Deloitte Bermuda Tax Alert

Legislation on economic substance passed

On 17 December 2018, the Bermuda House of Assembly passed a bill entitled the Economic Substance Act 2018 (Act) that introduces increased substance requirements for certain Bermuda-resident entities and introduces changes to the Investment Funds Act 2006. Accompanying regulations (Economic Substance Regulations 2018) also were released, which provide further details on the requirements outlined in the Act.

The measures in the Act apply as from 1 January 2019 (with a six-month transitional period for existing entities) and affect Bermuda companies (including local companies, permit companies and overseas companies), limited liability companies (LLCs), and/or partnerships (entities) that are engaged in “relevant activities”.

Relevant activities are further defined in the regulations and include the following:

  • Banking
  • Insurance
  • Fund management
  • Financing
  • Leasing
  • Headquarters
  • Shipping
  • Distribution and service center
  • Intellectual property
  • Holding entity

This legislation reinforces Bermuda’s commitment to meet the requirements imposed by the EU Code of Conduct Group (COCG) on jurisdictions that currently appear on the EU’s “grey list.” Grey list countries are required to address concerns of the COCG relating to the need for businesses to demonstrate sufficient economic substance, with a deadline of 31 December 2018 for passage of domestic economic substance legislation.

Economic substance requirements

According to the Act, every Bermuda entity that engages in relevant activities must maintain a substantial economic presence in Bermuda. A Bermuda entity will be deemed to comply with the economic substance requirements if:

  • The entity is managed and directed in Bermuda;
  • Core income-generating activities (CIGA) are undertaken in Bermuda with respect to the relevant activity;
  • The entity maintains adequate premises in Bermuda;
  • The entity has adequate full-time employees in Bermuda with suitable qualifications; and
  • There is adequate operating expenditure incurred in Bermuda in relation to the relevant activity.

The substance test will be applied in relation to the CIGA of the entity, which are further defined in the regulations.

Annual economic substance declaration

The Act prescribes that all entities must file an annual economic substance declaration with the Registrar of Companies that includes at least the following information:

  • Whether or not the entity is carrying on a relevant activity, and the type of relevant activity carried on or undertaken by the entity;
  • Whether the entity is engaging in a high risk intellectual property activity;
  • Whether the entity will outsource the relevant activity and to whom;
  • The CIGA (as may be prescribed) that are undertaken in Bermuda with respect to the relevant activity;
  • The gross income for the relevant financial year;
  • The premises in Bermuda;
  • The name(s) and physical address(es) of the following  representatives who are ordinarily resident in Bermuda:
      – Where the entity is a company, the director or directors;
      – Where the entity is a limited liability company, the manager or
         managers; and
      – Where the entity is a partnership, the general partner or general
  • The holding entity, the ultimate parent entity, the owner or the beneficial owner of the entity;
  • The operating expenses and assets for the relevant financial year;
  • The number of full-time employees; and
  • Such other information as may reasonably be required by the Registrar.

It is not yet clear what form the declaration submission will take, and further guidance is likely to be released in due course.

The Registrar will provide information regarding any entity that is determined not to have met the economic substance requirements for a relevant financial period to the competent authority. The Registrar also will provide information regarding any entity that is engaged in intellectual property-related activities prescribed as high risk, with an affiliate outside of Bermuda.

The competent authority will share this information with the foreign competent authority of any relevant EU member state in which a holding entity, the ultimate parent entity, an owner or the beneficial owner of the Bermuda entity is registered or resident. 

Penalties and other sanctions for noncompliance

The Act outlines a notice process with graduated penalties to be applied for failure to meet economic substance requirements following each subsequent notice. The penalties to be applied range from BMD 7,500 to BMD 250,000.

Where a person knowingly provides false information to the Registrar, the person will be liable on summary conviction to a fine not exceeding BMD 10,000 or to imprisonment for two years, or both. Where an entity fails to comply, and the submission of false information is proved to have been committed with the consent or involvement of an officer (i.e. director or senior manager, as appropriate) of the body corporate, both the officer and the body corporate will be liable.

Finally, the Act provides for the Registrar to apply to the court to make an order requiring the entity to take any action for the purpose of meeting the economic substance requirements, including an order for increased regulation or restriction of the conduct of the entity’s affairs or business, or authorizing other proceedings such as a strike-off of the entity.


Bearing in mind the effective date of 1 January 2019, potentially affected entities should assess the application of the law and take appropriate steps to ensure compliance with the economic substance requirements.

Potentially affected entities/groups should consider the following actions:

  • Classifying their structures on an entity-by-entity basis to flag those that undertake a relevant activity and, therefore, fall within the scope of the new requirements;
  • Considering current and future compliance for those entities that undertake relevant activities with respect to the substance requirements outlined;
  • Considering the means by which compliance with the economic substance tests will be documented and evidenced; and
  • Considering any operational or structural changes that may be required to meet the substance requirements outlined. 

View or download the Bermuda Tax Alert document
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