Bermuda’s Economic Substance Requirements
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The Economic Substance Act 2018 (the “Economic Substance Act”) was tabled on 7 December 2018 and, following revisions, again on 17 December 2018.
In November 2017, the Government of Bermuda made a commitment to the Code of Conduct Group (Business Taxation) (the “COCG”) of the Council of the EU to address concerns relating to economic substance. Bermuda agreed to pass legislation to implement any appropriate changes by 31 December 2018 to avoid being put on an EU list of non-cooperative tax jurisdictions.
Following the COCG’s assessment of the Island’s legal and regulatory framework with regard to compliance with the EU Council’s criteria concerning, amongst other things, the area of fair taxation, Bermuda was classified as a “Criterion 2.2 jurisdiction”. Among other Criterion 2.2 jurisdictions are the Cayman Islands, Jersey, Guernsey and the Isle of Man.
The Economic Substance Act will apply to every registered entity (i.e. company, limited liability company or partnership) in Bermuda that engages in a relevant activity.
Following the COCG’s assessment of the Island’s legal and regulatory framework with regard to compliance with the EU Council’s criteria concerning, amongst other things, the area of fair taxation, Bermuda was classified as a “Criterion 2.2 jurisdiction”. Among other Criterion 2.2 jurisdictions are Cayman, Jersey, Guernsey and Isle of Man.
The Economic Substance Act will apply to every registered entity (i.e. company or limited liability company) in Bermuda that engages in a relevant activity.
Relevant activities – The relevant categories of activities include banking, insurance, fund management, financing, leasing, headquarters, shipping, distribution and service centre, intellectual property and holding entity.
The addition of holding entity, which “may include a pure equity holding company” is likely to significantly increase the number of Bermuda incorporated entities which will be covered by the ambit of the Economic Substance Act, but it remains to be seen what degree of “substance” is required of them (based on the interpretation of the word “adequate”). This should be clearer once the Economic Substance Regulations (the “Regulations”) and the guidance notes are produced.
Substance requirements – The Economic Substance Act provides that a registered entity that carries on a relevant activity complies with economic substance requirements if (a) it is managed and directed in Bermuda, (b) its core income-generating activities (as may be prescribed) are undertaken in Bermuda with respect to the relevant activity, (c) it maintains adequate physical presence in Bermuda, (d) it has adequate full-time employees in Bermuda with suitable qualifications and (e) it incurs adequate operating expenditure in Bermuda in relation to the relevant activity.
Filing requirements – A registered entity that carries on a relevant activity is obliged under the Economic Substance Act to file a declaration with the Registrar of Companies (the “Registrar”) on an annual basis, which declaration shall, at a minimum, include information for the relevant financial period in respect of (i) whether or not the entity is carrying on a relevant activity, and the type of relevant activity carried on or undertaken by the entity, (ii) whether the entity is engaged in high risk IP activity (iii) whether the entity will outsource the relevant activity and to whom, (iv) the core income generating activities (as may be prescribed) that are undertaken in Bermuda with respect to the relevant activity; (v) the gross income for the relevant financial year; (vi) the premises in Bermuda, (vii) the name(s) and physical address(es) of the directors (or managers, in the case of a limited liability company, or general partner(s), in the case of a partnership) who are ordinarily resident in Bermuda,(viii) the holding entity, the ultimate parent entity, the owner or the beneficial owner of the entity; (viii) the operating expenses and assets for the relevant financial year; (ix) the number of full-time employees; and (x) such other information as may be required by the Registrar.
Regulations and Guidance – The Regulations will serve to amplify the economic substance requirements by providing additional detail to assist with ensuring compliance. In addition, guidance is expected to be published by the Minister of Finance on the application of the Economic Substance Act and the Regulations.
Effective Dates – The economic substance requirements will apply with effect from 1 January 2019 for newly-formed registered Bermuda entities and there will be a minimum six-month transitional period for existing entities.
MJM would be pleased to provide any assistance required with regard to assessing the application of this legislation.