Increasingly, onshore and offshore jurisdictions alike seek to ensure that international business is conducted through active businesses who have their 'mind & management' closely linked to the jurisdictions where they assert their domicile. For example, onshore tax authorities frequently prescribe complex rules associated with, among other facts, where the 'mind & management' of an enterprise is located, the criteria for what makes a business 'active' as opposed to 'passive', how to determine the jurisdiction of corporate control, or what the tests might be to determine if an entity has a real and substantial connection to a jurisdiction.
Bermuda is no exception. For specified business activities in Bermuda, which include banking, insurance, fund management, financing and leasing, corporate headquarters, among others, Bermuda's Economic Substance Act 2018 and related regulations (2018), stipulate certain economic substance requirements that must be met. Enterprises that are within the scope of those requirements must be managed and directed in Bermuda, have their core-income generating activities undertaken in Bermuda, have an adequate number of suitably qualified full-time employees in Bermuda, adequate operating expenditure in Bermuda and an adequate physical presence in Bermuda.
The Government of Bermuda's 37-page publication Economic Substance Requirements for Bermuda: Guidance Notes- General Principles (revised 1st January 2020) provides excellent guidance for compliance with those requirements.
However, Bermuda is an extremely business friendly and pragmatic jurisdiction. One example is the fact that various Bermuda laws and regulations take into account the commercial, financial and human resource realities that require many enterprises in Bermuda to have parts of their operations conducted by service providers, either in Bermuda or outside of Bermuda. Although all entities that are within the scope of Bermuda's economic substance regime must comply with those laws and regulations, some enterprises in Bermuda take advantage of the increased operational efficiencies, cost effectiveness (including foreign exchange advantages), improved access to human resources and economies of scale that either commercial outsourcing services or inter-company shared and consolidated back-office services can provide.
As long as the basic business laws and applicable regulations for establishing and operating a business in Bermuda are satisfied, it is beneficial to international markets to know that various Bermuda laws make it possible for a Bermuda enterprise to outsource aspects of its business operations and infrastructure to both Bermuda based and onshore service providers and it will not be an impediment to foreign investment in Bermuda.
In addition to Bermuda's aforementioned economic substance requirements, there are two good examples of the legal and regulatory balance that exists between attracting desirable foreign investment to Bermuda (on the one hand) and the permissive acceptance that commercial, operational and financial circumstances of Bermuda based enterprises that often dictate the need to outsource aspects of their operations to either Bermudian or onshore service providers, whether those transactions are commercial in nature or are entered into among affiliates.
The first example of Bermuda's regulatory acceptance of outsourcing practices is found in Bermuda's emerging privacy laws. It is widely expected that Bermuda's Personal Information Protection Act 2016 (PIPA) will be brought into full force and effect later in 2023 when compliance with PIPA may be subject to a grace period of some months. Much of PIPA was formulated to accommodate the necessary commercial outsourcing by Bermuda organisations that use personal information.
For example, section 5 (3) of PIPA provides that, "Where an organisation engages (by contract or otherwise) the services of a third party in connection with the use of personal information, the organisation remains responsible for ensuring compliance with this Act at all times." Section 17 (1) further stipulates that when an organisation transfers personal information to an overseas third party to use on behalf of the organisation (i.e. engages in outsourcing) "...the organisation remains responsible for compliance with this Act in relation to that personal information." Therefore, that requirement both respects the accepted practice of outsourcing both within and from Bermuda, while also intimating that the outsourcing organisation's compliance obligations under PIPA should be contractually flowed down to its outsourcing service provider.
Furthermore, PIPA also recognises that various management functions within a Bermuda enterprise are routinely outsourced to an officer of an affiliated entity by permitting the required appointment of an organisation's Privacy Officer to be satisfied whether the person appointed to that management role is employed by another company, if both companies are under common control.
Perhaps the most direct aspect of PIPA to accommodate the practice of outsourcing from Bermuda, is Section 17, entitled 'Transfer of Personal Information to an Overseas Third Party'. Simply stated, those provisions of PIPA set out a detailed regime of the undertakings, conditions and requirements concerning the nature and governance that such outsourcing transactions must comply with.
Another illustration comes in several forms from Bermuda's financial services regulator, the Bermuda Monetary Authority (BMA). The BMA's recognition of outsourcing is demonstrated in the recently issued compliance directives that are related to: outsourcing transactions and agreements, IT services and operational cyber risk management and to business continuity and disaster recovery policies and practices. Those outsourcing related prescriptions may vary across the different financial services that the BMA regulates and oversees but the common thread across all of those regulations, codes of conduct and guidance directives, is the thoughtful provision of a risk reducing framework (including related contracting practices) that are designed to promote outsourcing security, risk management, success and the prudent governance of those services, whether they are provided by affiliates or by independent commercial service providers.
Bermuda benefits from both the accepted and necessary laws and regulations that are designed to attract active and desirable businesses of substance to Bermuda and the pragmatic acceptance that enterprise's across varying sectors may need to outsource certain operations and infrastructure to third party service providers − as long as those service transactions are prudently considered, structured, contracted for and managed in accordance with the still evolving legal and regulatory prescriptions for those transactions. That is a pragmatic balance that is designed to flexibly attract desirable foreign investment to Bermuda.
First Published In the Bermuda Business Review 2023-2024 – June 2023
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
