BR 154 / 2018
TABLE OF CONTENTS
Citation
Interpretation
Economic substance requirements
Minimum economic substance requirements
Substance test for economic substance requirements: core income generating activities
Exchange of information
Non-IP Related Relevant Activities
Banking
Insurance
Fund management
Financing and leasing
Headquarters
Shipping Distribution and service centres
Holding entity
IP Related Relevant Activities
Intellectual property
Enhanced IP economic substance requirements
Powers of Registrar regarding non-compliance with economic substance requirements Commencement
The Minister of Finance, in exercise of the power conferred by section 11 of the Economic Substance Act 2018, makes the following Regulations:
Citation
1. These Regulations may be cited as the Economic Substance Regulations 2018.
Interpretation
2. In these Regulations, unless the context otherwise requires—
“Act” means the Economic Substance Act 2018; “
Companies Act” means the Companies Act 1981;
“core income generating activity”, with respect to a relevant activity, means the core income generating activity set forth in regulations 7 to 16, as the case may be;
“economic substance requirements” means the requirements set forth in section 3 of the Act and regulation 3;
“entity” means an entity to which section 3 of the Act applies;
“foreign affiliate” means an affiliate incorporated, formed or registered outside Bermuda;
“high-risk IP activities” means the IP activities set forth in regulation 16(3);
“IP” means intellectual property;
“IP assets” means intellectual property rights held by an entity in relation to an intangible asset which includes patents, copyright, technical know-how, trademark, brand or goodwill that generate IP income;
“IP income” means income which accrues to the business from IP assets and IP activities (such income being separately identifiable from any income generated from any tangible asset);
“minimum economic substance requirements” means the requirements set forth in regulation 4(2);
“Partnerships Acts” means the Partnership Act 1902, the Exempted Partnerships Act 1992 and the Limited Partnership Act 1883;
“pure equity holding entity” has the meaning given in regulation 14(2);
“relevant activity” has the meaning given in section 2 of the Act; “relevant financial period” means the financial year of the entity.
[Regulation 2 definitions "IP assets" and
"pure equity holding entity" amended, and definition "IP income" inserted by BR 34 / 2019 reg. 2 effective 22 February 2019]
Citation
1 These Regulations may be cited as the Economic Substance Regulations 2018.
Interpretation
2 In these Regulations, unless the context otherwise requires—
“Act” means the Economic Substance Act 2018;
“Companies Act" means the Companies Act 1981;
“core income generating activity", with respect to a relevant activity, means the core
income generating activity set forth in regulations 7 to 16, as the case may be;
“economic substance requirements" means the requirements set forth in section 3
of the Act and regulation 3;
“entity" means an entity to which section 3 of the Act applies;
“foreign affiliate" means an affiliate incorporated, formed or registered outside
Bermuda;
“high-risk IP activities" means the IP activities set forth in regulation 16(3);
“1P" means intellectual property;
“I? assets" means intellectual property rights held by an entity in relation to an
intangible asset which includes patents, copyright, technical know-how,
trademark, brand or goodwill that generate IP income;
“I? income" means income which accrues to the business from IP assets and IP
activities (such income being separately identifiable from any income generated
from any tangible asset);
“minimum economic substance requirements" means the requirements set forth in
regulation 4(2);
“Partnerships Acts" means the Partnership Act 1902, the Exempted Partnerships
Act 1992 and the Limited Partnership Act 1883;
“pure equity holding entity" has the meaning given in regulation 14(2);
“relevant activity" has the meaning given in section 2 of the Act;
“relevant financial period" means the financial year of the entity.
[Regulation 2 definitions '1? assets" and "pure equity holding entity"amended, and definition '1? income"
inserted by BR 34 / 2019 rug. 2 efiectfiye 22 February 2019]
Economic substance requirements
3 (1) In respect of each relevant financial period, an entity shall provide the following
information related to economic substance requirements—
(a) the nature and extent of the relevant activity engaged in by the entity
including, in particular, its core income generating activities undertaken
with respect to such relevant activity;
(b) the nature and extent of the entity‘s presence in Bermuda including—
(i) the physical offices or other premises occupied by the entity or its
affiliate in Bermuda; and
(ii) an adequate level of annual expenditure of the entity in Bermuda;
(c) whether the entity is managed and directed in Bermuda or from Bermuda,
having regard to—
(i) the location of strategic or risk management and operational decision-
making or where the management of the entity meets to make decisions
regarding business activities;
(ii) the presence of an adequate number of senior executives, employees or
other persons in Bermuda who are suitably qualified and responsible
for oversight or execution of its core income generating activities or
both;
(iii) the location—
(A) where the entity is a company, of its board meetings;
(B) where the entity is a limited liability company, of its managers‘
meetings;
(C) where the entity is a partnership, of its partnership meetings,
and the nature and frequency of those meetings held in Bermuda in
relation to the overall number of meetings;
(1) the nature and extent of outsourcing arrangements (if any) to affiliates or
service providers in Bermuda; and
(e) whether minimum economic substance requirements set forth in
regulation 4 apply with respect to the entity.
