Economic substance and Bermuda’s insurance industry
The Bermuda government passed legislation with effect from December 31, 2018 requiring relevant Bermuda entities to comply with specific obligations regarding economic substance in the jurisdiction. The Economic Substance Act 2018 and the Economic Substance Regulations 2018 were made operative in order to address concerns raised by the European Union with respect to offshore structures aimed at attracting profits which do not reflect real economic activity in the jurisdiction.
Entities which fall within the scope of Bermuda’s economic substance legislation include companies, limited liability companies and partnerships (that elect to have separate legal personality) where such entities carry on a “relevant activity”. Applicable entities which carry on a relevant activity must comply with specific obligations regarding economic substance in the jurisdiction. The relevant activities are banking, insurance, fund management, financing and leasing, headquarters, shipping, distribution and service centre, holding entity and intellectual property.
An applicable entity will satisfy the economic substance legislation by demonstrating that (i) it is managed and directed in Bermuda; (ii) the core income-generating activities are undertaken in Bermuda with respect to the relevant activity; (iii) it maintains adequate physical premises in Bermuda; (iv) there are adequate full time employees in Bermuda with suitable qualifications; and (v) there is adequate operating expenditure incurred in Bermuda in relation to the relevant activity.
With respect to insurance, core income-generating activities include predicting and calculating risk; insuring or r-insuring against risk; providing client services; and preparing regulatory reports.
Bermuda’s economic substance regime is immediately applicable for newly registered entities falling within the scope; existing entities have until July 1, 2019 to comply with the economic substance requirements. Failure to comply with the economic substance requirements will expose an applicable entity and its directors and officers to criminal penalties and may ultimately result in the entity’s business activities being regulated or restricted, or the entity being struck off the register.
It is anticipated that guidance notes will be issued by the Bermuda government to address the nuances of the regime as it relates to each relevant activity. A company licensed under the Insurance Act 1978 (whether as insurer or insurance intermediary) will comply with the economic substance requirements if the relevant company complies with (i) the appropriate requirements set out in the Companies Act 1981 with respect to corporate governance; and (ii) the applicable requirements, rules and regulations under the Insurance Act (including regulations, rules and the code of conduct made under the Insurance Act).
An entity subject to the economic substance requirements (including an entity registered under the Insurance Act) must file an economic substance declaration (Declaration) with the Registrar of Companies on an annual basis confirming that such entity complies with the economic substance requirements.
The Declaration must provide specific information relating to assessable economic substance criteria and will include the following disclosures: (a) whether the entity is carrying on a relevant activity and type of relevant activity carried on or undertaken by the entity; (b) whether the entity is engaging in high risk IP activity; (c) whether the entity will outsource the relevant activity and to whom; (d) the core income-generating activities that are undertaken in Bermuda with respect to the relevant activity; (e) the gross income for the relevant financial year; (f) the premises in Bermuda; (g) the names and physical addresses of directors (in the case of companies), managers (in the case of limited liability companies), or general partners (in the case of partnerships), who are ordinarily resident in Bermuda; (h) the holding entity, the ultimate parent entity, the owner or the beneficial owner of the entity; (i) the operating expenses and assets for the relevant financial year; (j) the number of full-time employees; and (k) such other information as may reasonably be required by the Registrar.
It is clear that the economic substance legislation has a considerably broad scope and will apply to a number of entities within the jurisdiction, including companies registered under the Insurance Act with varying regulatory obligations and risk profiles. Compliance with the economic substance requirements can be achieved by licensed entities by adhering to the applicable provisions of the Companies Act and the Insurance Act, although an analysis of the business and operations of each entity should be carried out to assess the scope and applicability of the economic substance regime.