Economic substance requirements

General requirements

What general economic substance requirements apply in your jurisdiction?

The general economic substance requirements under the Commercial Entities (Substance Requirements) Act 2018 (CESRA) are:

  • conducting core income-generating activities in The Bahamas; and
  • having adequate levels of board management and control within The Bahamas.

 

Conducting core income-generating activities in The Bahamas presupposes adequate:

  • levels of annual operating expenditure within The Bahamas;
  • levels of qualified full-time employees within The Bahamas; and
  • physical offices within The Bahamas.

 

Having adequate levels of board management and control within The Bahamas is demonstrated by:

  • having an adequate number of board meetings conducted in The Bahamas given the level of decision making required;
  • having a quorum of the board of directors physically present within The Bahamas during board meetings;
  • having the strategic decisions made at the board meetings recorded in the minutes of the meetings;
  • keeping all records and minutes in The Bahamas; and
  • having a board of directors that, as a whole, has the necessary knowledge and expertise to discharge its duties.
‘Directed and managed’

What requirements apply in relation to board meetings and the location where entities are directed and managed?

An adequate number of board meetings must be conducted in The Bahamas given the level of decision making required. At those meetings, a quorum of the board should be physically present within The Bahamas and the strategic decisions made should be recorded in the minutes. Further, all records and minutes of board meetings should be kept in The Bahamas and the board of directors, as a whole, must have the necessary knowledge and expertise to discharge its duties.

Guidelines issued by the Minister of Finance under CESRA indicate that the central management and control of an entity will be determined pursuant to the common law as developed by the Courts of The Bahamas and other common law jurisdictions, including England and Wales.

Core income-generating activities

What requirements apply in relation to core income-generating activities?

An entity that is required to have substantial economic presence in The Bahamas must conduct its core income-generating activities within The Bahamas.

An entity may outsource any of its core income-generating activities to an outsourcing service provider in The Bahamas, provided that it is able to demonstrate supervision and control of the outsourcing provider with respect to the outsourced activities.

Premises

What requirements apply in relation to the physical premises of relevant entities?

An entity that is required to have substantial economic presence in The Bahamas must have adequate physical offices or premises in The Bahamas, or an adequate level of expenditure on outsourcing to service providers in The Bahamas, proportionate to the activities of the entity.

Employees and personnel

What requirements apply in relation to the employees and personnel of relevant entities?

An entity that is required to have substantial economic presence in The Bahamas must have an adequate level of qualified full-time employees in The Bahamas, or an adequate level of expenditure on outsourcing to service providers in The Bahamas, proportionate to the activities of the entity.

Expenditure

What requirements apply in relation to expenditure?

An entity that is required to have substantial economic presence in The Bahamas must have an adequate level of annual expenditure incurred in The Bahamas, or an adequate level of expenditure on outsourcing to service providers in The Bahamas, proportionate to the activities of the entity.

Enhanced requirements

Are there any instances where enhanced substance requirements apply?

There are enhanced substance requirements under CESRA for entities that are required to have substantial economic presence in The Bahamas and are engaged in intellectual property income-generating activities. The enhanced substance requirements vary depending on whether the intellectual property business is considered low or high risk.

Low-risk intellectual property activities are defined as those in which the intellectual property asset is:

  • developed in-house;
  • acquired from an unrelated party; or
  • licensed to unrelated parties.

 

Businesses engaged in low-risk intellectual property activities are required to have substantial economic presence in The Bahamas but must also demonstrate that:

  • the strategic decisions and management of the intellectual property and the bearing of principal risks in relation to the development and exploitation, or the acquisition and subsequent exploitation, take place within The Bahamas; and
  • the underlying trading activities through which the intellectual property asset is exploited and which leads to the generation of revenue from a third party are conducted in The Bahamas.

 

High-risk intellectual property activities are defined as those in which the intellectual property asset is:

  • acquired from a related party;
  • not obtained through research and development activities within The Bahamas;
  • licensed or sold to a related party; or
  • monetised through activities performed by a related party outside of The Bahamas.

 

Businesses engaged in high-risk intellectual property activities are required to have substantial economic presence in The Bahamas but must also demonstrate that:

  • the strategic decisions and management of principal risks are undertaken in The Bahamas;
  • the underlying trading activities are conducted within The Bahamas; and
  • there is a high degree of control over the development, exploitation, maintenance, enhancement and protection of the intellectual property asset in The Bahamas.
Reduced requirements

Are there any instances where reduced economic substance requirements apply?

Holding companies are subject to reduced economic substance requirements.

A ‘pure equity holding company’ is defined in CESRA as a company that only holds equity participations and only earns dividends and capital gains or incidental income. Pure equity holding companies only need to comply with all applicable laws and regulations of The Bahamas and have adequate human resources and adequate premises in The Bahamas for holding and managing equity participation in other entities.

A ‘passive holding entity’ is defined in CESRA as an entity that does not by itself, or by any of its subsidiaries, conduct any relevant activity but does not include a collective investment vehicle. Passive holding entities only need to comply with all applicable laws and regulations of The Bahamas.

Outsourcing

What requirements apply in relation to outsourcing activities to entities located in your jurisdiction and entities located outside your jurisdiction?

An entity that is required to have substantial economic presence in The Bahamas may outsource any of its core income-generating activities to a service provider within The Bahamas provided that it is able to demonstrate supervision and control of the outsourcing provider with respect to the outsourced activities.

The outsourcing of core income-generating activities to a service provider outside of The Bahamas by an entity that is required to have substantial economic presence in The Bahamas is expressly prohibited under CESRA.

CESRA does not have any restrictions with respect to the outsourcing of activities which are not core income-generating activities.