A guide to the Economic Substance Act in Bermuda
The Bermuda Economic Substance Act (ESA) has significantly impacted the island's corporate landscape since its implementation in 2018. Introduced in response to the EU's Code of Conduct Group's focus on tax transparency and fairness, the ESA requires entities engaged in relevant activities to demonstrate economic substance within Bermuda.
In this article, Sam Butler, Client Director in Bermuda, provides valuable insights into the ESA's requirements, with a particular emphasis on the "directed and managed" criteria. As regulators continue to scrutinise compliance, understanding the intricacies of the ESA is essential for businesses operating in Bermuda.
What are the key requirements of the Economic Substance Regulations?
To comply with the Economic Substance Regulations, an in-scope entity must meet the following five criteria for each of its relevant activities:
- Managed and directed in Bermuda: The entity's key decision-making functions and strategic oversight must be carried out within Bermuda.
- Core income-generating activities (CIGA) undertaken in Bermuda: The entity's primary profit-generating activities related to the relevant activity should be conducted within Bermuda.
- Adequate physical presence: The entity must maintain a suitable physical presence in Bermuda, reflecting the nature and scale of its operations.
- Qualified full-time employees: The entity should have a sufficient number of full-time employees with appropriate qualifications to support its operations in Bermuda.
- Adequate operating expenditure: The entity must incur operating expenses in Bermuda that are commensurate with the level of its relevant activity.
What does “managed and directed” in Bermuda mean?
The "managed and directed" requirement of the Economic Substance Regulations stipulates that an entity's key decision-making functions and strategic oversight must be carried out within Bermuda. According to the latest Guidance Notes issued by the Minister of Finance, the Registrar must consider the following factors when assessing whether an entity meets this criteria:
“(a) holds meetings in Bermuda where strategic decisions are made (“strategic meetings”); and
(b) has an adequate number of senior executives, employees and other persons in Bermuda who are suitably qualified and responsible for oversight or execution of the Entity’s CIGA, and holds meetings at which risk management and operational decisions are made.”
The frequency of board meetings should be proportionate to the nature, scale, and complexity of the entity's relevant activities. Ideally, strategic meetings should be held in Bermuda within each relevant financial period.
It is essential to maintain detailed minutes of all key meetings, documenting the strategic, risk management, and operational decisions made. These minutes should be readily available for inspection in Bermuda, whether in electronic or hard copy format. While electronic records can be stored and accessed remotely, the data centre itself does not need to be located in Bermuda.
The "managed and directed" requirement emphasises the importance of conducting board meetings in Bermuda and ensuring that all critical strategic decisions related to the entity's CIGA are made at these meetings.
How should compliance with the Economic Substance Regulations be reported?
Entities engaged in relevant activities are required to submit an Economic Substance Declaration to the Registrar of Companies within six months of their financial year-end. For example, if an entity's financial year-end is December 31, 2024, the declaration must be filed by June 30, 2025.
How can Ocorian assist in ensuring compliance with the Economic Substance Regulations?
While the specific requirements of the Economic Substance Regulations may vary based on the nature of an entity's relevant activities, the overarching principle is that entities must demonstrate that their strategic decisions are made and their Core Income-Generating Activities (CIGA) are undertaken within Bermuda. Utilising local resident directors and holding regular board meetings in Bermuda are effective ways to assist with meeting these requirements.
Ocorian’s experienced and qualified directors, based in Bermuda, can provide valuable insights and expertise to support your entity's operations. Our team of highly qualified professionals, with expertise in law, accounting and assurance services, and investment management, not only contribute valuable insights but can also assist in forming a quorum to ensure board meetings are held in Bermuda.
In addition, our Corporate Services team can assist in facilitating and filing your entity’s Economic substance declaration, aiding accuracy and timely submission
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