Tax Residency Change to Economic Substance Act

Tax Residency Change to Economic Substance Act

About Jeremy LeeseJeremy Leese

Jeremy’s practice focuses on corporate finance, mergers and acquisitions, corporate reorganisations and restructurings, banking and international real estate finance, structured finance, as well as regulatory and legislative compliance.

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The Economic Substance Act 2018 (the “Economic Substance Act”) was established in direct response to concerns raised by the Council of the European Union concerning the absence of economic substance requirements for entities conducting business in and through Bermuda.

Since the introduction of the Economic Substance Act, given the number of Bermuda entities which are resident in other jurisdictions for tax purposes (many of which are publicly listed), there was concern expressed around the requirement that – unlike in other offshore jurisdictions which have implemented economic substance legislation – every entity carrying on a relevant activity including those that are tax resident elsewhere would be subject to, and have to demonstrate full compliance with, the Economic Substance Act.

Economic Substance Amendment Act

To address this anomaly, the Government of Bermuda recently passed into law the Economic Substance Amendment Act 2019 (the “Economic Substance Amendment Act”).

The principal changes brought about by the Economic Substance Amendment Act:

(i)        introduce a new category of entity known as a “non-resident entity” (i.e, an entity which is resident for tax purposes in a jurisdiction outside Bermuda that is not on the EU’s list of non-cooperative jurisdictions for tax purposes);

(ii)       require a non-resident entity that carries on a relevant activity, to provide to the Registrar of Companies (the “Registrar”) for each relevant financial period, the jurisdiction in which it claims to be resident for tax purposes together with sufficient evidence to support that tax residence; and

(iii)      require information received by the Registrar from a non-resident entity to be provided to the foreign competent authority of an EU member state or other jurisdiction where a holding entity, the ultimate parent entity, an owner or the beneficial owner of the non-resident entity is incorporated, formed, registered or resident.

Speaking in the House of Assembly on 21 June 2019, the Minister of Finance stated:

The absence of the exemption in Bermuda’s legislation put the country at a serious commercial disadvantage relative to all of our competitors.”

As such, the changes to the Economic Substance Act 2018 position Bermuda in alignment with other offshore centres and thus reinforce Bermuda’s standing as a jurisdiction of choice.