(2) For the purposes of paragraph (1)(d), an entity must provide information as to
whether—
(a) the employees or other persons in the entity who are responsible for, or
involved in, oversight and assessment of the implementation or execution
of such outsourcing arrangement—
(i) are suitably qualified and able to monitor and control the carrying out
of the outsourcing arrangement by the affiliate or service provider; and
(ii) monitor and control each outsourcing arrangement in order to ensure
that the outsourced entity has adequate capacity to execute the
outsourcing arrangement;
(b) the affiliate or service provider responsible for, or involved in, the
implementation and execution of such outsourcing arrangement—
(i) has adequate capacity for the implementation and execution thereof;
(ii) has employees who are suitably qualified to implement and execute the
outsourcing arrangement;
(iii) complies with the economic substance requirements that apply to the
outsourcing entity; and in respect of such compliance, employees,
expenditure and premises must not be counted multiple times by
multiple entities when evidencing such compliance.
(3) For greater clarity, an entity engaged in one or more relevant activities during
a relevant financial period shall comply with economic substance requirements in respect
of each applicable relevant activity.
[Regulation 3 amended by BR 34 / 2019 rug. 3 reflective 22 February 2019]
Minimum economic substance requirements
4 (1) Minimum economic substance requirements set forth in paragraph (2) shall
apply in relation to an entity if—
(a) the entity is a pure equity holding entity as set forth in regulation 14(2); or
(b) subject where applicable to regulations 7 and 8, the entity is a local entity.
(2) For the purposes of paragraph (1), minimum economic substance requirements
to be applied pursuant to this regulation are—
(a) compliance with applicable corporate governance requirements set forth in
the Companies Act, the Limited Liability Company Act 2016 and
Partnerships Acts including keeping records of account, books and papers
and financial statements; and
(b) submission of an annual economic substance declaration form.
[Regulation 4 amended by BR 34 / 2019 rug. 4 reflective 22 February 2019]
Substance test for economic substance requirements: core income generating
activities
5 (1) Where an entity engages in a relevant activity, economic substance
requirements shall be applied in relation to the core income generating activities of the
entity.
(2) To satisfy the economic substance requirements, the core income generating
activities of an entity with respect to a relevant activity must be undertaken in Bermuda.
(3) Where an entity outsources any or all of its core income generating activities
to an affiliate or service provider, core income generating activities so outsourced must be undertaken in Bermuda and the Minister shall take into account the outsourcing arrangement.
[Regulation 5 paragraph (3) amended by BR 34 / 2019 rug. 5 eflective 22 February 2019]
Exchange of information
6 (1) Subject to section 6 of the Act, the International Cooperation (Tax Information
Exchange Agreements) Act 2005, in particular, section 4A, and any agreement made under
that Act, information received by the competent authority for Bermuda under section 6 of
the Act shall be exchanged by way of the spontaneous exchange of information.
(2) For purposes of paragraph (1), spontaneous exchange of information means an
unrequested automatic exchange of information set forth in section 6 of the Act by the
competent authority for Bermuda with the foreign competent authority (as those terms are defined in the Act).
Non-IP Related Relevant Activities
Banking
7 (1) An entity engages in banking if it engages in deposit taking business for which a licence is required in accordance with the Banks and Deposit Companies Act 1999.
(2) The core income generating activities of an entity engaged in banking include
the following—
(a) raising funds;
(b) managing risk including credit, currency and interest risk;
(c) taking hedging positions;
(d) providing loans, credit or other financial services to customers;
(e) managing regulatory capital; and
(f) preparing regulatory reports.
(3) A bank that is licensed under the Banks and Deposit Companies Act 1999 complies with the economic substance requirements if it complies with the requirements applicable to the matters in section 3 of the Act and regulation 3 as set forth—
(a) in the Companies Act relating to corporate governance; and
(b) in the Banks and Deposit Companies Act 1999, regulations, rules and other instruments made thereunder.
Insurance
8 (1) An entity engages in insurance if it engages in business for which registration
is required in accordance with the Insurance Act 1978.
(2) The core income generating activities of an entity engaged in insurance include
the following—
(a) predicting and calculating risk;
(b) insuring or re-insuring against risk;
(c) providing client services; and
(d) preparing regulatory reports.
