Who is subject to Economic Substance Requirements?

The Substance Act applies to “registered entities” which means companies subject to the Companies Act 1981 and companies formed under the Limited Liability Company Act 2016.

A registered entity will be in scope of the Substance Act if it conducts a relevant activity.  The relevant activities are:

banking;

insurance;

fund management;

financing

leasing;

headquarters;

shipping;

distribution and service centre; and

intellectual property.

A registered entity conducting a relevant activity will satisfy the economic substance requirements if:

1. it is managed and directed in Bermuda;

2. core income generating activities (CIGA) are undertaken in Bermuda in relation to the relevant activity;

3. it maintains adequate premises in Bermuda;

4. there are adequate employees in Bermuda;

5. there is adequate expenditure incurred in Bermuda in relation to the relevant activity.

How will a company be assessed on compliance?

The Minister of Finance (Minister) will determine, based on the Declaration filed by the registered entity (see further below), whether a company is compliant with the economic substance requirements.  Regulations (Substance Regulations) will be issued by the Minister which will set out the factors which the Minister will consider when assessing compliance with the Substance Act.

How is “adequate” to be assessed?

The Substance Act does not impose a minimum annual expenditure nor a minimum number of employees in order to satisfy the economic substance requirements. Rather, “adequacy” will be assessed based on the particular circumstances of the registered entity.  Guidance notes (which will include illustrative examples of CIGA for each of the relevant activities) will be issued by the government in due course to facilitate assessment of and compliance with the economic substance requirements.

Reporting Obligations: Economic Substance Declaration

Registered entities which are in scope of the Substance Act will be required to file on an annual basis an economic substance declaration (Declaration) with the Registrar of Companies (Registrar), confirming that the company complies with the economic substance requirements.

The Declaration will require the disclosure of certain key information applicable to an analysis of substance requirements, including the type of relevant activity undertaken, details of the management of the entity and its physical office location.

Compliance and Enforcement

The Registrar will have monitoring and enforcement powers under the Registrar of Companies (Compliance Measures) Act 2017 and will have the power to fine an entity for non-compliance.  Continued failure to meet the substance test may result in higher fines and could lead to the Registrar applying to the Bermuda Court to make an order requiring a non-compliant entity to take action to satisfy economic substance requirements.

Implementation Period

The proposed commencement date for the Substance Act is 1 January 2019 and the new regime will be immediately applicable to new registered entities incorporated or registered after this date. For existing companies, there will be a 6 month transitional period.

What can Appleby do to help?

We expect that all relevant entities will need to undertake an internal review to determine what measures, if any, they might need to take in order to achieve compliance.   We will have a clearer picture of the requirements once the Substance Regulations have been issued, likely in mid-December.  At that time, we will be in touch with more information about how we expect this new legislation to impact our clients.  In the meantime, if you have any questions, please reach out to your usual Appleby contact or a member of the team below.

Type

Insight

Sectors

Economic Substance

Locations

Bermuda

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