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NTU Management Review Vol. 35 No. 1 Apr. 2025

The Effects of Economic Substance Act on Offshore Investment
Structures and Tax Avoidance

Ming-Chin Chen, Department of Accounting, National Chengchi University
Jui-Chih Wang, Department of Accounting Information, National Taipei University of Business
Chen-Yu Tsai, PricewaterhouseCoopers Financial Advisory Services Company, Ltd.

1. Purpose

This study explores the effects of the Economic Substance Act, introduced by several
tax havens since 2019, on Taiwanese companies’ offshore investment structures and tax

avoidance behaviors. The Economic Substance Act generally requires entities registered
in tax havens to conduct substantial economic activities, including employing adequate
staff, maintaining physical premises, and performing Core Income-Generating Activities.
Noncompliance may result in penalties or the automatic exchange of information with
tax authorities in parent jurisdictions. Under the circamstances, this study examines

whether TWSE /TPEx listed companies have reduced their use of tax haven subsidiaries
in their offshore investment structures and their corporate tax avoidance behaviors since
the enactment of the act. Specifically, we analyze corporate tax avoidance behaviors by

observing reductions in proportionate revenues allocated to tax haven subsidiaries and
increases in effective tax rates (ETRs) and cash effective tax rates (CASHETRs).

2. Methodology

The study uses financial statement data from TWSE/TPEx listed companiesspanning
2016 to 2021, comprising 6,748 firm-year observations. The sample period allows for
the analysis of corporate tax avoidance behaviors before and after the enactment of the
Economic Substance Act.

This study employs the following regression models to examine the research
questions. First, the study employs logistic regression models to investigate whether
the Economic Substance Act drives these companies to reduce the use of tax haven
subsidiaries by establishing fewer subsidiaries, liquidating existing subsidiaries, or

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