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BERMUDA ECONOMIC SUBSTANCE REGULATIONS 2018

ECONOMIC SUBSTANCE REGULATIONS 2018

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