Economic Substance Update – Year-end Update
About Brian Holdipp
Brian Holdipp is a senior associate in the firm’s corporate practice group. His practice encompasses many areas of general corporate and commercial law, with specialist expertise in securities, joint ventures, corporate restructurings and cross-border financings. Mr. Holdipp also advises on partnerships.
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Following on from the Government’s commitment to harmonize Bermuda’s economic substance regime with that of other major offshore jurisdictions, the Economic Substance Amendment (No. 2) Act 2019 (the “ESA Amendment Act”) was tabled on 29 November 2019.
The ESA Amendment Act, together with anticipated revised Economic Substance Regulations (the “Regulations”, which it is understood should follow shortly after the ESA Amendment Act comes into effect), represent the culmination of the Government’s efforts to ‘level the playing field’ and minimize any jurisdictional arbitrage as it pertains to Bermuda.
The legislation, as tabled, contains provisions to improve the Economic Substance Act 2018. This includes, among other things, the insertion of new, and the amendment of key, defined terms. Most significantly, “holding entity” is redefined to mean a “pure equity holding entity”, thereby abolishing a two-category approach to holding entity business which is expected to result in far less registered entities being considered ‘in scope’ as holding entities for purposes of the economic substance requirements. The ESA Amendment Act also requires registered entities, at the time of establishment and at the time of filing of an annual declaration, to provide information as to whether or not they propose to carry on or already carry on a relevant activity and the type of relevant activity
The descriptions of relevant activities and the definitions of core income generating activities of entities that engage in such relevant activities are contained in the Regulations. Earlier in the year, the Registrar of Companies advised industry that the level-setting exercise would be undertaken to align the descriptions of certain relevant activities and definitions of their related core income generating activities with the wording found in the corresponding EU and OECD-approved rules or regulations of other major offshore jurisdictions. It is expected that the real ‘substance’ of the harmonization changes will be reflected in the revised Regulations which it is understood should follow shortly after the ESA Amendment Act is passed and assented.
This area continues to be one of rapid development and we will endeavour to keep you updated. In the meantime, if you require any assistance in analysing Bermuda’s economic substance regime as it stands, please feel free to reach out to our Jeremy Leese or Brian Holdipp.
Previous posts on this topic can be found here: