In June 2019 there were a number of important updates to Bermuda's economic substance regime ahead of the 1 July 2019 compliance deadline for entities in existence when the economic substance legislation came into force. This article summarises these developments.
Entities tax resident overseas out of scope
The Economic Substance Amendment Act 2019 came into force on 28 June 2019. The amendment act introduced to the Economic Substance Act 2018 and associated regulations (collectively, the economic substance regime) the concept of a 'non-resident entity', which is defined as an entity that is resident for tax purposes in a jurisdiction outside Bermuda that is not in Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes (ie, an entity resident in a blacklisted jurisdiction will not count as a non-resident entity). The amendment act further excludes non-resident entities from the scope of the economic substance regime. This means that non-resident entities carrying on a relevant activity will not be subject to Bermuda economic substance requirements. However, for each relevant financial period, they must provide the registrar of companies with:
- the jurisdiction in which they claim to be resident for tax purposes; and
- sufficient evidence to support that tax residence.
In the guidance notes (see below), the registrar has indicated that it would expect to receive documentary evidence issued by the competent authority or tax authority for the jurisdiction in question of tax residence overseas in the form of:
- a letter or certificate 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 tax payments or any other document.
The amendment act also modifies the provisions that govern the exchange of information. The registrar will now disclose information on entities that fail to comply with the economic substance requirements or engage in high-risk IP activities not only to authorities in the relevant EU member state where the entity's holding entity, the ultimate parent entity, an owner or the beneficial owner is incorporated, formed, registered or resident (as the case may be), but also to authorities in any jurisdiction in which such owner is incorporated, formed, registered or resident.
Similarly, the registrar will provide information that it receives in support of a non-resident entity's claim of tax residency overseas to the competent authority of the jurisdiction in which the non-resident entity claims to be resident for tax purposes and the competent authority of the jurisdiction in which a holding entity, the ultimate parent entity, an owner or the beneficial owner of the non-resident entity is incorporated, formed, registered or resident.
On 26 June 2019 the registrar published, for industry consultation, draft guidance notes on general principles relating to the economic substance regime. These guidance notes aim to:
- help entities determine whether they fall within the economic substance regime; and
- provide guidance as to how the registrar will measure and assess the criteria for meeting the economic substance requirements set out in the economic substance regime.
As the name suggests, the guidance notes focus more on matters of universal application to in-scope entities – in particular, filing requirements and procedures and the criteria for fulfilling Bermuda's economic substance requirements, rather than specific considerations that apply to particular industries or activities. It is anticipated that further, specific guidance notes will be published in relation to each relevant activity in due course.
The registrar is in the process of establishing an e-registration system to accept and manage the information and data that it collects pursuant to the economic substance regime, with the aim of having this system operational in the second quarter of 2020. In a recent update meeting with industry, the registrar's office indicated its anticipation that the first filing deadline for in-scope and non-resident entities is currently expected to be 30 June 2020.
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