The Economic Substance Act 2018 came into force on December 31, 2018, pursuant to which Bermuda companies conducting a "relevant activity" are required to submit declarations to the Registrar of Companies to confirm whether they have complied with the Act's economic substance requirements.

Over the past two years, there has been an increase in regulatory activity; first with the ROC taking enforcement steps against entities that self-declared noncompliance and, more recently, the ROC auditing entities' declarations, issuing requests for further information and taking enforcement steps after discovering previously undeclared noncompliance.

This article provides a brief summary of the legislative framework concerning the regulation of the ES requirements and provides some insights from our experience practising in this area.


To satisfy the ES requirements, an entity must ensure that it:

  • Is managed and directed in Bermuda
  • Undertakes its core income-generating activities in Bermuda, with respect to the relevant activity
  • Maintains adequate physical presence in Bermuda
  • Has adequate full-time employees in Bermuda with suitable qualifications
  • Has adequate operating expenditure incurred in Bermuda in relation to the relevant activity

The measures that must be implemented to satisfy the ES requirements will differ depending on the relevant activity being carried out.


The Act confers a number of powers on the ROC for its oversight responsibility concerning the ES requirements, including requesting information and conducting on-site inspections.

Information requests are typically issued to entities lacking adequate or specific information in their annual declarations.

Failure to respond to information requests or providing insufficient information to satisfy ES requirements may lead to the imposition of civil penalties. Continued noncompliance with ES requirements can escalate into more severe regulatory enforcement actions.


In today's rapidly evolving regulatory landscape, preparedness and adherence to regulatory obligations are not optional — they are paramount.

The ES regime represents Bermuda's dedication to a transparent business environment. Noncompliance, whether intentional or accidental, carries significant commercial implications (eg, regulatory reporting requirements, civil penalties, etc). These consequences may extend beyond the entity and could impact directors and related group entities.

Appleby's team of regulatory and compliance professionals has helped many clients to navigate the complexities of the ES regime and mitigate any potential risks for noncompliance.

From that experience, here is a summary of common pitfalls:


Entities should be careful to avoid clerical errors. Whether or not minor clerical errors (ie typographical errors, incomplete names or addresses) risk enforcement action depends on the extent and nature of the error. A significant enough error may constitute a failure to submit all necessary information, pursuant to Section 5 of the Act. As discussed below, any breach of the Act carries with it the risk of a civil penalty


This is the most common issue we have seen in practice, where entities have misclassified their relevant activities or failed to declare all, usually on the basis of reasonable, but ultimately incorrect, assumptions. A common mistake we see entities make is for them to apply what they appear to consider is a "dominant purpose" test (ie, the entity's purpose is "financing and leasing"), as a result of which that is all they declare, notwithstanding they may also have a very small service centre or intellectual property operation

Whether out of genuine misunderstanding or intentional misrepresentation, the misclassification of relevant activities is an alarming trend. Misclassification often results in increased requests for information and/or warning notices from the ROC concerning the breach. Accordingly, entities must take care when making submissions to ensure their responses sufficiently mitigate risk of further enforcement.


Compliance is subjective. Most entities that face enforcement understand what is required, but (sometimes for good reason) have not implemented necessary measures, or are still remediating issues that arose when the requirements were first implemented and the substance was less developed as it is now

Common issues include:

  • Not having enough meetings in Bermuda
  • Not having adequate and suitably qualified full-time employees in Bermuda
  • Not having appropriate outsourcing arrangements in place.


Failure to comply with the Act and the ES requirements renders an entity liable to a civil penalty of up to $250,000.

Pursuant to ES Guidance Notes, penalties are imposed when an entity fails to comply with a Notice to Comply, subject to the following bands:

  • First failure: $7,500 to $50,000
  • Second failure: $25,000 to $100,000
  • Third failure: $50,000 to $250,000

After the third failure to comply, the ROC has the power to seek a court order to restrict the entity's business and/or wind up the entity.

Beyond civil financial penalties, the long-term impact on reputation and business growth is an important consideration.

Regular interactions with the ROC because of noncompliance issues may tarnish an entity's standing, as well as the standing and reputation of the directors and officers responsible for the entity's regulatory compliance, making it challenging to conduct business both domestically and internationally.

First Published in The Royal Gazette, Legally Speaking column, October 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.