ocorian.com

GUIDE TO ECONOMIC

SUBSTANCE

BERMUDA

Updated to include legislative changes

effected as of 24 December 2019

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CONTENTS INTRODUCTION TO ECONOMIC SUBSTANCE ............................................................................................................... 3

HOW CAN OCORIAN HELP? ......................................................................................................................................... 4

PENALTIES FOR NON-COMPLIANCE ............................................................................................................................ 5

WHICH ENTITIES ARE AFFECTED? ................................................................................................................................ 5

RELEVANT ENTITIES .............................................................................................................................................................. 5

WHAT ARE RELEVANT ACTIVITIES? .......................................................................................................................................... 6

MEASURING SUBSTANCE ............................................................................................................................................ 6

RELEVANT ACTIVITY DEFINITIONS AND CORE INCOME GENERATING ACTIVITY .......................................................... 7

DIRECTED AND MANAGED .........................................................................................................................................14

MEETINGS AND MINUTES OF THE BOARD OF DIRECTORS..........................................................................................15

PURE EQUITY HOLDING ENTITIES - “REDUCED ES TEST” .............................................................................................15

REDUCED SUBSTANCE TEST GUIDANCE FOR PEHE IN BERMUDA ...............................................................................15

REPORTING SUBSTANCE ............................................................................................................................................16

FREQUENTLY ASKED QUESTIONS ...............................................................................................................................17

ECONOMIC SUBSTANCE FLOW CHART .......................................................................................................................22

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INTRODUCTION TO ECONOMIC SUBSTANCE

The Economic Substance Act 2018 and the Economic Substance Regulations 2018 and subsequent Amendments (ES

Regime) apply to certain entities that are carrying on one or more ‘relevant activities’, are not tax resident in a

jurisdiction outside of Bermuda and have gross income attributable to a relevant activity in any accounting period

commencing on or after 1 January 2019.

The legislation is designed to protect the reputation of offshore jurisdictions by ensuring that income streams from

certain activities are based on actual local activity to substantiate the use of low tax jurisdictions.

Substance legislation does not apply to all entities in Bermuda – rather, it applies only to entities carrying out certain

relevant activities. Depending on whether your entity is carrying on one or more of the relevant activities, it may be

required to evidence substance on the ground in Bermuda by way of being managed or directed, to have adequate

people, expenditure and physical presence and to conduct ‘core income generating activities’ in Bermuda.

Guidance Notes with respect to the economic substance regulation for Bermuda have been published by the Registrar

of Companies and can be found on the Government of Bermuda website: https://www.gov.bm/department/registrar-

companies

If your entity has been classified as a Pure Equity Holding Entity (PEHE), although it will be considered in scope of the

ES regime, as explained in this guide it will be subject to a much reduced Economic Substance Test (ES Test) as well as

lighter annual reporting requirements.

The importance of compliance with the new substance regulations should not be understated given the potential

liability for extensive penalties. Our experts can help you navigate the complexities of the new legislation to ensure

that you are meeting the requirements.

For more information please contact:

Damian Resnik

Client & Operations Director

+1 441 294 8097

damian.resnik@ocorian.com

Carol Feathers

Director of Client Services

+1 441 294 8004

carol.feathers@ocorian.com

DISCLAIMER:

OCORIAN IS NOT TYPICALLY A PROVIDER OF LEGAL OR TAX CONSULTANCY SERVICES. IF YOU ARE UNSURE OF YOUR LEGAL OBLIGATION OR TAX POSITION PLEASE GET IN

TOUCH WITH YOUR USUAL OCORIAN CONTACT WHO WILL BE HAPPY TO ARRANGE FOR INDEPENDENT LEGAL AND/OR TAX ADVICE FOR YOU.

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HOW CAN OCORIAN HELP?

Ocorian has a significant presence in jurisdictions affected by changes to substance legislation. Alongside this, we have

comprehensive experience in gathering and reporting entity data in those jurisdictions. As a result, we are uniquely

placed to help our clients understand and respond to the new legislation.

We address the following questions to deal with substance requirements.

1. Is the entity in question in scope of the new law?

Our experts will offer professional guidance to help identify entities which are in scope of the new law and conducting

relevant activities. Lawyers from our affiliate Ocorian Law (Bermuda) Limited can offer legal opinions if required.

