Summary of economic substance requirements in Bermuda, BVI, and Cayman

First published by the Hong Kong Lawyer, July 2019.

New regulations in Bermuda, the British Virgin Islands (BVI) and the Cayman Islands came into force at the start of 2019 which require certain entities carrying on specific types of business to demonstrate adequate economic substance in that jurisdiction.  New laws and regulations (Substance Regulations) have been adopted in each jurisdiction in response to concerns expressed by the Council of the European Union about the absence of clear general legal substance requirements for entities doing business in and through these jurisdictions.

WHICH ENTITIES ARE SUBJECT TO THE SUBSTANCE REGULATIONS?

The scope of the Substance Regulations varies from jurisdiction to jurisdiction.  As a first step, clients should take an inventory of all their entities in the affected jurisdictions and make note of the type of company, LLC or partnership and how they are taxed.  BVI and Cayman entities may be able to claim exemption on the basis that they are tax resident in another jurisdiction, but such exemption is not currently available to Bermuda entities.

ARE YOUR IN-SCOPE ENTITIES CONDUCTING A RELEVANT ACTIVITY?

An in-scope entity will only be required to meet the economic substance test if it carries on a relevant activity.

The relevant activities in each jurisdiction are:

1. banking;

2. insurance;

3. fund management;

4. financing and leasing;

5. headquarters;

6. shipping;

7. distribution and service centres;

8. holding entity;

9. and intellectual property.

WHAT ARE THE ECONOMIC SUBSTANCE REQUIREMENTS?

An entity (other than a holding entity, and entities that conduct intellectual property business, for which there are different criteria) conducting a relevant activity will satisfy the economic substance requirements if:

it is managed and directed in the jurisdiction;core income generating activities (CIGA) are undertaken in the jurisdiction in relation to the relevant activity;it maintains adequate physical premises in the jurisdiction;there are adequate employees in the jurisdiction with suitable qualifications;there is adequate expenditure incurred in the jurisdiction in relation to the relevant activity; and it files a confidential economic substance report each year with the applicable authority in its jurisdiction which will assist the authority in assessing compliance.

The Substance Regulations also set out the circumstances where the above activities may be outsourced.

WHAT ARE THE DEADLINES FOR FILING OF ECONOMIC SUBSTANCE REQUIREMENTS?

Whilst existing in-scope entities have until 30 June or 1 July 2019 to comply with the Substance Regulations, the first reporting would not occur until 2020.

Cayman entities that are subject to economic substance requirements will be required to file a notice via a new Economic Substance Portal at the beginning of 2020 stating whether or not they are carrying out relevant activities, whether they intend to claim tax residency in another jurisdiction and the date of its financial year.  No later than 12 months after the last day of each financial year commencing in 2019, the entities will be required to file a basic return setting out particulars as to income, expenses, assets, management, employees, physical presence and other matters.

BVI entities that are subject to economic substance requirements will be required to file certain information via the existing Beneficial Ownership Secure Search System no later than 6 months after the last day of each financial year commencing in 2019.  Information to be submitted includes total turnover generated by the relevant activity, amount of expenditure incurred, total number of employees and the number of them engaged in the BVI, nature of equipment located in the BVI, names of the persons responsible for the direction and management of the relevant activity, together with their relationship to the entities and whether they are resident in the BVI.

Bermuda entities that are subject to economic substance requirements will be required to file an annual Declaration as part of its submission of annual return at the beginning of each year from 2020.  Information required to be disclosed include (but not limited to) the relevant activities, CIGA activities and outsourcing activities.

OUR RECOMMENDATION

We recommend that Bermuda, BVI and Cayman entities give consideration to whether or not they meet the definition of relevant entity under their applicable Substance Regulations. Those that appear to be in scope of the new regime should undertake an internal review to determine if they undertake relevant activities.

If so, contact us and we can help provide an economic substance solution for your entity.