Economic Substance Update – Civil Penalties Imposed

Economic Substance Update – Civil Penalties Imposed

About Brian HoldippBrian Holdipp

Brian Holdipp is Counsel 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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The economic substance regime has now been in place for four years. As such, there have now been three cycles of annual economic substance declaration (“Declaration”) filings made with the Registrar of Companies by entities in scope of the economic substance requirements. The information collected in the Declaration will be considered by the Registrar when determining whether an entity meets such requirements.

Last summer, the Registrar announced its intention to increase the number of desk-based reviews and onsite inspections of entities regarding the status of their compliance. This compliance review process was initiated by sending requests for information to drill down further on responses provided in Declarations filed in respect of previous years and conducting an onsite inspection of the entity’s corporate and other records in respect of its economic substance obligations.

Assessments of the Declarations filed for the financial years ended 31 December 2019 and 31 December 2020 have now been completed. During the first quarter of this year, the Registrar sent warning notices to companies that were determined to have failed to meet the economic substance requirements in accordance with the legislation, proposing to impose civil penalties for non-compliance in previous relevant financial periods. The legislation provides that an entity that receives a warning notice has the right to make written representations as to why the civil penalty should not be imposed and the Bermuda Registrar must decide, within three months, whether to impose a penalty. Very recently, decision notices have been issued by the Registrar noting his decision to impose the penalty, confirming the amount of the penalty, the reasons for his decision and the deadline by which such penalty must be paid or an appeal lodged with the Supreme Court. These decisions yield a clearer understanding of the key metrics applied by the Registrar to determine the adequacy of their on-island presence and, accordingly, their compliance with the economic substance requirements.

A decision of the Registrar to impose a civil penalty can be appealed to the Supreme Court and a decision appealed shall not have effect until the end of the period within which the appeal can be brought and, if such an appeal is brought, until it is determined or withdrawn.

What is evident is that the Registrar has significantly stepped up its efforts to enforce compliance with the economic substance requirements in Bermuda. What remains to be seen is how the appeal process will play out in the courts.

Should you require assistance in analysing Bermuda’s economic substance regime and your entity’s compliance with the same, please feel free to reach out to our Brian Holdipp or any other member of our Corporate team.