Oct 2024
For Bermuda-based entities which have a financial year end of 31 December 2024, the final quarter of the fiscal year is a good time to consider their position with respect to Economic Substance.
Economic Substance Regime
The Economic Substance Act 2018 and the Economic Substance Regulations 2018 (together, the “Economic Substance Regime”) apply to Bermuda-based entities which have carried on a ‘Relevant Activity’ in the relevant period. The list of ‘Relevant Activities’ pursuant to the Economic Substance Regime includes banking, insurance, fund management, financing and leasing, headquarters, shipping, intellectual property, distribution and service centres and pure equity holding entity.
Economic Substance Requirements
The Economic Substance Regime requires entities carrying on a Relevant Activity (with the exception of local entities carrying on a Relevant Activity, and pure equity holding entities) and which earn revenue to maintain a substantial economic presence in Bermuda. The requirements will be met if:
- the entity is managed and directed in Bermuda;
- core income generating activities are undertaken in Bermuda with respect to the Relevant Activity
- the entity maintains adequate physical presence in Bermuda;
- there are adequate full time employees in Bermuda with suitable qualifications; and
- there is adequate operating expenditure incurred in Bermuda in relation to each Relevant Activity.
Pure equity holding entities and local entities which carry on a Relevant Activity need only comply with minimum economic substance requirements.
Economic Substance Declaration
Entities undertaking relevant activities must annually file an Economic Substance Declaration (ESD) with the Registrar of Companies (the “Registrar”) providing information in relation to the previous financial year, within six months of their financial year end. In the ESD entities will confirm details of the substance that they maintained in Bermuda during the financial year, and ultimately make a declaration as to whether they have complied with the Economic Substance Regime. Entities which do not earn any gross revenue in respect of a relevant activity are not required to comply with the Economic Substance Regime, and are required to file a ‘nil’ Declaration Form, which is shorter and simpler than the standard ESD. Entities that are tax-resident outside Bermuda (in a jurisdiction which is not on the EU’s list of non-cooperative jurisdictions for tax purposes) are required only to file evidence or confirmation of such tax residence.
Monitoring and Enforcement
The Registrar carries out compliance checks in respect of entities which have not filed their ESD (therefore suggesting they have not carried out any Relevant Activity), can request information/documents from entities which have filed ESDs declaring they undertook a Relevant Activity, and may attend an entity’s registered office to conduct an audit of its records to assess compliance. It is important, therefore, that entities maintain adequate records in order to substantiate their ESD filing (or their determination that they are not in scope). As the Economic Substance Regime continues to mature it is likely that penalties for failure to comply with the regime will increase, especially in respect of entities which have repeatedly failed to comply.
Are You in Compliance?
Entities should assess and determine whether they have carried out a Relevant Activity thus far during the financial year or expect to do so during the fourth quarter of 2024, and carefully consider the type of Relevant Activity the entity is carrying on. The Registrar has noted that there continues to be a number of misfilings as a result of incorrect interpretation of the Economic Substance Regime. A particularly common error is misfiling as a pure equity holding entity when the entity is also carrying on another Relevant Activity, commonly by providing intra-group financing resulting in the entity carrying on the Relevant Activity of financing and leasing. The Registrar is identifying these filing errors upon a review of the entity’s financial statements, which reflect interest income earned.
Entities should also assess whether they expect to earn any revenue from a Relevant Activity, and confirm whether they will be in compliance for the year. Entities which may not currently be on track to be in compliance should consider steps that they can take to get into compliance. For example, has the entity been managed and directed in Bermuda during the current financial year through holding an adequate number of meetings in Bermuda where strategic, risk management and/or operational decisions were made, and having an adequate number of senior executives and other suitably qualified persons in Bermuda who are suitably qualified and responsible for oversight and execution of the entity’s core income generating activities in Bermuda.
Entities will also be preparing their Annual Declarations which must be filed with the Registrar, along with the payment of their Annual Government Fees, by 31 January 2025. As part of the Annual Declaration entities must declare what Relevant Activity they carried out during the relevant financial year. The Registrar may compare the Annual Declaration filing to the ESD filing to monitor whether they align. As the end of the fiscal year approaches it is advisable for entities to carefully consider and assess their position under the Economic Substance Regime.
How Can We Help?
Conyers has been closely involved with the implementation of Bermuda’s Economic Substance Regime. Our lawyers have advised and assisted our clients with their assessment of the impact of the economic substance requirements, as well as the filing of their ESDs. In so doing, we have acquired an unrivalled understanding in Bermuda of the economic substance requirements of various types of entities, across all relevant activities.
Please reach out to your usual Conyers contact or our economic substance team at [email protected], for help with:
- determining the status of an entity for economic substance purposes
- advising on the compliance of an entity with the economic substance requirements
- clarifying the reporting obligations of an entity
- completing and filing the Declaration Form
- compliance reviews
If you would like Conyers to assist with any of the above in connection with your ESD filings or compliance reviews, please contact us as soon as possible.
Corporate Services
In some instances, entities required to meet economic substance requirements may benefit from our fiduciary services, including local directorship services. Contact us to find out whether we can assist you in fulfilling your obligations under the Economic Substance Regime.