2. Does the entity meet the substance requirements?

The first step is that Ocorian will perform a preliminary classification exercise taking your entity through a series of client

questions submitted through our online portal. We will then be able to determine and provide a preliminary

classification to you along with resolutions and advice on next steps.

If your entities are in scope of the ES regime, we will perform an in-depth gap analysis (ES Test) which may involve a

request for additional information from you. Substance requirements differ depending on the type of relevant activity

an entity performs. Our tests include a gap-analysis against the requirements for adequate control, people, facilities and

expenditure. If an entity is found to have gaps for one or more of its relevant activities, it may be necessary to makes

changes to its operations to add substance in Bermuda.

3. How can the entity enhance its substance?

If your entities do not currently meet the substance requirements will receive a report from Ocorian which will include

recommendations to add substance in Bermuda. For standard structures, solutions may be straightforward including

additional corporate services or director activities. For more complex structures, we can facilitate the development and

implementation of tailor-made solutions, including consideration of functions which may be outsourced to Ocorian.

4. Submissions of notifications and reports

In Bermuda all entities are required to advise to the Registrar annually, whether they have carried on a relevant activity

during the preceding relevant financial period. In-scope entities are required to file an annual Economic Substance

Declaration via an e-registration reporting portal which is being developed by the Registrar.

Entities which have established tax residence outside Bermuda and which are carrying on relevant activities, may wish

make an application be classified as a Non-resident entity (NRE). NRE’s are required to submit evidence of their tax

residency status annually.

Ocorian can assist in the preparation and submission of your notifications, and reports or NRE applications in the format

required by the Registrar.

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PENALTIES FOR NON-COMPLIANCE

The ES Regime includes specific powers to request additional information in relation to any substance information

provided on or with the annual economic substance declaration.

The ES Regime also include specific sanctions to address circumstances where companies have acted so as to avoid or

seek to avoid the application of the ES regime.

The Registrar has a duty to ensure that every Entity satisfies the ES Requirements. The sanctions for non-compliance

run in two schemes which run successively to each other. One scheme is the Notice to Comply and the other is the civil

penalty scheme which is the result of the issuance of a Warning Notice, and then a Decision Notice, with a right of

appeal. There are three successive stages in each scheme and entities will be allowed between 30 and 180 days to

remedy non-compliance after each notice is issued.

Penalties for failure to comply with the ES regime include:

Three stages of fines:

first notice $7,500 to $50,000

second notice $25,000 to $100,000

third notice $50,000 to $250,000

Removal from the Companies Register

A penalty of $10,000 and/or two years imprisonment for an “officer” of the entity, who knowingly

provides false information to the Registrar.

WHICH ENTITIES ARE AFFECTED?

Relevant entities

The ES Regime in Bermuda applies to:

Companies to which the provisions of the Companies Act 1981 apply (including local companies, permit

companies and overseas companies)

Companies formed under the Limited Liability Company Act 2016

Partnerships (exempted, exempted limited or overseas) which have elected to have separate legal

personality under s4A of the Partnership Act 1902

The following entity types are excluded from the legislation:

Trusts and Foundations

Foundations

Funds and Collective Investment Vehicles

Charities

Non-resident entities (subject to annual verification)

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What are Relevant Activities?

Relevant Activity means carrying on as a business any one or more of the following:

a. Banking

b. Distribution and Service Centre

c. Finance and Leasing

d. Fund Management

e. Headquarters

f. Holding Entity

g. Insurance

h. Intellectual property

i. Shipping

Entities, which are carrying on multiple relevant activities, will need to meet the applicable substance requirements

for each activity.

Guidance Notes issued in Bermuda indicate that the Registrar will consider that the activities are being carried on as a

business if an entity earns any gross income in respect of such activity during the relevant financial period.

An entity that does not carry on a relevant activity is not subject to the economic substance requirements, however

this needs to be confirmed annually to the Registrar.

In order to assist with classifying the relevant activities which are being conducted, the legislation defines typical core

income generating activities; the extent of the substance requirements for an entity which is conducting one or more

relevant activities depends on the nature, scale and complexity of the business.

MEASURING SUBSTANCE

Substance requirements may differ depending on the types of relevant activities an entity performs.

