The Government has been engaged in active dialogue with the EU Code of Conduct Group and the OECD during the last 6 months to ensure equivalency with other 2.2 jurisdictions. This has culminated in the introduction of the Economic Substance Amendment (No. 2) Act, 2019 and a further iteration of the Economic Substance Regulations.
The amendments, which came into force 24 December 2019, introduce key changes to the economic substance regime. One of the most significant changes is to the definition of "holding entity". The revised definition now only includes "pure equity holding entities". In order to fall within this new definition, an entity must acquire and hold equitable interests as its primary function, hold a controlling stake in another entity and must not carry on any other commercial activity. As a result of this change, those entities which were previously within scope of the economic substance regime solely on the basis that they held or managed "assets" but didn't otherwise conduct a relevant activity, will now fall outside scope.
Another significant change is to the definition of "shipping" which now excludes those entities which own a vessel but do not otherwise take part in its operation. The defining characteristics for this relevant activity are now the operation and management of a ship, which better reflects the commercial reality of the industry.
Important changes have also been made to the definition of "insurance". This has been narrowed in scope so that insurance intermediaries (being managers, agents and brokers) are no longer within scope of this relevant activity which now only captures insurers/re-insurers.
Amendments have also been made to the definitions of "financing" and "leasing" so that they are no longer separate relevant activities but have been condensed into a single relevant activity of "financing and leasing". The changes clarify the activity that will fall within scope and will also avoid any potential double reporting.
The revisions also simplify the substance requirements for "local entities" which will now not have to file an economic substance declaration provided that the local entity is not carrying out "insurance" or "banking" activity and provided that the local entity is not part of a MNE Group.
The revised legislation and regulations introduce significant changes which may impact the scope and applicability of the economic substance regime to your Bermuda entities. If you have any questions on how these changes may impact your business, please reach out to your usual Appleby contact or a member of the team below.
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