A note on definition of ‘substance’
On December 24, 2019, Bermuda introduced the Economic Substance Amendment Act 2019 and the Economic Substance Amendment Regulations 2019. These changes align Bermuda’s economic substance regime with other British Overseas Territories and Crown Dependencies. The Minister of Finance simultaneously released Guidance Notes outlining the scope and application of the economic substance legislation.
Key Changes
The Amendment Legislation addresses several significant areas:
- Holding entities
- Financing and leasing
- Shipping
- Insurance
- Local entities
Holding Entities
The definition of “holding entity” has been refined to focus on pure equity holding entities. Such entities must limit their sole function to acquiring and holding shares or equitable interests in other entities, perform no commercial activity, and maintain controlling stakes in those entities.
Entities conducting additional commercial activities outside of pure equity holding fall outside the economic substance legislation scope. Pure equity holding entities need only meet minimum requirements: comply with corporate governance standards under Bermuda’s Companies Act, file annual economic substance declaration forms, maintain adequate people for managing equity participations, and sustain adequate premises in Bermuda.
Financing and Leasing
Previously separate activities of financing and leasing have merged into one relevant activity. This combined category now encompasses “providing to any person for consideration credit facilities of any kind, such as loans, hire purchase arrangements, finance leases (excluding in relation to land) and conditional sale or credit sale arrangements.”
Credit receivables assigned to other parties mean the assignee becomes the person providing the credit facility and falls within scope.
Application to Central and Eastern Europe
Similar changes have occurred in other offshore jurisdictions like the Marshall Islands, which affects corporate group holding structure planning in the region.