In general, an entity that is carrying out a relevant activity will meet the substance requirements if it:

ensures that the relevant activity is managed and directed in Bermuda;

undertakes the related Core Income Generating Activities in Bermuda;

maintains an adequate physical presence in Bermuda;

engages adequate suitably qualified people in Bermuda (‘People’ may include employees, directors and

employees of outsourced service providers); and

incurs adequate operating expenditure proportionate to the level of activity carried on in Bermuda

Every ‘in-scope’ entity must file an annual economic substance declaration to the Registrar within six months of the

end of each relevant financial period ending on or after 31 December 2019. In general, when reviewing compliance

with the ES requirements, the Registrar will apply the criteria of “adequacy” in the context of the nature scale and

complexity of each entity’s business.

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RELEVANT ACTIVITY DEFINITIONS AND CORE INCOME GENERATING ACTIVITY

Core income generating activities are the key essential and valuable activities that generate the income of the entity. It

is not necessary for the entity to perform all of the core income generating activities listed in the legislation for the

relevant activity.

In most situations, the core income generating activities as described below for each relevant activity need to be carried

out in Bermuda to demonstrate substance. As noted above, the Registrar will take into account the nature, scale and

complexity of the entity’s business.

RELEVANT ACTIVITY BERMUDA CORE INCOME GENERATING ACTIVITY

Banking An entity engages in banking if it engages in deposit taking business for which a licence

is required in accordance with the Banks and Deposit Companies Act 1999.

The core income generating activities for banking business include—

Raising funds

Managing risk including credit, currency and interest risk

Taking hedging positions

Providing loans, credit or other financial services to customers

Managing regulatory capital; and

Preparing regulatory reports

A bank that is licensed under the Banks and Deposit Companies Act 1999 complies with

the economic substance requirements if it complies with the requirements applicable

to the matters in section 3 of the Act and regulation 3 as set forth—

in the Companies Act relating to corporate governance; and

in the Banks and Deposit Companies Act 1999, regulations, rules and

other instruments made thereunder.

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Distribution and

service centres

An entity engages in business as a distribution centre if it engages in resale of goods

purchased from a foreign affiliate.

The core income generating activities of an entity engaged in business as a distribution

centre include―

transporting and storing goods; and

managing stock and taking orders

An entity engages in business as a service centre if it primarily provides consulting or

administrative services to a foreign affiliate.

The core income generating activities of an entity engaged in business as a service

centre include―

providing consulting or administrative services to a foreign affiliate

Financing and

leasing

An entity engages in financing and leasing if it credit facilities of any kind for

consideration to any person (a “customer”), and for the purposes of this definition—

consideration may include consideration by way of interest;

the provision of credit may be by way of instalments for which a

separate charge is made and disclosed to the customer in connection

with —

the supply of goods by hire purchase;

financial leasing (excluding land and interests in land); or

conditional sale or credit sale; and

where any credit repayable by a customer to a person is assigned to

another person, that other person shall be considered to be the person

providing the credit facility;

but, any activities falling within the activities of banking, insurance, or fund

management do not constitute financing and leasing for the purposes of the

economic substance Regulations.

The core income generating activities of an entity that engages in financing and

leasing include—

Agreeing funding terms

Identifying and acquiring assets to be leased (in the case of leasing)

Monitoring and revising any agreements

Setting the terms and duration of any financing or leasing

Managing risk associated with such agreements

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Fund management

business

An entity engages in fund management if it manages investments for funds and in

respect of which a licence is required in accordance with the Investment Business Act

2003 or for which a licence would be required if such activity were taking place in

Bermuda.

The core income generating activities of an entity that engages in fund management

include—

Taking decisions on the holding and selling of investments

Calculating risk and reserves

Taking decisions on currency or interest fluctuations and hedging

positions

Preparing relevant regulatory or other reports for government

authorities and investors

For the purposes of paragraph (1), “managing investments” has the meaning given in

the Investment Business Act 2003.

Headquarters

business

An entity engages in business as a headquarters if the entity engages in the general

management and administration of its affiliates within or outside Bermuda.

The core income generating activities of an entity engaged in business as a

headquarters include—

Taking relevant management decisions

Incurring expenditures on behalf of affiliates; and

Coordinating group activities

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Holding company

business

An entity engages in business as a holding entity if it is a pure equity holding entity.

