10 June 2019Analysis

Impact of economic substance regulations on captives expected to be minor

Bermuda’s insurers - and by extension captive insurers - have until July 1 to meet the government’s new economic substance requirements, although much of the industry is confident captives are in a good position to satisfy these requirements and that the impact of the legislation will be minor.

These requirements will be explored a panel on Tuesday afternoon, breaking down the ways Bermuda-based service providers can help support captives and their owners demonstrate economic substance in Bermuda. Speakers include James Dockeray, US tax partner at Deloitte; Shelby Weldon, senior vice president and team leader at Marsh Management Services (Bermuda); and insurance regulatory specialist lawyer Michael Frith.

The Economic Substance Act 2018 and the Economic Substance Regulations 2018 have come into force to address concerns raised by the European Union with regard to offshore structure aimed at attracting profits which do not reflect real economic activity in the jurisdiction.

Due to a typographical error in its economic substance documents, Bermuda had found itself placed by the EU's Economic and Financial Affairs Council (ECOFIN) on the list of non-cooperative jurisdictions for tax purposes, also known as the blacklist.

However, it was removed from the blacklist on May 17 after the Bermuda government met with EU tax officials who agreed that Bermuda’s economic substance regime

In order for a captive to demonstrate it has economic substance, as per the new legislation, it will first have to be able to show that is managed and directed in Bermuda, and the core income-generating activities (CIGA) are undertaken in Bermuda with respect to the relevant activity.

The CIGA of captives include predicting and calculating risk, re/insuring against risk, providing client services and preparing regulatory reports.

Furthermore, Bermuda captives must satisfy the requirement that it maintains an adequate physical premises on Bermuda, which includes having adequate full-time employees and adequate operating expenditure incurred on Bermuda in relation to the relevant activity.