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Bermuda - Economic substance draft guidelines issued

The Bermuda Government has issued draft general principle guidance notes to assist members of the business community in understanding how to satisfy the requirements of the island’s economic substance legislation.

The notes also provide guidance regarding how the Registrar of Companies will measure and assess the criteria for meeting the ES requirements.

The Economic Substance Act 2018 became operative on December 31, 2018. The purpose of ES laws in Bermuda is to “ensure that Bermuda does not facilitate the use of structures which attract profits but which do not reflect real economic activity that is being undertaken in Bermuda”.

The legislation was enacted in the face of pressure by the European Union’s Code of Conduct Group, made up of tax officials from EU countries. Bermuda promised to pass legislation to address the group’s concerns about tax avoidance by multinational companies.

Entities incorporated, formed and/or registered in Bermuda that are engaged in a “relevant activity” are subject to the ES requirements. The “relevant activities” are banking, insurance, fund management, financing, leasing, headquarters, shipping, distribution and service centres, intellectual property, and holding entities.

An entity will meet ES requirements if it is managed and directed in Bermuda, its core income-generating activities are undertaken in Bermuda, it maintains an adequate physical presence in Bermuda, there are adequate full-time employees in Bermuda with suitable qualifications, and there is adequate operating expenditure incurred in Bermuda in relation to its “relevant activity”.

Entities licensed under the Insurance Act 1978 and the Banks and Deposit Companies Act 1999 “are generally considered to operate in Bermuda with adequate substance”, according to the guidance notes.

An entity may be subject only to “minimum economic substance requirements”, the notes say, where the entity is a “pure equity holding company” or is a local entity.

All entities must file an annual declaration with the Registrar, which will “take a practical approach to the interpretation and application of the ES requirements”. Further, the Registrar “will have regard to the nature, scale and complexity of the entity’s business, and will apply criteria such as ‘adequacy’ in that context.”

When considering whether an entity is “managed and directed in Bermuda”, the guidance notes say the Registrar will assess whether the entity holds meetings in Bermuda where strategic or risk management and operational decisions are made, and has an adequate number of senior executives, employees or other persons in Bermuda who are suitably qualified and responsible for oversight or execution of the entity’s core income-generating activities. Those meetings, the notes say, “may include board meetings, managers’ meetings and partnership meetings in the case of companies, LLCs and partnerships respectively, as well as senior executive/management and committee meetings”.

The Registrar “would normally expect at least a majority of such key meetings to be held in Bermuda.” However, “it is not always necessary for all such meetings to be held in Bermuda or that the quorum always be present in Bermuda, where the circumstances of the entity reasonably require the holding of some meetings outside of Bermuda (provided that the entity is able to evidence such circumstances).”

The core income-generating activities of an entity in respect to any “relevant activity” must be undertaken in Bermuda, the guidance notes say. Where those activities are outsourced or undertaken by an affiliate of the entity, they must also be undertaken in Bermuda.

The requirement that an entity has an adequate physical presence in Bermuda “does not imply a positive obligation on an entity to acquire or occupy premises if no such premises are reasonably required for the business of that entity,” the notes say. “If the entity, either itself or through monitored outsourcing arrangements with a service provider or an affiliate, has an adequate physical presence in Bermuda to undertake the relevant activity, this requirement will be satisfied.”

An entity must incur adequate expenditure in Bermuda, the notes say, in relation to the relevant activity it is engaged in. Expenditure must be adequate “relative to the core income-generating activities undertaken in Bermuda and proportionate to the nature, scale and complexity of the business of the entity.” Such expenditures will be expected to include business expenses, fees, goods, services and employment costs paid to individuals or entities located in Bermuda, the notes say.

The requirement that entities in Bermuda should have adequate full-time employees with suitable qualifications in relation to its relevant activity “does not imply a positive obligation on an entity to hire full-time (or any) employees if no such employees are reasonably required for the business of that entity,” the notes say. If an entity itself, or a service provider or affiliate of the entity, “has adequate employees to carry on the relevant core income-generating activities, this requirement would be satisfied.”

Moreover, the notes say, “a ‘full-time’ employee does not necessarily mean an individual working on a full-time basis in connection with a relevant activity. The staffing requirement may only need a portion of an employee’s time to fulfill the requirements of his/her function in order to be adequate”. Where directors of an entity, or their equivalent, perform core income-generating activities for the entity, in addition to executing their fiduciary duties, “this will result in the reduction or possible elimination of the entity’s need for full-time employees or an outsourcing arrangement. In such cases, the Registrar may consider evidence of the core income-generating activities performed by the directors in Bermuda.”

An entity may outsource its core income-generating activities to an affiliate or service provider provided those outsourced activities are undertaken in Bermuda, the notes say, and several other conditions are met.

An entity that establishes to the Registrar’s satisfaction that it is resident for tax purposes in a jurisdiction outside Bermuda will be considered a non-resident entity and therefore outside the scope of the ES requirements provided that jurisdiction is not included in Annex 1 of the EU’s list of non-cooperative jurisdictions for tax purposes, the notes say.

Where an entity does not satisfy the ES requirements in respect of its “relevant activities,” or is engaged in a “high-risk IP-related activity with an affiliate outside Bermuda”, the guidance notes say the Registrar must provide to the Minister of Finance a copy of the entity’s declaration form and related information. The Registrar is also obliged to send to the minister evidence of a non-resident entity’s claim to be tax-resident elsewhere.

In both instances, the minister must provide that information “to his counterpart in the relevant EU member state or other jurisdiction in which the relevant entity or non-resident entity has its holding entity, its ultimate parent entity, an owner or beneficial owner, or where the relevant non-resident entity claims to be resident for tax purposes.”

The Registrar has a duty to ensure that every entity satisfies ES requirements. Sanctions for non-compliance include an escalating series of civil penalties and, ultimately, the Registrar’s power to apply to the court for an order to regulate the conduct of the entity’s business, or restrict the entity from carrying on business, or authorise the Registrar to take proceedings under the relevant legislation, including strike-off.

For the purpose of determining whether an entity has complied with ES laws, the notes say, the Registrar “will consider whether that entity has followed the principles” set out in the guidance notes. However, the notes warn, they “are not intended to be prescriptive or to provide an exhaustive list of all matters that an entity should consider when assessing compliance with the ES laws.”

The Registrar will have an e-registration system to accept and manage information and data collected pursuant to the ES laws. That system is scheduled to launch in the second quarter of 2020, the notes say.

Government says that additional sector-specific guidance notes will be circulated after further consultation with representatives of each specific sector. Those notes will provide further detail with respect to the application of the adequacy test to particular “relevant activities”, the notes say.

In the meantime, Government invites comments/feedback on the first draft notes no later than July 26 at That date is some 25 days after the original deadline set for compliance with the ES laws.

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