An entity is a pure equity holding entity if it is an entity which as its primary function

acquires and holds shares or an equitable interest in other entities, performs no

commercial activity and which—

holds the majority of the voting rights in another entity

is a shareholder, member or partner in another entity and has the right

to appoint or remove a majority of the board of directors, managers or

equivalent of that other entity; or

is a shareholder, member or partner in another entity and controls

alone, under an agreement with others, a majority of the voting rights

in that other entity

A pure equity holding complies with the economic substance requirements if it—

complies with minimum economic substance requirements; and

has adequate people for holding and managing equity participations,

and adequate premises in Bermuda.

Insurance

business

An entity engages in insurance if it engages in insurance business in accordance with

the Insurance Act 1978.

The core income generating activities for insurance business include—

Predicting and calculating risk

Insuring or re-insuring against risk

providing client services; and

preparing regulatory reports

An entity engaged in insurance activities complies with the economic substance

requirements if it complies with the requirements applicable to the matters in section

3 of the Act and regulation 3 as set forth—

in the Companies Act relating to corporate governance; and

in the Insurance Act 1978, regulations, rules or other instruments

(including the Code of Conduct) made under that Act

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Intellectual property Regulation 15

An entity engages in IP business if the entity engages in the exploitation of IP assets

(including non-trade intangible assets).

1. For the purposes of the above paragraph the core income generating activities

associated with an intangible asset will depend on—

the nature of the IP asset, that is to say, whether it is a patent, technical

know-how, trademark, customer lists or brand or goodwill; and

how the IP asset is being used to generate income for the entity

The core income generating activities for entities engaged in IP activities include—

conducting research and development in relation to IP assets, such as

patents

marketing, branding and distribution of non-trade intangible assets,

such as trademarks

taking the strategic decisions and managing and bearing the principal

risks related to the development and subsequent exploitation of an IP

asset

taking the strategic decisions and managing and bearing the principal

risks related to any third party acquisition and subsequent exploitation

of an IP asset; and

carrying on the underlying trading activities through which IP assets are

exploited and which lead to the generation of income from third parties

Regulation 16

Enhanced IP economic substance requirements

1. Where an entity engaged in IP business owns an IP asset that—

was developed or created by the entity; or

a. has been acquired from an entity other than an affiliate; and

b. is licensed to an entity other than an affiliate,

paragraph 2 applies.

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Where such entity’s IP core income generating activities (as set forth in regulation

15(3)(a) and (b)) are not undertaken in Bermuda during a relevant financial period, it is

presumed that the entity does not comply with economic substance requirements,

unless it is shown to the contrary that the entity—

a. undertakes other core income generating activities associated with IP

income in Bermuda as demonstrated by―

i. taking the strategic decisions and managing and bearing the

principal risks related to the development and subsequent

exploitation of an IP asset;

ii. taking the strategic decisions and managing and bearing the

principal risks related to any third party acquisition and subsequent

exploitation of an IP asset;

iii. carrying on the underlying trading activities through which IP assets

are exploited and which lead to the generation of IP income from

third parties; and

b. has an adequate number of employees with the suitable qualifications

who reside and perform the IP related relevant activities and adequate

premises in Bermuda.

2. An entity engages in high risk IP activities where the entity owns an IP asset that—

a. has been acquired from an affiliate or has been obtained through the

funding of overseas research and development activities; and

b. is licensed to a foreign affiliate or is used to generate IP income through

activities performed by such foreign affiliate,

and in such case, paragraph (4) applies.

3. Where this paragraph applies, it is presumed (whether or not the entity’s core

income generating activities as set forth in Regulations 15(3) are undertaken in

Bermuda) that the entity does not comply with economic substance requirements

unless it is also shown to the contrary that—

the entity satisfies the requirements set forth in paragraph (2)(a) and (b) above; and

a. the entity does not merely passively hold and generate IP income from

IP assets in Bermuda, but a high degree of control over the

development, exploitation, maintenance, enhancement and protection

of the IP asset is, and historically has been, exercised by an adequate

number of employees with suitable qualifications who reside and

perform their IP related activities in Bermuda as demonstrated by—

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i. a detailed business plan;

ii. information demonstrating the presence of an adequate number

of employees in Bermuda during the relevant financial period

who are suitably qualified and are responsible for control and

oversight or execution of, and decisions in respect of, its IP core

income generating activities; and

iii. such additional information as the Minister may reasonably

require for this purpose.

