Thoughts from the Fiscal Front
Economic Substance Requirements: What You Need to Know
Economic Substance Requirements: What You Need to Know<br/>經濟實質規定:企業須知

The governments of Bermuda, British Virgin Islands (BVI) and Cayman have each passed legislation that will require certain entities carrying out any ‘relevant activity’ to have economic substance (ES) in its jurisdiction. Below is a summary of the ES requirements as legislated in each of the three jurisdictions, as of 16 September.

 

BERMUDA

Legislation and registered entities

Bermuda’s ES Act 2018 and ES Regulations 2018 became operative on 31 December 2018, and will be supplemented by the Guidance Note, which is currently in draft form. 

A “registered entity” includes: 

1. a company incorporated or an overseas company registered under the Companies Act; 

2. a limited liability company formed under the Limited Liability Company Act; or

3. a partnership that has elected to have a separate legal personality under the Partnership Act.

 

Relevant activities

A registered entity will be in-scope if it conducts any of the following “relevant activities” (as defined in the regulations):

• banking

• insurance

• fund management

• financing

• leasing

• headquarters

• shipping

• distribution and service centre

• intellectual property (IP)

• holding entity (HE)

 

Requirements 

A registered entity conducting a relevant activity, other than a pure equity holding entity (PEHE), will satisfy the Requirements if:

1. it is managed and directed in Bermuda;

2. its core income-generating activities (CIGAs) are undertaken in Bermuda with respect to the relevant activity;

3. it maintains adequate physical presence in Bermuda;

4. there are adequate full-time employees in Bermuda with suitable qualifications; and

5. there is adequate operating expenditure incurred in Bermuda in relation to the relevant activity.

 

PEHE and HE 

A Bermuda PEHE, being a company that carries out no relevant activity other than holding or managing equity participations, and which earns passive income from dividends, distributions, capital gains and other incidental income only, is subject to the following reduced Requirements:

1. compliance with the corporate governance requirements set forth under applicable Bermuda legislation including keeping records of accounts, books and papers and financial statements, and the filing of a declaration form; and

2.  adequate employees for holding and managing equity participation, as well as adequate premises in Bermuda. 

A registered entity which is not a PEHE will be classified as a HE if it engages in activities including holding or managing any assets or equity participations, and will be required to comply with the full requirements for in-scope entities as outlined above.

 

BVI 

Legislation and legal entities

BVI’s ES (Companies and Limited Partnerships) Act, 2018 (BVI Act) came into force on 1 January 2019, and will be supplemented by the BVI’s ES Code (BVI Code), which is currently in draft form. 

A ‘legal entity’ includes:

1. a company incorporated/registered or a foreign company registered under the BVI Business Companies Act; or

2. a limited partnership or a foreign limited partnership formed/registered under the Partnership Act or Limited Partnership Act, excluding any limited partnership which does not have a legal personality,

but does not include:

(a) an investment fund (within the meaning of applicable BVI legislation); or

(b) a non-resident company or a non-resident limited partnership.

 

Relevant activities

The BVI Act imposes Requirements on all legal entities carrying out any “relevant activity.” A legal entity will be in-scope of the BVI Act if it conducts any of the relevant activities listed above under Bermuda’s relevant activities, as further defined in the BVI Act and clarified in the BVI Code.

 

Requirements 

Each legal entity (other than a PEHE) must, in relation to any relevant activity, carry out defined CIGAs in BVI and demonstrate ES by reference to the following criteria, having regard to the nature and scale of the relevant activity:

1. the relevant activity is directed and managed in BVI;

2. there are an adequate number of suitably qualified employees in relation to that activity who are physically present in BVI;

3. there is adequate expenditure incurred in BVI;

4. there are appropriate physical offices or premises in BVI for the CIGAs; and

5. where the relevant activity is an IP business requiring the use of specific equipment, that equipment is located in BVI.

 

PEHE 

A BVI PEHE, being a company that carries out no relevant activity other than holding equity participations in other entities, and which earns dividends and capital gains only, is subject to the following reduced Requirements:

1. compliance with its statutory obligations under the BVI Business Companies Act, or Limited Partnership Act, as applicable; and

2. adequate employees and premises in BVI for holding equity participations and, where it manages those equity participations, adequate employees and premises in BVI for carrying out that management.

 

CAYMAN 

Legislation and relevant entities

Cayman’s International Tax Co-operation (ES) Law, 2018, and (Prescribed Dates) Regulations, 2018, (together, Cayman Law) became operative on 1 January 2019, and are supplemented by the Guidance for ES for Geographically Mobile Activities (Cayman Guidance). 

A “relevant entity” means (with some exceptions):

1. a company, other than a domestic company, incorporated/registered under the Companies Law, or incorporated/registered as a limited liability company under the Limited Liability Companies Law;

2. a limited liability partnership registered under the Limited Liability Partnership Law; or

3. a company incorporated outside Cayman and registered under the Companies Law,

but does not include:

(a) an investment fund (within the meaning of applicable Cayman legislation); or

(b) an entity that is tax resident outside Cayman.

 

Relevant activities

The Cayman Law imposes Requirements on all relevant entities carrying out any “relevant activity.”

A relevant entity incorporated or registered in Cayman will be in-scope of the Cayman Law if it conducts any of the relevant activities listed above under Bermuda’s relevant activities, as further defined in the Cayman Law and clarified in the Cayman Guidance.

 

Requirements 

A relevant entity conducting a relevant activity (other than a PEHE) will satisfy the Requirements if it:

1. conducts CIGAs in Cayman in relation to that relevant activity;

2. is directed and managed in an appropriate manner in Cayman in relation to that relevant activity; and

3. having regard to the level of relevant income derived from the relevant activity carried out in Cayman, has an adequate:

(a) amount of operating expenditure incurred in Cayman;

(b) physical presence (including maintaining a place of business or plant, property and equipment) in Cayman; and

(c) number of full-time employees or other personnel with appropriate qualifications in Cayman.

 

PEHE

A Cayman PEHE has the same definition as a BVI PEHE and is subject to the following reduced Requirements:

1. compliance with all applicable filing requirements under applicable Cayman legislation; and

2. adequate human resources and adequate premises in Cayman for holding and managing equity participations in other entities.

 

IP BUSINESS

Bermuda, BVI and Cayman place enhanced requirements on entities carrying out IP businesses (as defined in the respective legislation).

 

TAX RESIDENCY OUTSIDE BERMUDA, BVI OR CAYMAN

Any Bermuda, BVI or Cayman entity resident for tax purposes in a foreign jurisdiction is regarded as a non-resident entity and therefore is exempted from compliance with the Requirements. Satisfactory evidence is required to be produced to substantiate the same. 

 

OUTSOURCING

An in-scope entity may outsource some or all of its CIGAs to another person or entity, subject to certain requirements.

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