Economic Substance Require-ments in Bermuda, the British Virgin Islands and the Cayman Islands (summary)

What is the Background to the Economic Substance Legislation?

New economic substance legislation (“ES Legislation”) in each of Bermuda, the British Virgin Islands (BVI) and the Cayman Islands came into force on 31 December 2018 (in Bermuda) and 1 January 2019 (in the BVI and the Cayman Islands) which requires certain entities carrying on specific types of business to demonstrate adequate economic substance in that jurisdiction. The ES Legislation was adopted in response to concerns expressed by the Council of the European Union about the absence of economic substance requirements for entities doing business in and through these jurisdictions.

Which Entities are Subject to the Economic Substance Legislation?

The scope of the ES Legislation varies from jurisdiction to jurisdiction. As a first step, clients should take inventory of all their entities in the affected jurisdictions and make note of the type of company, LLC or partnership and where it is taxed. Entities that would otherwise fall within the economic substance regime of the BVI or the Cayman Islands may be able to claim exemption on the basis that they are tax resident in another jurisdiction. Such exemption is not currently available to entities incorporated or registered in Bermuda.

Are In-Scope Entities Conducting a Relevant Activity?

An in-scope entity will only be required to meet the relevant jurisdictions economic substance requirements if it carries on any “relevant activity”, namely:

• banking;

• insurance;

• fund management;

• financing and leasing;

• headquarters;

• shipping;

• distribution and service centres;

• holding entity; or

• intellectual property.

What are the Economic Substance Requirements?

An entity (other than a holding entity (for which there are reduced requirements) or an entity that conducts intellectual property business (for which there are enhanced requirements) conducting a relevant activity will satisfy the economic substance requirements of Bermuda, the BVI or the Cayman Islands, as applicable, if:

• it is managed and directed in that jurisdiction;

• core income generating activities are undertaken in that jurisdiction in relation to the relevant activity;

• it maintains adequate physical premises in that jurisdiction;

• there are adequate employees in that jurisdiction with suitable qualifications;

• there is adequate expenditure incurred in that jurisdiction in relation to the relevant activity; and

• it files an economic substance report each year with the applicable authority in that jurisdiction (which will assist the authority in assessing compliance).

The ES Legislation also sets out the circumstances in which any of the above activities may be outsourced.

What are the Deadlines for Compliance with and Reporting Under Economic Substance Requirements?

While, depending on the jurisdiction, existing in-scope entities have until 30 June or 1 July 2019 to comply with the ES Legislation, the first reporting would not occur until 2020.

A Bermuda entity that is subject to Bermuda’s ES Legislation will be required to file an annual Declaration as part of its annual return filing at the beginning of each year from 2020. Information required to be disclosed includes (but is not limited to) any relevant activity, core income-generating activities and outsourcing activities.

A BVI entity that is subject to BVI’s ES Legislation will be required to file certain information via the existing Beneficial Ownership Secure Search System no later than six months after the last day of each financial year commencing in 2019. Information to be submitted includes total turnover generated by the relevant activity, amount of expenditure incurred, total number of employees and the number of them engaged in the BVI, nature of equipment located in the BVI, names of the persons responsible for the direction and management of the relevant activity, together with their relationship to the entity and whether they are resident in the BVI.

A Cayman entity that is subject to Cayman’s ES Legislation will be required to file a notice via a new Economic Substance Portal at the beginning of 2020, stating whether or not it is carrying out any relevant activity, whether it intends to claim tax residency in another jurisdiction and the date of its financial year. No later than 12 months after the last day of each financial year commencing in 2019, the entity will be required to file a basic return setting out prescribed particulars as to income, expenses, assets, management, employees, physical presence and other matters.

Recommendation: Take Action Now

We recommend that entities incorporated or registered in Bermuda, BVI or the Cayman Islands consider whether or not they meet the definition of Bermuda’s “registered entity”, BVI’s “legal entity” or Cayman’s “relevant entity” under the applicable ES Legislation. Any entity that appears to be in scope of the ES Legislation of any of these jurisdictions should undertake an internal review to determine if it undertakes any “relevant activity” (as defined under the ES Legislation of the applicable jurisdiction) and, if so, seek advice as to which steps it must take in order to comply with that jurisdiction’s economic substance requirements.

Editorial Note: this is a summary of the article “Economic Substance Requirements in Bermuda, the British Virgin Islands and the Cayman Islands” which was circulated via Hong Kong Lawyer eNewsletter and posted on Hong Kong Lawyer website in June 2019.

Jurisdictions: 

Partner, Appleby

Fiona Chan is a partner in the corporate department of Appleby´s Hong Kong office, advising on a full spectrum of banking and finance, non-contentious insurance, private client and trust matters relating to the laws of Bermuda, British Virgin Islands and Cayman Islands. Fiona is a member of Appleby's global Technology & Innovation Group and leads the Fintech/ICO team in Hong Kong. She also advises on latest developments of economic substance requirements in Bermuda, BVI and Cayman.

Fiona has been widely recognized by her clients as well as legal directories. She was selected as one of the region's 10 most notable offshore lawyers of the Asian Legal Business' Offshore Client Choice List 2017, 2018 and 2019. She was also selected as one of the 2017 Influential Women in Re/Insurance by Intelligent Insurer and recognized in Legal 500 Asia-Pacific (Offshore). She regularly speaks at conferences and seminars and is often asked to contribute to policy discussions, interviews and articles for leading industry organizations and journals in the offshore space.