Shipping An entity engages in shipping if it engages in any of the following activities involving

the operation of a ship anywhere in the world other than in the territorial waters of

Bermuda-

transporting, by sea, passengers or animals, goods or mail for a charge;

renting or chartering of ships for the purpose described above

sale of travel tickets and ancillary ticket-related services in connection

with the operation of a ship

use maintenance or rental of containers, including trailers and other

vehicles or equipment for the transport of containers, used for the

transport of anything by sea; or

functioning as private seafarer recruitment and placement service.

To be within the shipping relevant sector a company must operate one or more ships

in international traffic, for the transport of either passengers, cargo or both.

Other activities where they are also conducted will be included within this sector, but

only if they are undertaken by a company in connection with its trade of operating ships

in international traffic, as above.

These other activities briefly include:

the rental on a charter basis of other ships

the sale of tickets or similar documents

the use, maintenance or rental of containers

the management of crew of other ships

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The core income generating activities of an entity engaged in shipping include the

following—

managing the crew (including hiring, paying and overseeing crew

members)

hauling and maintaining ships

overseeing and tracking deliveries

determining what goods to order and when to deliver them; and

organising and overseeing voyages

For the purposes of this subsection—

“ship” does not include a pleasure vessel;

“pleasure vessel” has the meaning given in regulation 2 of the Merchant Shipping

(Registration of Ships) Regulations 2003

DIRECTED AND MANAGED

In general, entities undertaking relevant activities are required to be directed and managed in or from Bermuda and to

undertake “core income generating activities” (CIGA) in Bermuda. The Registrar expects that entities will generally be

able to demonstrate and provide satisfactory evidence of the following for each relevant financial period:

the majority of “key meetings” where strategic or risk management and operational decisions are made,

are held in Bermuda

Key Meetings are held at an frequency proportionate to the nature scale and complexity of the

Relevant Activities conducted

even for entities with a minimal level of activity there will be at least one key meeting held in Bermuda

where the circumstances of an entity reasonably require some meetings to be held (or for the quorum

of some meetings to be) outside Bermuda the Entity must be able to evidence such circumstances

minutes will be kept of all key meetings and will evidence all the relevant strategic or risk management

and operational decisions taken

minutes will be accessible from and available for inspection in Bermuda (electronic records are

acceptable and it is not necessary that the relevant data centre be located in Bermuda)

records to reflect that senior executives, direct employees or other persons (such as the employees of

outsourced service providers) who are responsible for oversight or execution of CIGA in Bermuda, are

suitably qualified to hold such responsibilities.

Where there are corporate directors, these will be looked through, to the individuals (officers of the corporate director)

actually performing the duties of the director.

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MEETINGS AND MINUTES OF THE BOARD OF DIRECTORS

The directed and managed assessment described above is designed to ensure that an adequate number of board

meetings are held and attended in Bermuda; it is not necessary for all board meetings to be held in Bermuda.

For a meeting to be deemed to take place in Bermuda, at least 50% of the directors forming the quorum must be

present in Bermuda. ‘Quorum’ in this context will be determined in accordance with Companies Law and the entity’s

Articles.

It is important to ensure that Boards are constituted and organised as decision-making bodies, with the necessary

knowledge and experience, and are not simply giving effect to decisions taken outside of Bermuda whether taken by

the directors or others.

The Registrar is unlikely to be accept that the Board of Directors is responsible for strategic direction if there is

evidence that substantive decision making is taking place in any forums, or by any persons, without reference to or

the oversight to the Board of Directors.

Minutes of board meetings and any other key meetings should refer to all the relevant decisions taken, even where

the board considers courses of action and rejects them.

Entity records expected to be maintained and physically reside, or be electronically available, in Bermuda would

include: certificates of incorporation, articles of association/incorporation, annual audited financial statements (if

applicable) quarterly management financial statements, relevant certifications to operate, major funding

documentation, substantive agreements.

