Economic substance requirements
Annual reporting
Exchange of information
Commencement and transition
Amendments to Investment Funds Act


Many offshore financial centres laboured to meet the EU Council's end-of-year deadline to impose economic substance requirements on entities that carry on 'geographically mobile' business activities from certain jurisdictions. For jurisdictions subject to the deadline ('criterion 2.2 jurisdictions'), failure to introduce substance laws as required by the EU Council may result in being placed on the EU Council's list of non-cooperative jurisdictions for tax purposes. Bermuda, the Cayman Islands, Jersey, Guernsey, the Isle of Man, the British Virgin Islands and The Bahamas are among the criterion 2.2 jurisdictions.

The Bermuda government conferred with the EU Council, the Organisation for Economic Cooperation and Development's (OECD's) Global Forum on Harmful Tax Practices, other criterion 2.2 jurisdictions and its financial services industry when drafting Bermuda's substance laws.

The EU Council is expected to meet in early 2019 to assess the adequacy of each criterion 2.2 jurisdiction's substance laws. This article outlines Bermuda's Economic Substance Act and Regulations which both became operative on 31 December 2018.


The EU Council has indicated that, by requiring criterion 2.2 jurisdictions to introduce economic substance laws, it ultimately aims to prevent international businesses from benefiting from different tax laws between countries by artificially transferring profits to jurisdictions that impose little or no income tax.

During 2017, the EU Council's Code of Conduct Group (CoCG) assessed the tax regimes of 92 countries against the CoCG's tax good governance criteria in respect of tax transparency, fair taxation and implementation of anti-base erosion and profit shifting (anti-BEPS) measures. The CoCG acknowledged that Bermuda cooperated with the assessment and complied with the implementation of international tax transparency and anti-BEPS measures.

As part of the fair taxation assessment, the CoCG assessed jurisdictions' low or zero rates of corporate income tax against its criterion 2.2, which states: "The jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction."

The CoCG expressed concerns that criterion 2.2 jurisdictions may not impose adequate legal substance requirements on entities doing business in or through those jurisdictions, and therefore that their tax regimes are potentially harmful.

During late 2017, Bermuda and other criterion 2.2 jurisdictions committed to enacting legislation by the end of 2018 to address the CoCG's concerns.


Entity types potentially within scope
The act provides that the following entity types are subject to the economic substance requirements if they carry on relevant activities:

  • companies to which the Companies Act 1981 applies (therefore including overseas companies with a permit to engage in business in Bermuda);
  • limited liability companies formed under the Limited Liability Company Act 2016; and
  • exempted partnerships, exempted limited partnerships and overseas partnerships registered under Bermuda's partnership laws, where such partnerships have elected to have separate legal personality under the Partnership Act 1902.

Relevant activity
The act provides that 'relevant activity' means carrying on as a business any one or more of the following activities:

  • banking;
  • insurance;
  • fund management;
  • financing;
  • leasing;
  • headquarters;
  • shipping;
  • distribution and service centre;
  • intellectual property; and
  • holding entity.

Economic substance requirements

The act provides that the entity satisfies the economic substance requirements if:

  • the entity is managed and directed in or from Bermuda;
  • core income generating activities 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 relating to the relevant activity.

Managed or directed in or from Bermuda
In respect of whether an entity is managed or directed in or from Bermuda, the regulations require the entity to provide information regarding the:

  • location of strategic or risk management and operational decision making or where the entity's management meets to make decisions regarding business activities;
  • presence of 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 core income generating activities or both; and
  • location, nature and frequency of management (eg, board) meetings held in Bermuda relating to the overall number of such meetings.

Core income generating activity
The regulations outline the 'core income generating activities' for each relevant activity. There is no one size fits all.

It is anticipated that guidance issued by the Bermuda government will include examples of what constitutes 'adequate' premises, employees and expenditure. Outsourcing to affiliates or service providers must be taken into account by the registrar of companies when assessing an entity's compliance with these requirements.

Economic substance requirements depend on the type of relevant activity
The regulations provide that 'pure equity holding entities' (ie, entities that hold only equity participations in one or more entities and earn only passive revenues from dividends, distributions, capital gains and incidental income) are subject to minimum economic substance requirements.

The act provides that entities licensed to carry on insurance or banking business in Bermuda that comply with existing (governance and regulatory) requirements that are substantively equivalent to the new substance requirements are deemed to comply with Bermuda's economic substance requirements.

