Economic Substance Requirements

Effective 1 January 2019, Bermuda has introduced the Economic Substance Act 2018 (‘Act’) and the Economic Substance Regulations 2018 (‘Regulations’), which provide for the implementation of economic substance requirements that are primarily meant to address EU concerns.

The Regulations have been amended to address the outstanding EU concerns following the issuance of the original regulations. The key amendments include the replacement of certain regulations in relation to holding entities, intellectual property, and enhanced IP to bring more types of business arrangements under their ambit and provide clarity in the existing provisions.

The law requires companies engaged in the following activities to demonstrate that they have a substantial economic presence in Bermuda:

Banking;
Insurance;
Fund management;
Financing;
Leasing;
Headquarters;
Shipping;
Distribution and service center;
Intellectual property; and
Holding entity.

It is clarified that an entity engaged in one or more relevant activities during a relevant financial period is required to comply with economic substance requirements in respect of each applicable relevant activity.

A company/entity is considered to have economic substance on the fulfillment of the following conditions:

The entity is managed and directed in Bermuda;
Core income generating activities (as may be prescribed) are undertaken in Bermuda with respect to the relevant activity;
The entity maintains an adequate physical presence in Bermuda;
There are adequate full-time employees in Bermuda with suitable qualifications; and
There is adequate operating expenditure incurred in Bermuda in relation to the relevant activity.

Companies subject to the substance requirements are required to file an economic substance declaration with the registrar on an annual basis within a period of six months from the end of the relevant financial year of the reporting entity.

Effective 28 June 2019, the Act was amended to provide new rules for non-resident entities carrying on a relevant activity. Under the new rules, a non-resident entity will not be in the scope of the Bermuda economic substance requirements if the non-resident entity provides in its annual report filed with the registrar for each relevant financial period, the jurisdiction in which it is a tax resident, together with supporting evidence of its tax residency. However, this exclusion does not apply if the non-resident entity is a tax resident of a jurisdiction listed as an EU non-cooperative jurisdiction for tax purposes (see below for the list). Further, it is clarified that an entity will not be deemed to be a resident for tax purposes in another jurisdiction if:

The other jurisdiction does not have a corporate tax regime; or
The entity is not subject to equivalent economic substance requirements in such other jurisdiction.

For this purpose, such other jurisdictions may include Anguilla, Bahamas, Bahrain, Barbados, British Virgin Islands, Cayman Islands, Turks and Caicos Islands, and the United Arab Emirates.

Information on such non-resident entities will be provided to the foreign competent authority of the relevant EU Member State or other jurisdiction in which the non-resident is a tax resident.

The Bermuda tax authorities issued a revised guidance note dated 30 January 2023 on the general principles for economic substance requirements, including definitions, applicability, filing requirements, clarification on tax residency, and sanctions and penalties.

Failure to meet the substance requirements attracts penalties in the range of BMD 7,500 to BMD 250,000. On continuous failure, it may be referred to the Court, which may issue orders to regulate or restrict the entity's activities or authorize that the entity is stricken from the registrar.

Tax Information Exchange Agreements (TIEAs)

Tax Information Exchange Agreements (TIEAs) provide for the exchange of information on tax matters and Bermuda has concluded TIEAs with more than 40 countries, including Argentina, Aruba, Australia, Bonaire, Saint Eustatius and Saba, Brazil, Canada, Chile, China, Curacao, Czech Republic, Denmark, Faroe Islands, Finland, France, Germany, Greenland, Guernsey, Iceland, India, Indonesia, Ireland, Isle of Man, Italy, Japan, Malaysia, Malta, Mexico, the Netherlands, the Netherlands Antilles, New Zealand, Norway, Poland, Portugal, Singapore, South Africa, South Korea, St. Maarten, Sweden, the United Kingdom and the United States of America.

Financial Account Information Reporting and Exchange

Bermuda acceded to the OECD Mutual Assistance Convention as amended, and the convention entered into force for Bermuda on 1 March 2014. Effective September 2017, Bermuda has signed the Common Reporting Standard (CRS) Multilateral Competent Authority Agreement and adopted measures to implement the automatic exchange of financial account information in accordance with the global standard for the exchange of information developed by the OECD under the CRS.

Further, Bermuda signed an Intergovernmental Agreement Model 2 (IGA) with the United States on 19 December 2013 to improve international tax compliance and implement the U.S. Foreign Account Tax Compliance Act (FATCA).

Low or No Tax Jurisdictions and Tax Regimes

A non-resident entity is not required to comply with the economic substance requirements if the entity can demonstrate that it is a tax resident outside of Bermuda and provides adequate evidence to the Bermuda Registrar of Companies that all of its income from its relevant activity or activities is charged to tax in the overseas jurisdiction. However, this exclusion does not apply if the non-resident entity is a tax resident of a jurisdiction listed as an EU non-cooperative jurisdiction for tax purposes.

Jurisdiction Listed by the EU as non-cooperative (as of 18 October 2024) are:

American Samoa	Antigua and Barbuda (removed effective 18 October 2024)	Anguilla (effective 12 October 2022)	Barbados (removed effective 26 February 2021)
The Bahamas (removed effective 26 February 2024)	British Virgin Islands (removed effective 23 October 2023)	Belize (removed effective 26 February 2024)	Costa Rica (removed effective 23 October 2023)
Dominica (removed effective 12 October 2021)	Fiji	Guam	Marshall Islands (removed effective 23 October 2023)
Palau	Panama	Russia (effective 14 February 2023)	Samoa
Seychelles (removed effective 26 February 2024)	Trinidad and Tobago	Turks and Caicos Islands (removed effective 26 February 2024)	The US Virgin Islands
Vanuatu

Beneficial Ownership Disclosure

On 23 March 2018, Bermuda implemented the law requiring all companies registered in Bermuda to maintain information on their beneficial owners at their registered offices and also file the information with the Bermuda Monetary Authority.

A beneficial owner is a natural person who ultimately owns or controls, directly or indirectly, more than 25% of the shares, voting rights, or interests in the company, or who controls the entity in any other manner.

In the absence of persons who meet the above-mentioned criteria, the entity's top management is considered as the beneficial owner.

Certain entities are exempt from the beneficial ownership reporting requirements, such as:

Legal entities registered with the Bermuda Stock Exchange or an overseas stock exchange designated by the Minister of Finance;
A closed-ended investment vehicle managed or administered by a person licensed under the Investment Business Act, 2003 or the Investment Funds Act, 2006 or registered, authorized, or licensed by a foreign regulator recognized by the Bermuda Monetary Authority;
An overseas company;
An open-ended investment fund, investment provider, fund administrator, trust company, and corporate service provider; and
Any other type of company or entity that is exempted by Ministerial order.

Failure to comply with the reporting requirements attracts a fine ranging from BMD 5,000 to BMD 50,000.

Powerful Tax Solutions

Tax Rules Engine

Collaboration Tools

Latest Tax News