Bermuda: Economic Substance: Impact On Bermuda Insurers And Insurance Intermediaries

Last Updated: 4 September 2019
Article by Nick Miles, Mark Chudleigh and Nicolas Champ
Most Read Contributor in Bermuda, September 2019

Bermuda's Economic Substance Act 2018 (ESA) and Economic Substance Regulations 2018 (ESR) came into operation on 31 December 2018. The ESA was enacted in response to guidance published by the European Code of Conduct Group (Business Taxation) (COCG) regarding the manner in which the COCG will assess Bermuda's compliance with the "economic substance" element of its "fair taxation" criteria.

In June 2019, Bermuda's Minister of Finance (Minister) published draft guidance notes: (i) to assist entities registered in Bermuda to determine if they are within scope of the economic substance requirements under the ESA and, if so, how to satisfy them; and (ii) to provide guidance as to how the Registrar of Companies (Registrar) will measure and assess the criteria for meeting the requirements.

This memorandum is tailored for members of the Bermuda insurance industry and is designed to assist them in understanding the requirements of the ESA.

1 REGISTERED INSURANCE ENTITIES FALL WITHIN THE SCOPE OF THE ESA

The ESA applies to companies, limited liability companies and partnerships registered in Bermuda and overseas permit companies (Registered Entities) that carry on a "relevant activity". Carrying on insurance as a business is a relevant activity. "Insurance" is amplified in the ESR as comprising "business for which registration is required in accordance with the Insurance Act 1978."

As a result, all Registered Entities that carry on, in or from within Bermuda, insurance business or business as an insurance manager, broker or agent (together, Registered Insurance Entities), must, unless the entity is a Non-Resident Entity (see Section 2, below), comply with the ESA.

2 EXEMPTION FOR NON-RESIDENT ENTITIES

Entities which are resident for tax purposes in a jurisdiction outside Bermuda that is not in Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes (Non-Resident Entities) are not required to comply with the ES requirements. This exemption will apply, for instance, to insurers who have elected to be treated as a United States corporation for federal income tax purposes under Section 953(d) of the US Internal Revenue Code of 1986, or have otherwise organized their affairs so as to be tax resident in another jurisdiction.

This does not mean that Non-Resident Entities have no obligations under the ESA. They must make an annual claim for exemption (see Section 5 below), which must be approved by the Registrar to be valid, and are subject to new tax information exchange provisions (see Section 6 below).

3 IMPACT OF THE ES REQUIREMENTS ON REGISTERED INSURANCE ENTITIES

There are four chief consequences of an entity being within scope of the ESA:

  1. The entity must meet the economic substance requirements (see Section 4).
  2. The entity must file an annual compliance declaration (ES Declaration).
  3. The entity is potentially subject to tax information exchange-related powers created by the ESA.
  4. The entity is within scope of the ESA compliance and enforcement regime.

4 COMPLIANCE WITH ES REQUIREMENTS FOR REGISTERED INSURANCE ENTITIES

The ESA requires all Registered Entities carrying on a relevant activity as a business to maintain a substantial economic presence in Bermuda by:

  1. Being managed and directed in Bermuda.
  2. Undertaking "core income generating activities" in Bermuda
  3. Maintaining adequate physical presence in Bermuda
  4. Employing adequate suitably qualified full time employees in Bermuda
  5. Incurring adequate operating expenditure in Bermuda

(ES requirements).

However, in recognition of the fact that the Insurance Act 1978 and associated codes of conduct already contain provisions requiring a substantial presence on the island, Registered Insurance Entities benefit from a deeming provision in the ESR, according to which they may comply with the ES requirements by complying with certain requirements applicable to economic substance set forth in:

  1. Provisions of the Companies Act 1981 (Companies Act) relating to corporate governance (Companies Act Specific Requirements).
  2. The Insurance Act 1978 (Insurance Act), regulations, rules or other instruments (including code of conducts) made under that Act (Insurance Act Specific Requirements; together with Companies Act Specific Requirements, Specific Requirements).

The Companies Act Specific Requirements include requirements in the Companies Act that a Registered Insurance Entity:

  1. Maintain its registered office in Bermuda.
  2. Maintain statutory books, records of account, financial statements and registers at its registered office address in Bermuda.
  3. May be served with legal process in Bermuda.
  4. Appoint a minimum of one director or officer or a representative resident in Bermuda.

The Insurance Act Specific Requirements applicable to a Registered Insurance Entity vary relative to the licensing class of the Registered Insurance Entity. An exhaustive list of the Insurance Act Specific Requirements applicable to a specific Insurance Registered Entity could only be determined after consideration of the licensing class and the business carried on by the Insurance Registered Entity.

However, there are some requirements that are common to all or to all members of a broad category of Insurance Registered Entities. For example, for all Insurance Registered Entities, the Insurance Act Specific Requirements include the requirement to maintain a principal office in Bermuda. For all insurers, they include the requirement to appoint a principal representative in Bermuda approved by the BMA.

The Insurance Act Specific Requirements for commercial insurers include the requirement to comply with the head office requirements set forth in Section 8C of the Insurance Act (Head Office Requirements), including that the insurance business of the insurer be directed and managed from Bermuda.