PURE EQUITY HOLDING ENTITIES - “REDUCED ES TEST”

If your entity has been classified as a pure equity holding entity it will be considered ‘in scope’ of the ES Regime but

would only be required to satisfy ‘minimum economic substance requirements’, which include:

to be in compliance with applicable corporate governance requirements set forth in the Companies Act,

the Limited Liability Company act 2016 or the relevant Partnerships Acts (as applicable), including

keeping records of account, books and papers and financial statements

filing an annual economic substance declaration form to the Registrar

having adequate people in Bermuda (which may include direct employees, directors and/or effectively

supervised employees of outsourced service providers) and adequate premises in Bermuda for holding

and managing equity participations

REDUCED SUBSTANCE TEST GUIDANCE FOR PEHE IN BERMUDA

Guidance Notes issued by the Bermuda registrar confirm that it will never be acceptable for a PEHE to have no people

and no premises in Bermuda. However, the maintenance of a registered office (or equivalent) in Bermuda, and the

management of the entity by the board of directors (or equivalent) in Bermuda or outsourced service providers in

Bermuda, may be considered by the Registrar to be adequate, if appropriate for the nature scale and complexity of

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the entity’s business. The Registrar expects that the declaration form filed by PEHE will demonstrate the adequacy of

the resources (people and premises) which are in place.

Where Ocorian already provides outsourced services such as a Bermuda Registered Office, corporate secretarial and

accounting functions, it is likely that a PEHE already substantially meets the applicable ‘minimum economic substance

requirements’. Depending on the circumstances, it may be desirable to increase the activity of the board of directors

(or equivalent) in Bermuda to demonstrate have a greater degree of substance in Bermuda. Please let us know if you

wish to discuss ways in which we can help you fill any substance gap.

REPORTING SUBSTANCE

Entities which are subject to ES requirements will be required to complete an annual Economic Substance Declaration

to the Registrar via an e-registration system which is expected to be completed during the second quarter of 2020.

Based on current guidance, the minimum information to be provided for the relevant financial period (RFP) may be

summarised as follows:

whether the entity is carrying on a relevant activity;

nature and extent of the relevant activity (including related core income generating activities);

whether the entity is engaging in high risk IP activity;

gross income (by type) for each relevant activity for the RFP - this will generally be the turnover figure

from the (standalone non-consolidated) financial statements.;

nature and extent of the entity’s presence in Bermuda including:

the physical offices or other premises occupied by the entity or its affiliate in Bermuda

an adequate level of annual expenditure of the entity in Bermuda

the name and physical address of the entity’s Directors, Managers or General Partners (as applicable to

the entity type) who are ordinarily resident in Bermuda

the holding entity, ultimate parent entity, owner or beneficial owner

whether the entity is managed and directed in or from Bermuda having regard to:

location of strategic or risk management and operational decision making or where management

meets to make decisions regarding business activities

presence adequate number of suitably qualified personnel in Bermuda – responsible for

oversight/execution of CIGA

whether “minimum economic substance requirements” apply to the entity

nature and extent of any outsourcing arrangements to affiliates or service providers in Bermuda

including evidence that the arrangements are subject to proper oversight and that those responsible for

such oversight are suitably qualified to monitor and control and assess whether the service providers:

employ suitably qualified staff to provide the services

have adequate capacity to implement and execute the CIGA

comply with the applicable economic substance requirements

have not counted employees, expenditure and premises multiple times

operating expenses (in Bermuda and in total) and assets by relevant activity for the RFP

number of (qualified) employees (includes if applicable directors and person employed by outsourced

services providers), specifying the number of full time equivalents

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such other information as may reasonably be required by the Registrar

All supporting documentary evidence must be submitted in English, or with a certified translation.

FREQUENTLY ASKED QUESTIONS

1. What information will be required to complete the substance assessment?

In order to complete the full economic substance assessment you will require:

Financial statements with accounting that demonstrates the entity’s gross income and expenditure and

also that incurred in Bermuda during the accounting period.

Full Time Equivalent (FTE) employee calculations. Ocorian will provide information where it relates to its

employees, however information will be required for alternate outsource providers not contracted by

Ocorian and also external directors.

The qualifications of directors and employees to evidence the Direction and Managed requirements.

Ocorian will provide information where it relates to its employees, however information will be required

for external directors.

2. The entity is tax resident outside of Bermuda, does it still need to perform the ES assessment and is it

required to submit an annual ES declaration?

