Enforcement and compliance

Enforcement authorities

Which government authorities are responsible for the enforcement of economic substance requirements? What is the extent of their information-gathering powers?

The Bermuda Registrar of Companies is the authority responsible for the monitoring and enforcement of the economic substance requirements in Bermuda. Entities in scope of the economic substance requirements must file an economic substance declaration with the Registrar each year, the information in which forms the primary basis for the Registrar’s assessment of compliance. The Registrar also has very broad powers to request additional information, and to conduct on-site inspections of entities’ books and records, to further support its monitoring and enforcement efforts. This includes the power to ‘police the perimeter’ by requesting information and inspecting records of entities that believe themselves not to be in scope of the economic substance requirements (eg, because the entity believes that it is not carrying on a relevant activity).

Reporting formalities

What reporting formalities apply with respect to the economic substance requirements?

Every entity that is in scope of the economic substance requirements must complete and file a detailed economic substance declaration with the Registrar of Companies in respect of each relevant financial period (being each financial year of that entity in which any relevant activity has been carried on). The declaration must be filed by each entity within six months of the end of that entity’s financial year. The information to be provided in the declaration will include key financial data (eg, gross revenue and expenses per relevant activity), details of the nature and frequency of meetings, residency of employees and directors, location of premises, details of any outsourced core income-generating activities (CIGA) and details of the ownership and beneficial ownership of the entity.

An entity that is making a claim that it is a non-resident entity in respect of any particular relevant financial period (ie, resident for tax purposes in a jurisdiction outside of Bermuda, and therefore not subject to the economic substance requirements for that period) must file its evidence of such tax residency status with the Registrar within six months of its financial year end.

Demonstrating compliance

How does an entity in practice demonstrate its compliance with the economic substance requirements? How do the enforcement authorities assess compliance?

Every entity that is in scope of the economic substance requirements must complete and file a detailed economic substance declaration with the Registrar of Companies in respect of each relevant financial period (being each financial year of that entity in which any relevant activity has been carried on). The declaration must be filed by each entity within six months of the end of that entity’s financial year. The information to be provided in the declaration will include key financial data (eg, gross revenue and expenses per relevant activity), details of the nature and frequency of meetings, residency of employees and directors, location of premises, details of any outsourced CIGA and details of the ownership and beneficial ownership of the entity. The information contained in the economic substance declaration will be the primary source of information used by the Registrar to assess compliance by that entity.

The Registrar also has very broad powers to request additional information, and to conduct on-site inspections of entities’ books and records, to further support its monitoring and enforcement efforts. This includes the power to ‘police the perimeter’ by requesting information and inspecting records of entities that believe themselves not to be in scope of the economic substance requirements (eg, because the entity believes that it is not carrying on a relevant activity). Entities are therefore required to maintain, in Bermuda, records of their activity, and in particular those records most relevant to assessments of compliance (eg, additional detail on employees’ qualifications and time records, detailed financial records, details of business conducted, etc).

Penalties

What are the potential penalties for failure to comply with the economic substance requirements?

Where the Registrar determines that an entity has not complied with the economic substance requirements, the entity in question will be issued with a notice to comply. This triggers the spontaneous exchange of information (being the information filed by that entity in respect of its economic substance compliance) with each jurisdiction in which that entity’s immediate parent, ultimate parent and beneficial owners are located. It may also trigger the imposition of a civil penalty payable by that entity. On the issuance of the first notice to comply, the civil penalty can range from a minimum of BD$7,500, to a maximum of BD$50,000. On the second notice to comply (ie, if the non-compliance is not remedied within the timeframe specified by the Registrar) the civil penalty increases to a minimum of BD$25,000 up to a maximum of BD$100,000. On the issuance of a third notice to comply, this increases further, from a minimum BD$50,000 to a maximum of BD$250,000. If the third notice to comply is not complied with, the Registrar may then apply to the Bermuda courts for an order to regulate the conduct of the entity’s business, restrict the entity’s ability to conduct business, or have the entity struck off the register altogether.

In addition to these civil penalties for non-compliance, the economic substance legislation makes it an offence for any person to knowingly provide false information to the Registrar, the penalty for which, on summary conviction, is a fine of up to BD$10,000 or up to two years’ imprisonment, or both. Where the offence is committed by the entity, and it is proven to have been committed with the consent or connivance of an officer of the entity, both the officer and the entity commit the offence and both may be liable to prosecution.