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Economic Substance

Legislative requirements requiring entities incorporated or formed in Bermuda carrying on specific business activities to demonstrate adequate economic substance have been introduced in a number of offshore jurisdictions, including Bermuda, in connection with the European Union’s Intergovernmental Code of Conduct (Business Taxation) Group (the “Code of Conduct Group”).

The Economic Substance Act 2018 (the “ESA”) and Economic Substance Regulations 2018 as amended came into operation on 31 December 2018 (collectively known as the “ESA”).

The ESA Regulations apply to all entities seeking to incorporate or form in Bermuda with effect from 1 January 2019. Existing entities will be granted a transition period in which to comply with the new ESA Regulations.

CHW can assist you to determine whether your entity falls within the scope of the Economic Substance Regulations and to assess the impact of these regulations.

Background to the ESA Regulations

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The Council of the EU adopted a resolution on a Code of Conduct for business taxation, the aim of which was counteracting the effects of zero tax and preferential tax regimes worldwide.

In 2017, the Code of Conduct of Conduct Group investigated the tax policies of both EU member states and third countries, assessing:

  • tax transparency;
  • fair taxation; and
  • implementation of anti–BEPS measures (the OECD’s project on Base Erosion and Profit Shifting).

Following such assessment, each non-EU relevant jurisdiction (which includes Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Isle of Man and Jersey) was required to address the Code of Conduct Group’s recommendations about ‘economic substance’.

The governments in each of these jurisdictions have worked closely with the Code of Conduct Group to ensure that those concerns are adequately addressed. As a result of this mandate the ESA and ESA Regulations were enacted.

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