(3) An entity engaged in insurance activities complies with the economic substance
requirements if it complies with the requirements applicable to the matters in section 3 of
the Act and regulation 3 as set forth—
(a) in the Companies Act relating to corporate governance; and
(b) in the Insurance Act 1978, regulations, rules or other instruments (including the code of conduct) made under that Act.
Fund management
9 (1) An entity engages in fund management if it manages investments for funds and
in respect of which a licence is required in accordance with the Investment Business Act
2003 or for which a licence would be required if such activity were taking place in Bermuda.
(2) The core income generating activities of an entity that engages in fund
management include the following—
(a) taking decisions on the holding and selling of investments;
(b) calculating risk and reserves;
(c) taking decisions on currency or interest fluctuations and hedging
positions; and
(d) preparing relevant regulatory or other reports for government authorities
and investors.
(3) For the purposes of paragraph (1), “managing investments" has the meaning
given in the Investment Business Act 2003.
Financing and leasing
10 (1) An entity engages in financing if it provides funds, other than by way of
subscription for shares or other equity contributions, for the business activities of one or
more other entities (whether or not affiliated).
(2) The core income generating activities of an entity that engages in financing
include the following—
(a) agreeing funding terms;
(b) setting the terms and duration of any financing;
(c) monitoring and revising agreements; and
(3) An entity engages in leasing if it provides leasing arrangements in respect of
which it is the lessor of one or more assets leased to one or more affiliates or third parties.
(4) The core income generating activities of an entity engaged in leasing include
the following—
(a) identifying and acquiring assets to be leased;
(b) setting the terms and duration of any leasing;
(c) monitoring and revising agreements; and
(d) managing any risk associated with such agreements.
Headquarters
11 (1) An entity engages in business as a headquarters if the entity engages in the
general management and administration of its affiliates within or outside Bermuda.
(2) The core income generating activities of an entity engaged in business as a
headquarters include the following—
(a) taking relevant strategic or management decisions;
(b) incurring expenditures on behalf of affiliates; and
(c) coordinating group activities.
Shipping
12 (1) An entity engages in shipping if it engages in ownership, leasing, operation or
management of a ship that is used to transport goods.
(2) The core income generating activities of an entity engaged in shipping include
the following—
(a) managing the crew (including hiring, paying and overseeing crew members);
(b) hauling and maintaining ships;
(c) overseeing and tracking deliveries;
(d) determining what goods to order and when to deliver them; and
(e) organising and overseeing voyages.
Distribution and service centres
13 (1) An entity engages in business as a distribution centre if it engages in resale of
goods purchased from a foreign affiliate.
(2) The core income generating activities of an entity engaged in business as a
distribution centre include the following—
(a) transporting and storing goods; and
(b) managing stock and taking orders.
(3) An entity engages in business as a service centre if it primarily provides
consulting or administrative services to a foreign affiliate.
(4) The core income generating activities of an entity engaged in business as a
service centre include providing consulting or administrative services to a foreign affiliate.
Holding entity
14 (1) An entity engages in business as a holding entity if it engages in activities
including holding or managing any assets or equity participations.
(2) A holding entity is a “pure equity holding entity" where it only holds or manages
equity participations, and earns passive income from dividends, distributions, capital gains
and other incidental income only.
(3) A pure equity holding entity that is engaged in a relevant activity complies with
the economic substance requirements if the entity—
(a) complies with minimum economic substance requirements; and
(b) has adequate employees for holding and managing equity participations,
and adequate premises in Bermuda.
(4) For a holding entity that holds a variety of assets and earns different types of
income (such as interest, rents and royalties), the core income generating activities are
those activities that are associated with the income that the holding company earns.
[Regulation 14 revoked and replaced by BR 34 / 2019 rug. 6 effective 22 February 2019]
1? Related Relevant Activities
Intellectual property
15 (1) An entity engages in IP business if the entity engages in the exploitation of IP
assets (including non-trade intangible assets).
(2) For the purposes of paragraph (1), the core income generating activities
associated with an intangible asset will depend on the following—
(a) the nature of the IP asset, that is to say, whether it is a patent, technical
know-how, trademark, customer lists or brand or goodwill; and
(b) how the IP asset is being used to generate income for the entity.
(3) The core income generating activities for entities engaged in IP activities include
the following—
(a) conducting research and development in relation to IP assets, such as
patents;
(b) marketing, branding and distribution of non-trade intangible assets, such
as trademarks;
(c) taking the strategic decisions and managing and bearing the principal
risks related to the development and subsequent exploitation of an IP
asset;
((1) taking the strategic decisions and managing and bearing the principal
risks related to any third party acquisition and subsequent exploitation of
an IP asset; and
(e) carrying on the underlying trading activities through which IP assets are
exploited and which lead to the generation of income from third parties.