An entity will be a Non-Resident entity and therefore out of scope of the ES requirements if it is resident for tax

purposes in a jurisdiction outside of Bermuda, which not on the EU’s list of non-cooperative jurisdictions.

https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/

In determining whether to classify an entity as Non-resident with respect to Bermuda’s ES Regime, the Registrar will

take into consideration:

where all income from Relevant Activities is taxed

whether or not the competent authority or tax authority in the jurisdiction outside Bermuda has

accepted that the entity or its members in the case of a transparent entity is chargeable to tax in the

jurisdiction

whether the entity has provided satisfactory evidence (in accordance with the Guidance Notes, when

published) for each Relevant Financial Period

For entities in a transitional situation – for example where the formal tax assessment or proof of payment is pending -

it is likely that the Registrar will accept a provisional application.

A entity that is not carrying on any Relevant Activities, is out of scope of the ES requirements and therefore may decide

not to submit a Non-resident entity claim, even if eligible to do so.

Ocorian will be pleased to assist with your Non-resident entity claim (which is renewable annually). Please discuss with

your usual Ocorian contact.

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Other annual reporting requirements:

A Non-resident entity is not subject to ES requirements but will be required to indicate in its annual reporting to the

Registrar whether or not it is engaged in a Relevant Activity.

3. My entity is not engaged in any relevant activity, it is required to file a report?

An Entity that is not engaged in any Relevant Activity is not subject to Bermuda’s ES Regime. However it will be

required to indicate in its annual reporting to the Registrar that it is not engaged in any Relevant Activity.

4. Can an entity be incorporated and managed & controlled in different jurisdictions

It is possible for an entity to be incorporated in one country and managed and controlled in another.

For example, the Crown Dependencies offer certificates of tax residency to entities that are incorporated in Bermuda

but are managed in controlled from Jersey, Guernsey or the Isle of Man.

5. What does ‘Adequacy’ mean?

“Adequate” is not defined by the ES regime and therefore has its ordinary meaning “Enough or satisfactory for a

particular purpose”.

What is adequate for each entity will be dependent on the particular circumstances of the entity and its business activity.

You should maintain and retain appropriate records to demonstrate the adequacy of the resources utilised and

expenditure incurred.

6. What constitutes outsourcing?

Outsourcing, in this context, includes outsourcing, contracting or delegating to third parties or group companies.

It is permissible for an entity to outsource any or all of its CIGA to an affiliate or service provider so long as the

outsourced activities are undertaken in Bermuda.

If core income generating activities are outsourced, the entity must be able to demonstrate that it has adequate

supervision of the outsourced activities.

Where a core income generating activity is outsourced the resources of the service provider in Bermuda will be taken

into consideration when determining whether the people and premises test is met.

Records must be maintained to demonstrate that there has been no double counting if the services are provided to

more than one entity.

The entity remains responsible for ensuring accurate information is reported on its return and this will include precise

details of the resources employed by its service providers, for example based on the use of timesheets.

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7. Why are financial statements required?

Gross income and operating expenditure should be the figures from financial statements prepared in accordance with

recognised accounting principles. The financial statements need not be audited if not required by law within the

jurisdiction (i.e. as in Bermuda).

Financial statements are required to demonstrate the entity’s gross income and expenditure and also the amounts

earned and incurred in Bermuda during the relevant financial period.

8. What is a pure equity holding company?

Please refer to the definition on page 10 above:

“An entity will be regarded as a pure equity holding entity which as its primary function acquires and holds shares or

an equitable interest in other entities, performs no commercial activity and which:

holds the majority of the voting rights in another entity

is a shareholder, member or partner in another entity and has the right to appoint or remove a majority

of the board of directors, managers or equivalent of that other entity; or

is a shareholder, member or partner in another entity and controls alone, under an agreement with

others, a majority of the voting rights in that other entity”

If an entity meets the criteria for a pure equity holding company, the placing of dividend monies received on deposit

or using them to acquire and passively hold other securities such as gilts, will not constitute a “commercial activity”,

and therefore the entity will still be regarded as a pure equity holding entity and subject to applicable (reduced)

substance requirements.

If an entity also undertakes other commercial activities, then it is outside of the narrow PEHE definition and will need

to consider whether it also (or instead) needs to meet the substance requirements of another relevant activity.

