries can form a multinational group, and no ruling settles this case.
If your structure sits between these cases, our team can check whether your company is caught.
Income the Substance Test Covers
For a group company, the Act treats four kinds of income differently, and substance only matters for the first two.
Income | How it is treated for a group company |
|---|---|
Foreign dividends, interest, rents and royalties | Taxed in Seychelles unless the company has adequate substance (section 5(1A)(d)) |
Gains from holding and managing shares | Passive income, so the same substance test applies (Eleventh Schedule, paragraph 7) |
Income from intellectual property held in Seychelles | Taxed, except a qualifying share of patent or copyrighted software income set by the R&D spent in Seychelles (section 5(1A)(c) and (1B)) |
Foreign trading income | Taxed unless earned through a permanent establishment outside Seychelles, whatever the substance (section 5(1A)(b)) |
Income from activities, goods or rights in Seychelles is taxed for every company. A permanent establishment is a base such as a fixed place of business or a dependent agent (section 2A), so a group company without one abroad pays Seychelles tax on its trading profit.
The Adequate Substance Test
A group company that meets these conditions in a tax year is a “qualifying company” for that year, and its foreign passive income stays untaxed (Eleventh Schedule, paragraph 2).
Condition | Pure equity or real estate holding company | Other companies |
|---|---|---|
Filing requirements under the IBC Act or Companies Act met | Required | Required |
Adequate staff and premises in Seychelles to hold and manage the investments | Required | Required |
Takes the necessary strategic decisions on each asset | Not required | Required |
Manages and bears the principal risks in Seychelles | Not required | Required |
Incurs adequate expenditure on acquiring, holding or disposing of each asset | Not required | Required |
A pure equity holding company mainly acquires and holds shares and “performs no substantial commercial or investment activity”; a real estate holding company mainly holds property interests.
Staff and premises, and risk management, can be outsourced if the company shows adequate supervision and the work is done in Seychelles (paragraph 4). The law sets no minimum headcount, office size or spend: staff and premises only have to be adequate “for holding and managing the investment assets”. Paragraph 5 lets the Minister issue guidelines on adequacy, and none has been published on the Revenue Commission or Ministry of Finance websites.
How the Exemption Is Claimed
There is no separate substance report. The exemption is claimed on the business tax return, and the Revenue Commission expects group companies to file the Schedule 3 return for large, multinational and group businesses (SI 108 of 2024, from tax year 2024).
Its Section C asks whether the company earned income in Seychelles and whether income from activities abroad is attributable to a permanent establishment there, with documents as proof. A schedule then lists each item of foreign income claimed as non-taxable, with its source. The return is due 3 months after the year end, 31 March for a calendar year.
The first condition also ties the test to your annual compliance obligations: a company behind on its IBC Act filing requirements fails it, whatever its staff and premises. Substance is tested each tax year, so qualifying once does not carry over.
What Happens If a Company Fails the Test
There is no separate penalty for failing the test. The foreign passive income simply counts as Seychelles-source income for that year and is taxed at 15% on the first SCR 1 million of taxable income and 25% on the rest (SI 108 of 2021). On SCR 3 million of taxable income, that is SCR 150,000 plus SCR 500,000, or SCR 650,000 in all.
Banks, telecoms companies, insurers and alcohol and tobacco makers pay 25% on the first SCR 1 million and 33% above, according to the Ministry of Finance 2026 Budget papers.
Substance Rules for FSA-Licensed Businesses
Some FSA licences carry their own substance conditions, separate from the tax test. A virtual asset service provider needs at least one resident director, a fully manned office in Seychelles, at least 2 board meetings and 4 management meetings a year in Seychelles, and a substance report lodged every January (VASP Act 2024, sections 13 and 21 and the Third Schedule). Securities licensees must carry out their core income-generating activities in Seychelles with adequate qualified staff and operating spend (SI 89 of 2018), and fund businesses and International Trade Zone licensees have their own substantial activity regulations.
Substance and Your Home Country
Substance in Seychelles settles Seychelles tax, not tax in the owners’ home country. EU member states, and countries such as the US, UK, Canada and Australia, have CFC rules that can tax resident owners on a controlled foreign company’s income; in the UK the CFC charge reaches only resident companies.
The EU’s Anti-Tax Avoidance Directive lets member states refuse the substance carve-out in those rules for companies outside the European Economic Area, and Germany does (section 8 of the Foreign Tax Act), so Seychelles substance does not switch off German CFC rules.
Separately, where your company is really managed can make it tax resident at home. The UK, for example, treats a company as UK resident if “the central management and control of its business is in the UK”, wherever it was incorporated (HMRC International Manual).
FAQ
Does Seychelles have economic substance rules like the BVI?
No. The British Virgin Islands and Cayman are among 11 jurisdictions the OECD reviews for stand-alone substance laws, and Seychelles is not. Its tax test sits in the Business Tax Act and applies only to group companies.
Does a standalone IBC need an office or staff in Seychelles?
Not for tax. An IBC outside a multinational group is taxed only on Seychelles-source income, so the substance test does not apply to it. It still needs a registered office and a registered agent in Seychelles, set up at formation, and a licensed activity can add its own substance conditions.
Can substance be outsourced to a Seychelles service provider?
Partly. Staff and premises, and the management of principal risks, can be outsourced if the company shows adequate supervision and the work is done in Seychelles. Strategic decisions and spending are not on that list, and no published guidance says which arrangements are enough.
Is my holding company caught by the substance test?
Only if it is in a multinational group, and then a pure equity holding company meets a lighter test: filings up to date plus adequate staff and premises in Seychelles. An IBC owned by individuals that holds foreign subsidiaries may head such a group itself, and no ruling settles that case, so have it checked before relying on the exemption.
