Bermuda proposes Economic Substance Requirements


As part of its ongoing commitment to compliance, regulation and transparency, Bermuda has adopted the Organisation for Economic Co-operation and Development (OECD) standards for Base Erosion and Profit Shifting (BEPS), FATCA, Common Reporting Standards (CRS) and Country-by-Country reporting. 

As part of this commitment, Bermuda has tabled a bill to implement legislative changes addressing concerns raised by the EU Code of Conduct Group regarding economic substance by 31 December 2018. On 7 December 2018, legislation was tabled in the House of Assembly proposing economic substance requirements on certain Bermuda companies and limited liability companies (each a relevant entity). Specifically tabled was the Economic Substance Act 2018 and published with this bill is the accompanying proposed the Economic Substance Regulations 2018 (collectively, the Economic Substance Acts). 

The primary intention of the Economic Substance Acts is to demonstrate that relevant entities carrying on a relevant activity are managed and directed in Bermuda and that core income generating activities of such entities are taking place in Bermuda. The Economic Substance Acts will require each relevant entity carrying on a relevant activity to annually file an Economic Substance Declaration (ESD) with the Registrar of Companies (the Registrar) confirming that they have a substantial economic presence in Bermuda. 

Economic Substance Requirements

The economic substance requirements in the Economic Substance Acts are expected to apply to relevant entities, including holding companies that are engaged in a ‘relevant activity’. The economic substance requirements will not apply to Bermuda partnerships. 

‘Relevant activity’ is defined in the Economic Substance Acts to mean carrying on business in one or more of the following areas: 

  • Banking business
  • Distribution and service centre business
  • Finance and leasing business
  • Fund management business
  • Headquarters business
  • Holding company business
  • Insurance business
  • Intellectual property holding business
  • Shipping business

Application to Holding Companies and Holding LLCs 

The economic substance requirement of holding companies will be lower than that applicable to other companies. The Economic Substance Acts confirm that minimum economic substance requirements apply if the relevant entity is a pure equity holding company which only holds equity participations and earns passive revenue from dividends, distributions, capital gains and other incidental income.

The minimum requirements applicable to all relevant entities, including pure equity holding companies, are; 

(1) compliance with applicable corporate governance requirements set forth in the Companies Act 1981, as amended and the Limited Liability Companies Act 2016 including keeping records of account, financial statements; and

(2) submission of an ESD. 

Economic Substance Declaration 

The annual ESD will be filed with the Registrar on a confidential basis. At a minimum, this declaration must include: (a) the type of relevant activity carried on or undertaken by the relevant entity; (b) the physical office locations (both in and outside of Bermuda); and (c) the name(s) and physical address(es) of any director(s) or manager(s) ordinarily resident in Bermuda. The final form of the ESD has not yet been agreed. 

It is expected that the existing annual declaration form that all Bermuda entities currently have to file with the Registrar will be amended to include a disclosure as to whether the entity is carrying out a relevant activity. 

Where the Registrar determines that a relevant entity has failed to meet the economic substance requirements and due notification has been given to comply and remedy non-compliance, the Registrar may impose civil penalties and/or a striking-off of the entity.

Whilst the effective date of the economic substance requirements will be 31 December 2018, it is expected that the first ESDs will be filed during early 2020 in respect of 2019. The exact date is yet to be confirmed.

Next steps for Marbury clients

As the final format of the ESD form and filing date have yet to be agreed, there is no action required from our clients at this stage. Your usual Marbury representative will be in touch in the new year when further guidance has been published.