9. What are the rules around Intellectual Property?

Where an entity receives income from IP, it will also have to consider if it is a “high risk IP entity”. There is a rebuttable

presumption that a high risk IP entity has failed the substance requirement as the risks of artificial profit shifting are

considered to be greater. As a result the competent authority will exchange all of the information, provided by the

entity, with the relevant competent authority where the immediate parent company, ultimate parent company and/or

ultimate beneficial owner is resident. Such exchange of information will be in accordance with the existing international

tax exchange agreements. To rebut the presumption and not incur further penalties, a high risk IP entity will have to

produce materials which will explain how the DEMPE (development, enhancement, maintenance, protection and

exploitation) functions have been under its control, and that this has involved people who are highly skilled and perform

their core activities in Bermuda.

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The high evidential threshold includes:

Detailed business plans which clearly lay out the commercial rationale for holding the Intellectual

Property asset(s) in the Bermuda.

Concrete evidence that the decision making and bearing principal risks is taking place in Bermuda, and

not elsewhere.

Information on employees in Bermuda, their experience, the contractual terms, their qualifications, and

their length of service. Periodic decisions by non-resident directors or board members, or local staff

passively holding intangible assets, cannot rebut the presumption.

10. The entity is in liquidation – do we still need to undertake the assessment and reporting?

If an entity in liquidation is still carrying on a relevant activity and continues to generate income then it is subject to

the substance requirements.

If a liquidator is appointed all powers of the directors cease, it will be the liquidators of the entity that are required to

demonstrate that the entity is directed and managed in Bermuda, the directed and managed requirements are aligned

to be the liquidator.

11. Who do I classify as an employee?

Employees for the purposes of the ES Regime may include:

1. Employees

2. Officers

2. Employees of outsourced service providers to whom responsibilities have been delegated

3. Directors (or equivalent for LLC’s and Partnerships)

The employee count will be based on the number of full time equivalents (FTEs), i.e. the number of persons who

worked full time within the entity in question, or on its behalf during the entire accounting period.

The work of persons who have not worked the full year, the work of those who have worked part-time, regardless of

duration, and the work of seasonal workers are counted as fractions of an FTE. For this purpose, a standard working

week will be considered as 35 hours.

Directors, including Non-Executive Directors, should be counted as a fraction of an FTE commensurate with the time

commitment of the role.

If the entity outsources, contracts or delegates some or all of its activity, then the resources of the service provider in

Bermuda will be taken into consideration.

Assessment of an adequate number of qualified employees, should be referenced relate to the number of employees

needed to be able to conduct the relevant activity as a whole (not just the core income generating activities).

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12. What does ‘qualified’ employees mean?

Qualified is not directly mentioned in the legislation however it is referenced in the EU scoping paper, and prescribes

Level 5NQF, EQF or equivalent.

The qualifications that are considered to be adequate will depend on the relevant sector that the entity has activity in,

the core income generating activities undertaken in Bermuda and the duties performed by those employees.

It is expected that qualifications which may be taken into account will include academic qualifications, vocational

qualifications, relevant industry technical qualifications and qualification by relevant experience.

13. My documentary evidence is not written in English – will it be accepted?

All evidence provided to the Registrar must be in English. A certified translation must be provided for any official

documents that are not in English.

14. Who is my information shared with?

Non-compliant and High Risk IP entities: If the Registrar determines that an Entity, has not met the applicable ES

Requirements in respect of its Relevant Activities; or is engaged in a high-risk IP related activity with an Affiliate outside

Bermuda, the Registrar is required by law to provide to the Minister the information filed by such Entity pursuant to the

ES Regime (e.g. the Declaration Form and related information).

Non-resident entities: Where a Non-resident entity has provided evidence to the Registrar of its claim to be resident

for tax purposes outside of Bermuda, the Registrar must provide that information to the Minister.

In all cases, upon receipt of the above information from the Registrar, the Minister, as competent authority for exchange

of information purposes, is required to provide that information to his counterpart in the relevant EU member state or

other jurisdiction in which the relevant Entity or Non-resident entity has its holding entity, its ultimate parent entity, an

owner or beneficial owner, or where the relevant Non-resident entity claims to be resident for tax purposes.

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ECONOMIC SUBSTANCE FLOW CHART