Featured article from Captive Insurance Times


Economic substance legislation was designed to protect the reputation of offshore jurisdictions. Industry Experts Discuss How Bermuda Is Striving To Stay Compliant

Crown Dependencies have strengthened their commitment to uphold Organization for Economic Co-operation and Development (OECD) principles to improve global tax transparency by introducing an economic substance test.

This legislation, which entered into force on January 1, 2019, was designed to protect the reputation of offshore jurisdictions by ensuring that income streams from certain activities are based on actual local activity to justify the use of low tax jurisdictions.

Those who introduced this legislation are Bermuda, the British Virgin Islands (BVI), the Cayman Islands, Guernsey, the Isle of Man and Jersey.

Nicholas Miles, Kennedys partner, says this doctrine is applied to distinguish taxpayer transactions with counterparties, especially related parties, designed to exploit tax rate differentials and which lack “economic substance.”

In the context of recent global legislative reforms driven by the EU and the OECD, it refers to proof that a company’s turnover is sufficiently attributable to the activity of its home.

In most jurisdictions, corporate profits are taxed at the domicile of the company.

Louise Charleson, partner at Ocorian, explains that Bermuda’s economic substance laws and regulations are enshrined in the Economic Substance Act 2018, the Economic Substance Regulations 2018 (both as amended, as well as the ES regime) and the notes related guidance issued by the Minister of Finance. September 18, 2020.

Another aspect of global tax reform is tax transparency, including cross-border cooperation in identifying assets held by taxpayers.

Miles says Bermuda, for many decades, has compiled information on beneficial ownership of businesses in a central register, maintained by the Bermuda Monetary Authority (BMA) acting as controller of exchanges.

He comments: “In accordance with various tax information exchange agreements and its implementation of common reporting standards and country-by-country reporting, Bermuda shares and has shared its beneficial ownership data with the authorities of Bermuda. a large number of foreign jurisdictions, if applicable. ”

“Unlike most other jurisdictions, including the UK, Bermuda actually verifies their beneficial ownership data, requiring beneficial owners to sign personal declaration forms and provide proof of ownership. ‘identity and residence (which is examined by the trade controller), “he adds.

Reflecting on how Bermuda strives to stay in compliance with economic substance legislation, Carol Feathers, Director of Client Services at Ocorian, says the Bermuda Companies Registrar (Registrar) is responsible for implementation, monitoring and application of the economic substance regime. The Registrar has the power to issue opinions on an entity to comply with economic substance requirements.

Feathers says, “If the entity does not, the Registrar can impose civil penalties of up to BD $ 250,000 in three steps. If, after exhaustion of civil penalties, an entity continues to be in default, the Registrar may apply to the court for an order on such terms as he sees fit, including an order to strike the entity out.

“In addition, there is an offense of knowingly making a false declaration of economic substance with penalties of up to BD $ 10,000 or imprisonment for two years or both,” she adds.

Impact on captives

Bermuda is one of the largest captive insurance homes in the world.

At the end of 2020, the home had a total of 680 captives on the small island.

On how this regulation affects the captive insurance market, Miles explains that the Insurance Act 1978 and associated codes of conduct already contain provisions requiring a substantial presence in Bermuda, captives benefit from a deeming provision in Economic Substance Regulations 2018 (ESR), according to which they can comply with economic substance requirements by complying with certain requirements applicable to economic substance.

Miles specifies that a captive must maintain a principal office in Bermuda and appoint a principal representative in Bermuda approved by the BMA.

He notes: “They must also comply with various rules relating to the outsourcing of regulated functions.

A captive must file an annual declaration of economic substance (ES Declaration) within six months of the end of her financial year.

For some captives that require more intensive administration, such as captives of industrial groups with several policyholders or those who underwrite business for third parties, including clients of the onshore parent company, Charleson adds that these, by virtue of their nature, are more likely to have a palpable substance attested by employees and locals.

“For other captives, such as those with a single policyholder (its onshore parent company) who conduct their offshore operations exclusively through a specialized captive management company, a closer look at the question of if its substantive requirements are met may be necessary to ensure that all key strategic decisions and income generating activities (CIGA) take place in Bermuda, ”Charleson points out.

Understanding the challenges

Companies have often relied on having regular physical board meetings in Bermuda to demonstrate the “spirit and management” and implementation of CIGA within the jurisdiction.

One of the biggest challenges of the past year has been the travel restrictions imposed in the wake of the COVID-19 pandemic, which Feathers says prevented entities from holding in-person board meetings locally. Physical board meetings are also essential for registered insurance entities to meet their regulatory obligations, ”she adds.

On March 20, 2020, the Registrar issued a notice recognizing that business continuity is difficult during this time and, as such, when meetings or other compliance actions of similar economic substance are not possible due to travel or quarantine restrictions, this may be taken into consideration. .

However, Charleson points out that the Registrar also noted that entities must continue to act in good faith and keep careful records of all relevant meetings, details of restrictions and actions taken.

A widely held view is that companies should nonetheless ensure that they have Bermuda-resident staff to conduct CIGA, whether they are directors, direct employees or employees of outsourced service providers. . On July 6, 2020, the BMA issued a similar notice, confirming that in assessing compliance with the requirement to hold physical board meetings in Bermuda for the period ending September 30, 2020, it would take into account all circumstances, including the inability of registrants to hold such meetings due to logistical and health challenges resulting from COVID-19.

However, Charleson also points out that the BMA has also noted that it expects registrants to continue to hold their board meetings virtually, by phone, by video.


Currently, Bermuda’s Economic Substance Act applies to exempt and local companies, exempt and local limited liability companies, overseas license companies, and partnerships that choose to have a separate legal personality. carrying out a “relevant activity”.

Charleson says the legislation is expected to be revised to extend its application to all partnerships, not just those with a separate legal personality.

She comments: “Bermuda’s economic substance legislation will continue to develop as needed to ensure continued compliance with the framework document issued by the European Union Code of Conduct Group (Business Taxation) in June 2018 . “

“There may also be minor changes regarding the ‘leveling up’ between all offshore jurisdictions to reduce any motivation to ‘island hopping’,” Charleson concludes.

Source link


About Author

Comments are closed.