The Economic Substance Act 2018 (the "Act")1 requires Bermuda-based entities that are carrying on a "relevant activity" in a relevant financial period and entities claiming "non-resident entity" status under the Act to file an Economic Substance Declaration Form (a "Declaration Form") with the Bermuda Registrar of Companies (the "Registrar"). Such Declaration Forms must be filed annually, within six months of the last day of the entity's financial year. For example, an entity with a financial year-end of 31 December 2022 will be required to file its completed Declaration Form by 30 June 2023.
The following are relevant activities, as defined by the Act:
- Financing and leasing
- Intellectual property
- Distribution and service centres
- Fund management
- Holding entity
Economic Substance Declaration
Every entity carrying on a relevant activity in respect of the relevant financial period must file a Declaration Form. The Declaration Form requires the disclosure of certain financial and other information, and the extent of the information required will depend on the nature of the relevant activity and the particular circumstances of the entity.
Nil Gross Revenue – Relevant Activity
Entities that do not earn any gross revenue in respect of a relevant activity are only required to file a "nil" Declaration Form. Any entity conducting a relevant activity that does not earn gross revenue in a relevant financial period is not required to comply with economic substance requirements beyond completing and filing the "nil" Declaration Form.
Entities Carrying on Fund Management
As a result of amendments to the Economic Substance Regulations 2018, enacted in December 2021, an entity will be deemed to be carrying on the relevant activity of "fund management" if it provides investment management services to an investment fund, whether or not the relevant entity is required to be licensed under the Investment Business Act 2003.
For an in-scope fund management entity which has a financial year-end of 31 December, the first relevant financial period is the financial year-end 31 December 2022. Such an entity is therefore required to file its Declaration Form on or before 30 June 2023.
"Non-resident Entity" Status2
Entities that are tax resident outside Bermuda (in a jurisdiction that is not on the European Union's list of non-cooperative jurisdictions for tax purposes) are only required to file evidence or confirmation of their tax residency. Where documentary evidence is not available for the entire relevant financial period at the time of filing the Declaration Form, it is possible for the entity to file a provisional claim of residency for tax purposes. Final evidence of tax residency must be supplied by a date specified to the entity by the Registrar, or, in any event, no later than 12 months from the date of the provisional claim. Non-resident entities are not required to comply with economic substance requirements beyond completing and filing the Declaration Form and evidence or confirmation of their tax residency status.
The Registrar has advised that one or more of the following is sufficient final evidence to demonstrate an entity's tax residency outside Bermuda:
- a letter or certificate from the competent authority or tax authority of the jurisdiction in question, stating that the entity is considered to be resident for tax purposes in that jurisdiction; or
- an assessment to tax on the entity, a confirmation of self-assessment to tax, a tax demand, evidence of payment of tax or any other equivalent document issued by the competent authority or tax authority for the jurisdiction in question.
Where an entity made a provisional tax residency claim in its Declaration Form filed in 2022, we recommend such entity provides the Registrar with the final evidence once it is available, if this has not yet been done.
If an entity intends to make a claim for "Non-resident Entity" status in its upcoming Declaration Form, we suggest such entity requests final evidence of this tax residency from the relevant tax authority as soon as practicable.
Entities which claim to be non-resident entities for tax purposes relying on an election made under section 953(d) of the Internal Revenue Code of the United States of America ("Election"), a document stamped or issued by the Internal Revenue Service which confirms approval of the Election will be construed as sufficient evidence of tax residence in the United States of America for a relevant financial period.
Economic Substance Requirements
Where an entity (i) is not a non-resident entity, (ii) has conducted a relevant activity and (iii) earned gross revenue in a relevant financial period in respect of such activity, its economic substance requirements will depend on the nature of the relevant activity and the particular circumstances of the entity.
For an overview of economic substance requirements for Bermuda-based entities, click here. However, we recommend seeking legal advice in Bermuda concerning the individual situation of any entity or proposed entity.
1. In 2018, Bermuda enacted legislation with respect to economic substance requirements for relevant entities based in the jurisdiction. All other major offshore jurisdictions have enacted similar legislation.
2. Pursuant to new guidelines from the OECD (i) entities claiming to be tax resident in certain no or only nominal tax jurisdictions including Anguilla, Bahamas, Bahrain, Barbados, British Virgin Islands, Cayman Islands, Turks and Caicos Islands, and the United Arab Emirates will not be deemed by the Registrar to be resident for tax purposes in those jurisdictions and as such will be rejected for the exclusion and (ii) entities claiming to be tax resident in Guernsey, Isle of Man or Jersey can only be accepted for the exclusion when sufficient proof exists that an entity is resident in the relevant jurisdiction for corporate income tax purposes, subject to the relevant corporate income tax law and is therefore required to meet substantial activity requirements for all its relevant activities.
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.