In keeping with its commitment to tax transparency, the Government of Bermuda is addressing proposals raised by the EU Code of Conduct Group regarding economic substance. In November 2017 the Premier of Bermuda committed to addressing the proposals relating to economic substance for entities doing business in or through Bermuda and to pass legislation to implement any appropriate changes by 31 December 2018 (Legislative Date).
This subject is one which is receiving attention in both the Overseas Territories and Crown Dependencies as we move closer to the Legislative Date. We anticipate draft legislation will be tabled in the House of Assembly soon and will provide further details of these provisions once known. Once the proposed legislative framework has been made public we will revert to assist potentially affected companies with assessing the application of the law and with appropriate planning.
By way of background information, such amendments are being introduced based on perceived harmful tax practices across member states as well as non-member states (third countries) that have become the focus of increased scrutiny from the European Union (EU). The Council of the EU adopted a resolution on a Code of Conduct for business taxation, the aim of which is counteracting the effects of zero tax and preferential tax regimes around the world. In 2017 the Code of Conduct Group (COCG) investigated the tax policies of both EU member states and third countries, assessing (i) tax transparency; (ii) fair taxation; and (iii) implementation of anti–BEPS measures.
Following assessment by the COCG, Bermuda was included in a list of jurisdictions (2.2 Jurisdictions) which are required to address the concerns of the COCG relating to demonstrating economic substance. Other countries in the 2.2 Jurisdictions category include BVI, Cayman, Guernsey, Jersey, Isle of Man and Mauritius.
To assist the 2.2 Jurisdictions in implementing appropriate substance requirements, the COCG published a technical scoping paper in June 2018 (Scoping Paper). The Government of Bermuda has been working closely with key stakeholders and industry in Bermuda to develop legislative proposals which adequately address the technical elements outlined in the Scoping Paper and allay any concerns raised by the COCG.
Implementing Substance Requirements
The Scoping Paper sets out the three key steps for implementing substance requirements:
1. Identify the “relevant activities”
2. Impose substance requirements
3. Ensure there are enforcement mechanisms in place.
The Scoping Paper identifies relevant activities as including (as a minimum) the following eight (8) industry sectors which will fall within the scope of the proposed substance rules:
We also understand that distribution and service centre businesses will also be classified as a relevant activity.
The Scoping Paper provides that entities which are engaged in a relevant activity must meet applicable substance requirements. These requirements may include having an adequate level of qualified employees in the jurisdiction; incurring an adequate level of annual expenditure; maintaining physical offices and premises in the jurisdiction; ensuring the entity is directed and managed in the jurisdiction; and that the core income-generating activities are performed in the jurisdiction. The Scoping Paper provides guidance on the nature of the activities which may constitute “core income generating activities” for both IP and non-IP regimes. We await guidance on what will constitute “adequate” levels of staffing, expenditure and physical premises. We understand that in line with other 2.2 Jurisdictions, outsourcing of core income generating activities within the jurisdiction may contribute towards satisfying substance requirements.
Whilst the detail of enforcement mechanisms has yet to be determined, we understand that enforcement provisions, in line with other 2.2 Jurisdictions, will include fines and restrictions on company activity.
Timeline for implementation
The Scoping Paper anticipates that the substance requirements will apply with effect from 1 January 2019 for newly incorporated entities and that there will be a transitional period for existing structures. The duration of the proposed transitional period is still being discussed although we understand it will be a minimum of 6 months.
Whilst the Scoping Paper provides the overarching technical framework, the detail of the requirements which will apply in Bermuda will only be available following conclusion of the discussions between the Government of Bermuda and the COCG. The Government of Bermuda is engaged in active dialogue with the COCG to develop and implement a framework which addresses the nature and extent of Bermuda’s substance regime. We believe that the result will be a sensible yet robust approach to regulation.
Please contact your usual Appleby partner or a member of the team set out below.
 Bermuda was listed specifically under Criterion 2.2 which relates to tax regimes that facilitate offshore structures which attract profits without real economic activity. Those countries listed in Annex II are referred to as “2.2 jurisdictions”.