FREQUENTLY ASKED QUESTIONS

WHY WAS THE ECONOMIC SUBSTANCE ACT INTRODUCED?

The Act was legislated by the Bermuda Government in 2018 in response to EU requirements. The underlying reason was to ensure Companies are not utilizing offshore domiciles simply to avoid taxes elsewhere.

WHICH BERMUDA ENTITIES ARE IN SCOPE AND WHAT IS REQUIRED?

Depending on whether the business is carrying on one or more Relevant Activities, it may be required to evidence substance present in Bermuda. Substance is evidenced by being managed and/or directed, and having adequate people, expenditure and physical presence and conduct ‘Core Income Generating Activities (CIGA)' physically in Bermuda.

Relevant Activity means carrying on as a business in any of the following categories:

Banking
Insurance
Finance and Leasing
Headquarters
Holding Entity
Fund Management
Intellectual property
Distribution and Service Centre
Shipping

In general, an entity that is carrying out a Relevant Activity will meet the substance requirements if it:

ensures that the Relevant Activity is managed and directed in Bermuda;
undertakes the related CIGA in Bermuda;
maintains an adequate physical presence in Bermuda;
engages adequate suitably qualified people in Bermuda; and
incurs adequate operating expenditure proportionate to the level of activity carried on in Bermuda

WHO ARE ‘EMPLOYEES’ FOR THE PURPOSES OF ECONOMIC SUBSTANCE?

Employees
Officers
Employees of outsourced service providers to whom responsibilities have been delegated.
Directors (or equivalent for LLC’s and Partnerships)

The employee count is based on the number of full time equivalents (FTEs), i.e. the number of persons who worked full time within the reporting entity, or on its behalf, during the entire accounting period.

People who have not worked the full year, and those who have worked part-time, regardless of duration, are counted as fractions of an FTE. For this purpose, a standard working week is considered as 35 hours.

If the entity outsources, contracts or delegates some or all of its activities, then the resources of the service provider utilised in Bermuda is taken into consideration.

Assessment of the adequate number of qualified employees is related to the number of employees needed to be able to conduct the relevant activity as a whole (not just the CIGA).

WHO ARE ‘QUALIFIED’ EMPLOYEES?

The qualifications that are considered to be adequate will depend on the relevant sector that the entity has activity in, the CIGA undertaken in Bermuda and the duties performed by those employees.

Qualifications which may be taken into account include professional qualifications and relevant industry technical qualifications and qualification by relevant experience.

WHERE CAN I FIND OUT MORE ABOUT THE REQUIREMENTS OF THE ECONOMIC SUBSTANCE ACT 2018

The Bermuda Government published Guidelines in December 2019, a copy which can be found here

Many law and accounting firms in Bermuda have published useful guides, some are linked below:

FAQ: FAQ