At the other end of the spectrum, the regulations provide that entities carrying on IP activities are presumed to fail the economic substance requirements. This presumption may be rebutted if the entity satisfies 'enhanced IP economic substance requirements'. This involves the entity overcoming an evidential burden to demonstrate that its revenues from IP activities in the jurisdiction are not derived from merely passively holding IP assets. The evidential burden is more onerous where the entity is engaged in high-risk IP activities, for example generating revenue from IP assets from transactions with foreign affiliates.

Annual reporting

Entities that are subject to Bermuda's economic substance requirements are required to file an annual declaration with the registrar.

The act provides that the annual declarations are required to include minimum information, including, but not limited to, the following with respect to the relevant financial period (ie, the financial year of the entity):

  • whether or not the entity is carrying on relevant activity and the type of relevant activity undertaken;
  • whether the entity is engaged in high-risk IP activity;
  • the entity's physical premises in Bermuda;
  • the names and physical addresses of directors (in the case of companies) or equivalent (in the case of other entity types) who are ordinarily resident in Bermuda;
  • the holding entity, ultimate parent entity, owner or the beneficial owner of the entity;
  • the gross income, operating expenses and assets and number of full-time employees;
  • details of core income generating activities conducted in Bermuda in respect of the relevant activity;
  • a declaration as to whether the entity satisfies the economic substance requirements; and
  • such other information as the registrar may reasonably require.

In addition, the regulations further require entities to provide information demonstrating the:

  • entity is managed and directed from Bermuda;
  • nature and extent of the relevant activity engaged in by the entity and its core income generating activities with respect to each relevant activity; and
  • employees or persons in the entity who are responsible for the oversight and assessment of the implementation of outsourcing to affiliates or services providers in Bermuda are suitably qualified and able to monitor and control the outsourcing arrangement to ensure the outsourced entity has adequate capacity to execute the outsourcing arrangement.

Exchange of information

The act provides that where an in-scope entity in a relevant financial period does not satisfy the economic substance requirements or is engaged in high-risk IP activity, Bermuda's competent authority shall provide the information received relating to that entity for that period to the competent authorities of the EU member states in which the holding entity, ultimate parent entity, owner or beneficial owner of the entity is incorporated, formed or registered.


The act provides for the imposition of civil penalties for non-compliance and fines and imprisonment for knowingly providing false information to the registrar in connection with the economic substance requirements. Ultimately, the registrar may refer entities' non-compliance to the Supreme Court.

Provided that the court agrees with the registrar's determination, it has wide powers to make such orders it sees fit in respect of the entity's non-compliance, such as:

  • requiring the entity to take action to satisfy the economic substance requirements;
  • regulating or restricting the conduct of the entity's affairs or business; and
  • ordering that the entity be wound up.


The act provides protection:

  • for disclosure of information necessary for the purposes of the registrar's due performance of its functions under the act; and
  • against disclosure of:
    • personal information in breach of Bermuda's privacy laws; or
    • economic substance information in response to information requests under Bermuda's public access to information laws.

Commencement and transition

The economic substance requirements imposed by the act apply in respect of financial periods starting on or after 1 January 2019. Entities within scope that are established on or after 1 January 2019 are required to comply with the economic substance requirements. Existing entities have a transitional period of six months from the commencement of the act to comply with the economic substance requirements.

Amendments to Investment Funds Act

The act amends the Investment Funds Act 2006 to modify Bermuda's existing regimes for excluded funds and exempted funds, which are now respectively known as 'private funds' and 'professional' funds and, together, as 'registered funds'.

The amendments include requirements for the:

  • registration of, and annual reporting by, registered funds; and
  • engagement of a custodian (subject to the authority's ability to waive the requirement) and a Bermuda-licensed service provider.

These amendments are intended to complement economic substance requirements that apply to entities carrying on relevant activities and to ensure that Bermuda's regime for regulation of investment funds remains equivalent with international standards.


The economic substance requirements may have a material impact on the way entities carry on relevant activities in or through criterion 2.2 jurisdictions. A number of such entities may find they readily satisfy the requirements. In other cases, the requirements may prompt entities to restructure – perhaps to ensure more core income generating activities occur in the criterion 2.2 jurisdiction. Bermuda's substance laws ensure that the country maintains its stellar reputation in international finance.

For further information on this topic please contact Ashley Fife at Carey Olsen Bermuda by telephone (+1 441 542 4500) or email ([email protected]). The Carey Olsen Bermuda website can be accessed at