[Regulation 15 amended by BR 34 / 2019 rug. 7 effective 22 February 2019; Regulation 15 paragraph
(2) revoked and paragraph (3) renumbered as paragraph (2) by BR 34 / 2019 rug. 7 reflective 22 February
2019; Regulation 15 paragraph (2) sub-paragraphs (c) to (e) revoked by BR 34 / 2019 rug. 7 effective 22
February 2019; Regulation 15 revoked and replaced by BR 38 / 2019 rug. 2 reflective 4 March 2019]
Enhanced 1P economic substance requirements
16 (1) Where an entity engaged in IP business owns an IP asset that—
(a) was developed or created by the entity; or
(b) has been acquired from an entity other than an affiliate; and
(c) is licensed to an entity other than an affiliate, paragraph (2) applies.
(2) Where such entity‘s IP core income generating activities (as set forth in
regulation 15(3)(a) and (b)) are not undertaken in Bermuda during a relevant financial
period, it is presumed that the entity does not comply with economic substance
requirements, unless it is shown to the contrary that the entity—
(a) undertakes other core income generating activities associated with IP
income in Bermuda as demonstrated by—
(i) taking the strategic decisions and managing and bearing the principal
risks related to the development and subsequent exploitation of an IP
asset;
(ii) taking the strategic decisions and managing and bearing the principal
risks related to any third party acquisition and subsequent exploitation
of an IP asset;
(iii) carrying on the underlying trading activities through which IP assets
are exploited and which lead to the generation of IP income from third
parties; and
(b) has an adequate number of employees with the suitable qualifications who
reside and perform the IP related relevant activities and adequate premises
in Bermuda.
(3) An entity engages in high risk IP activities where the entity owns an IP asset
that—
(a) has been acquired from an affiliate or has been obtained through the
funding of overseas research and development activities; and
(b) is licensed to a foreign affiliate or is used to generate IP income through
activities performed by such foreign affiliate, and in such case, paragraph (4) applies.
(4) Where this paragraph applies, it is presumed (whether or not the entity‘s IP
core income generating activities as set forth in regulation 15(3) are undertaken in
Bermuda) that the entity does not comply with economic substance requirements unless it
is also shown to the contrary that—
(a) the entity satisfies the requirements set forth in paragraph (2)(a) and (b)
above; and
(b) the entity does not merely passively hold and generate IP income from IP
assets in Bermuda, but a high degree of control over the development,
exploitation, maintenance, enhancement and protection of the IP asset is,
and historically has been, exercised by an adequate number of employees
with suitable qualifications who reside and perform their IP related
activities in Bermuda as demonstrated by the following—
(i) a detailed business plan;
(ii) information demonstrating the presence of an adequate number of
employees in Bermuda during the relevant financial period who are
suitably qualified and are responsible for control and oversight or
execution of, and decisions in respect of, its IP core income generating
activities; and
(iii) such additional information as the Minister may reasonably require for
this purpose.
[Regulation 16 revoked and replaced by BR 34 / 2019 rug. 8 effective 22 February 2019; Regulation 16
amended by BR 38 / 2019 rug. 3 effective 4 March 2019]
Powers of Registrar regarding non—compliance With economic substance
requirements
17 For the avoidance of doubt, it is hereby declared that if it is determined that an
entity has failed to comply with economic substance requirements, the Registrar shall
exercise the powers by section 13 of the Act conferred on the Registrar for the purposes of
ensuring compliance with the Act, and such powers shall include the following—
(a) the issue, under the Registrar of Companies (Compliance Measures) Act
2017, of a notice to the entity to comply with economic substance
requirements;
(b) if the entity does not comply with the notice to comply referred to in
paragraph (a) or any further notice to so comply, the Registrar shall impose
a civil penalty under the procedure set forth in the Registrar of Companies
(Compliance Measures) Act 2017 with respect to each such failure; and
(c) where an entity's non-compliance with economic substance requirements
continues after the issue of a final notice to comply and the imposition of
a civil penalty under the Registrar of Companies (Compliance Measures)
Act 2017, the Registrar shall apply to the Court for—
(i) an order for regulation of the conduct of the affairs of the entity; or
(ii) an order restricting the entity from carrying on business, and a
direction to exercise the power conferred on him under the relevant Act
(as the term “relevant Act" is defined by the Registrar of Companies
(Compliance Measures) Act 2017), to strike-off the entity.
Commencement
18 These Regulations shall come into operation on 31 December 2018.
Made this 28th day of December 2018
Minister of Finance
[Operative Date: 31 December 2018]
[Amended by:
BR 34 / 2019
BR 38 / 2019]