Economic Substance: a new reality for Bermuda
In June 2018, Bermuda committed to satisfying the EU’s Intergovernmental Code of Conduct (Business Taxation) Group (the “Code of Conduct Group”) imposing legislative requirements on certain jurisdictions with regards to the economic substance of entities incorporated/formed in such jurisdiction. Such legislation is intended to address concerns arising from perceived harmful tax practices that have become the focus of increased scrutiny across the European Union and have the aim of counteracting the effects of preferential tax regimes around the world. Bermuda was one of 40 countries identified by the Code of Conduct Group in 2017 and classified as a “Criterion 2.2 jurisdiction”.
In response, the Bermuda government has worked closely with stakeholders and industry in Bermuda to enact legislation that adequately addresses the concerns raised by the Code of Conduct Group and the technical elements outlined in the technical scoping paper published by the Code of Conduct Group. The result is the introduction of the Economic Substance Act 2018 (the “ESA”), which came into force on 21 December 2018 and became operational on 1 January 2019.
The Bermuda government is currently awaiting confirmation that the ESA has been approved by the Code of Conduct Group. An announcement from the EU listing non-cooperative jurisdictions is expected in February 2019 and will confirm that the provisions of the ESA are sufficient to ensure Bermuda’s compliance with the Code of Conduct Group’s requirements.
Who is affected?
The ESA imposes economic substance for Bermuda entities that are “resident” in Bermuda and carry on “Relevant Activities”.
The definition of an entity under the provisions of the ESA include:
- all companies to which the Companies Act 1981 applies, including permit companies and overseas companies;
- all limited liability companies formed under the Limited Liability Company Act 2016; and
- all partnerships registered under the Exempted Partnerships Act 1992, the Limited Partnership Act 1883 and the Overseas Partnerships Act 1995 which have elected to have separate legal personality under the Partnerships Act 1902.
Pursuant to the provisions of the ESA, an entity is required to meet the economic substance parameters where it is engaged in the following Relevant Activities: banking; insurance; fund management; financing business; leasing business; headquarters business; shipping; distribution and service centre business; intellectual property; and holding entities.
What are the ESA substance requirements?
The ESA provides that an entity conducting a Relevant Activity will satisfy the economic substance requirements if:
- the entity is managed and directed in Bermuda;
- the core income generating activities (as may be prescribed) that are undertaken in Bermuda with respect to the Relevant Activity;
- there are adequate full time employees in Bermuda;
- the entity maintains adequate physical presence in Bermuda;
- there are adequate operating expenses incurred in Bermuda in relation to the Relevant Activity.
Furthermore the Economic Substance Regulations 2018 (the “ESA Regulations”) became operative on 31 December 2018 and require an entity to provide various information in relation to economic substance including but not limited to:
- whether or not the entity is carrying on a Relevant Activity, and the type of Relevant Activity carried on or undertaken by the entity;
- the name(s) and physical address(es) of (i) where the entity is a company, the director or directors; (ii) where the entity is a limited liability company, the manager or managers; and (iii) where the entity is a partnership, the general partner or general partners, who are ordinarily resident in Bermuda;
- whether the entity is engaged in high risk IP activity;
- whether the entity will outsource the relevant activity and to whom;
- if the gross income for the relevant financial year;
- if a holding entity, the ultimate parent entity, the owner or the beneficial owner of the holding entity;
- if there are adequate operating expenses incurred in Bermuda in relation to the Relevant Activity and assets for the relevant financial year;
- the location of strategic business or risk management and operational decision making or where management meets to make decisions regarding business activities;
- the presence of an adequate number of suitably qualified senior executives, employees or other persons in Bermuda responsible for oversight and/or execution of core income generating activities;
- the location of board meetings and the nature and frequency of the meetings held in Bermuda in relation to the overall number of meetings; and
- such other information as may reasonably be required by the Registrar of Companies (the “Registrar”).
Annual filing requirements
Every entity that is in scope of the ESA and the ESA Regulations, will be required, on an annual basis, to file an economic substance declaration with the Registrar confirming that it satisfies the economic substance requirements.
Implementation and impact
Each of the ESA and the ESA Regulations are applicable to all entities incorporated, formed or registered in Bermuda from 1 January 2019. For existing companies, it is anticipated that there will be a transitional period, of six months.
The provisions of the ESA and the ESA Regulations will have a significant impact on companies (including permit and overseas companies), limited liability companies and partnerships (local, exempted, permit and overseas) registered in Bermuda. It is of upmost importance that all persons and bodies within and outside Bermuda understand the impact of the ESA on their existing and prospective business structures.
The Ministry of Finance is expected to publish additional guidance on the application of the ESA and the ESA Regulations in due course. This information will be of critical importance in assessing compliance with the ESA and the ESA Regulations. Feedback from the Code of Conduct Group is expected in February and may require further changes or adjustments to Bermuda’s ESA legislation.
The corporate team at CHW is available to advise on any queries relating to the ESA.
|Ernest Morrison||Managing Director||441 294-1503||
|Kathleen Moniz||Senior Associate||441 294-1510||
|Janice Gutteridge||Senior Associate||441 294-1508||