All Registered Insurance Entities must in addition comply with various rules relating to the outsourcing of regulated functions.

Beyond that, the Insurance Act Specific Requirements encompass requirements to maintain documents and information at the Registered Insurance Entity's registered office or principal office in Bermuda and other matters.

5 FILING OF ES DECLARATION

The second chief consequence of being within scope of the legislation is the requirement to file an ES Declaration annually with the Registrar. Starting in 2020, each Registered Insurance Entity must file an ES Declaration within six months of the end of its financial year. The first Registered Insurance Entities to file will be those whose current financial year ends on 31 December 2019.

The ES Declaration must include at a minimum the following information about the Registered Insurance Entity for the relevant financial period:

  1. The nature and extent of core income generating activities (CIGA) undertaken in Bermuda (including, predicting and calculating risk, insuring or re-insuring against risk, providing client services, and preparing regulatory reports).
  2. The holding entity, the ultimate parent entity, the owner or the beneficial owner of the Registered Insurance Entity.
  3. Gross income and operating expenses and assets for the relevant financial year.
  4. The name(s) and physical address(es) of the director or directors of the Registered Insurance Entity who are ordinarily resident in Bermuda.
  5. The number of full-time employees.
  6. The nature and extent of the entity's presence in Bermuda including:

    1. The physical offices or other premises occupied by the entity or its affiliates in Bermuda.
    2. Level of annual expenditure in Bermuda.
  7. Whether the entity is managed and directed in Bermuda or from Bermuda, having regard to:

    1. The location of strategic or risk management and operational decision making or where the management of the entity meets to make decisions regarding business activities.
    2. The presence of an adequate number of senior executives, employees or other persons in Bermuda who are suitably qualified and responsible for oversight or execution of its core income generating activities or both.
    3. The location of its board meetings and the nature and frequency of those meetings held in Bermuda in relation to the overall number of meetings.
  8. The nature and extent of outsourcing arrangements (if any) to affiliates or service providers in Bermuda, and, in respect of such arrangements, details of the oversight and assessment by the entity of the outsourced activities, the resources and qualifications of the outsourcing entity and the outsourcing entity's own compliance with ES requirements.

Registered Insurance Entities will be required to file a completed ES Declaration even though they are able to rely on the deemed compliance regime (and thus the level of detail may exceed that which is strictly necessary to demonstrate compliance with Specific Requirements).

Since, under the Insurance Act, the Bermuda Monetary Authority (BMA) supervises compliance with Insurance Specific Requirements, it is hoped that the Registrar will follow the BMA's determination about compliance with such matters, and indeed the Registrar may be required to do so. Early indications are that the Registrar will generally follow the determination of the BMA as a matter of practice. However, the Registrar may choose not to do so where, on the basis of an ES Declaration, he has concerns about the Registered Insurance Entity's actual compliance with Specific Requirements.

As previously mentioned, Non-Resident Entities do not fall within the scope of the legislation. Registered Insurance Entities who consider that they are entitled to exemption on this basis must file a claim for exemption with the Registrar, within the filing period applicable to ES Declarations, for each relevant financial period. Claimants must provide sufficient evidence to support their claim.

6 PROVISION OF INFORMATION TO FOREIGN COMPETENT AUTHORITIES

The ESA brings information provided to the Registrar within the scope of the Minister's tax information exchange-related powers and functions under the International Cooperation (Tax Information Exchange Agreement) Act 2005. In particular:

  1. The Registrar will pass all information contained in a Non-Resident Entity's annual claim for non-resident status to the Minister for sharing with the competent authority of any relevant jurisdiction with which Bermuda has a tax information exchange agreement in which a holding entity, the ultimate parent entity, an owner or the beneficial owner of the entity is incorporated, formed, registered or resident (foreign competent authority).
  2. If the Registrar determines that a Registered Insurance Entity has not met the ES requirements for a financial period, it must provide all information contained in the entity's ES Declaration to the Minister for sharing with any relevant foreign competent authority.

7 ES ENFORCEMENT JURISDICTION

Finally, falling within scope means that Registered Insurance Entities will be subject to the enforcement regime under the ESA. The ESA invests the Registrar with a range of enforcement-related powers where a Registered Insurance Entity fails to comply with the Specific Requirements, including powers to (i) issue a notice to comply; (ii) undertake on-site visits; and (iii) impose a civil penalty in the absence of compliance with a notice to comply.

Where non-compliance continues after the issue of a final notice to comply and the imposition of a civil penalty, the Registrar may notify the Minister and apply to the court for an order:

  1. For the regulation of the conduct of the affairs of the entity.
  2. Restricting the entity from carrying on business.
  3. Authorising the Registrar to begin the strike-off procedure under the Companies Act (if applicable), the result of which would be the dissolution of the entity.

In addition, as noted in 6(b), above, if the Registrar determines that a Registered Insurance Entity has not met the ES requirements for a financial period, it must provide all information from the entity's ES Declaration to the Minister for sharing with any applicable foreign competent authority.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Kennedys operates in Bermuda in association with Kennedys Chudleigh Ltd.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions