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GUIDE TO ECONOMIC SUBSTANCE BERMUDA Updated to include legislative changes effected as of 24 December 2019 ocorian.com CONTENTS INTRODUCTION TO ECONOMIC SUBSTANCE ............................................................................................................... 3 HOW CAN OCORIAN HELP? ......................................................................................................................................... 4 PENALTIES FOR NON-COMPLIANCE ............................................................................................................................ 5 WHICH ENTITIES ARE AFFECTED? ................................................................................................................................ 5 RELEVANT ENTITIES .............................................................................................................................................................. 5 WHAT ARE RELEVANT ACTIVITIES? .......................................................................................................................................... 6 MEASURING SUBSTANCE ............................................................................................................................................ 6 RELEVANT ACTIVITY DEFINITIONS AND CORE INCOME GENERATING ACTIVITY .......................................................... 7 DIRECTED AND MANAGED .........................................................................................................................................14 MEETINGS AND MINUTES OF THE BOARD OF DIRECTORS..........................................................................................15 PURE EQUITY HOLDING ENTITIES - “REDUCED ES TEST” .............................................................................................15 REDUCED SUBSTANCE TEST GUIDANCE FOR PEHE IN BERMUDA ...............................................................................15 REPORTING SUBSTANCE ............................................................................................................................................16 FREQUENTLY ASKED QUESTIONS ...............................................................................................................................17 ECONOMIC SUBSTANCE FLOW CHART .......................................................................................................................22 2 ocorian.com INTRODUCTION TO ECONOMIC SUBSTANCE The Economic Substance Act 2018 and the Economic Substance Regulations 2018 and subsequent Amendments (ES Regime) apply to certain entities that are carrying on one or more ‘relevant activities’, are not tax resident in a jurisdiction outside of Bermuda and have gross income attributable to a relevant activity in any accounting period commencing on or after 1 January 2019. The legislation is designed to protect the reputation of offshore jurisdictions by ensuring that income streams from certain activities are based on actual local activity to substantiate the use of low tax jurisdictions. Substance legislation does not apply to all entities in Bermuda – rather, it applies only to entities carrying out certain relevant activities. Depending on whether your entity is carrying on one or more of the relevant activities, it may be required to evidence substance on the ground in Bermuda by way of being managed or directed, to have adequate people, expenditure and physical presence and to conduct ‘core income generating activities’ in Bermuda. Guidance Notes with respect to the economic substance regulation for Bermuda have been published by the Registrar of Companies and can be found on the Government of Bermuda website: https://www.gov.bm/department/registrar- companies If your entity has been classified as a Pure Equity Holding Entity (PEHE), although it will be considered in scope of the ES regime, as explained in this guide it will be subject to a much reduced Economic Substance Test (ES Test) as well as lighter annual reporting requirements. The importance of compliance with the new substance regulations should not be understated given the potential liability for extensive penalties. Our experts can help you navigate the complexities of the new legislation to ensure that you are meeting the requirements. For more information please contact: Damian Resnik Carol Feathers Client & Operations Director Director of Client Services +1 441 294 8097 +1 441 294 8004 [email protected] [email protected] DISCLAIMER: OCORIAN IS NOT TYPICALLY A PROVIDER OF LEGAL OR TAX CONSULTANCY SERVICES. IF YOU ARE UNSURE OF YOUR LEGAL OBLIGATION OR TAX POSITION PLEASE GET IN TOUCH WITH YOUR USUAL OCORIAN CONTACT WHO WILL BE HAPPY TO ARRANGE FOR INDEPENDENT LEGAL AND/OR TAX ADVICE FOR YOU. 3 ocorian.com HOW CAN OCORIAN HELP? Ocorian has a significant presence in jurisdictions affected by changes to substance legislation. Alongside this, we have comprehensive experience in gathering and reporting entity data in those jurisdictions. As a result, we are uniquely placed to help our clients understand and respond to the new legislation. We address the following questions to deal with substance requirements. 1. Is the entity in question in scope of the new law? Our experts will offer professional guidance to help identify entities which are in scope of the new law and conducting relevant activities. Lawyers from our affiliate Ocorian Law (Bermuda) Limited can offer legal opinions if required. 2. Does the entity meet the substance requirements? The first step is that Ocorian will perform a preliminary classification exercise taking your entity through a series of client questions submitted through our online portal. We will then be able to determine and provide a preliminary classification to you along with resolutions and advice on next steps. If your entities are in scope of the ES regime, we will perform an in-depth gap analysis (ES Test) which may involve a request for additional information from you. Substance requirements differ depending on the type of relevant activity an entity performs. Our tests include a gap-analysis against the requirements for adequate control, people, facilities and expenditure. If an entity is found to have gaps for one or more of its relevant activities, it may be necessary to makes changes to its operations to add substance in Bermuda. 3. How can the entity enhance its substance? If your entities do not currently meet the substance requirements will receive a report from Ocorian which will include recommendations to add substance in Bermuda. For standard structures, solutions may be straightforward including additional corporate services or director activities. For more complex structures, we can facilitate the development and implementation of tailor-made solutions, including consideration of functions which may be outsourced to Ocorian. 4. Submissions of notifications and reports In Bermuda all entities are required to advise to the Registrar annually, whether they have carried on a relevant activity during the preceding relevant financial period. In-scope entities are required to file an annual Economic Substance Declaration via an e-registration reporting portal which is being developed by the Registrar. Entities which have established tax residence outside Bermuda and which are carrying on relevant activities, may wish make an application be classified as a Non-resident entity (NRE). NRE’s are required to submit evidence of their tax residency status annually. Ocorian can assist in the preparation and submission of your notifications, and reports or NRE applications in the format required by the Registrar. 4 ocorian.com PENALTIES FOR NON-COMPLIANCE The ES Regime includes specific powers to request additional information in relation to any substance information provided on or with the annual economic substance declaration. The ES Regime also include specific sanctions to address circumstances where companies have acted so as to avoid or seek to avoid the application of the ES regime. The Registrar has a duty to ensure that every Entity satisfies the ES Requirements. The sanctions for non-compliance run in two schemes which run successively to each other. One scheme is the Notice to Comply and the other is the civil penalty scheme which is the result of the issuance of a Warning Notice, and then a Decision Notice, with a right of appeal. There are three successive stages in each scheme and entities will be allowed between 30 and 180 days to remedy non-compliance after each notice is issued. Penalties for failure to comply with the ES regime include: Three stages of fines: first notice $7,500 to $50,000 second notice $25,000 to $100,000 third notice $50,000 to $250,000 Removal from the Companies Register A penalty of $10,000 and/or two years imprisonment for an “officer” of the entity, who knowingly provides false information to the Registrar. WHICH ENTITIES ARE AFFECTED? Relevant entities The ES Regime in Bermuda applies to: Companies to which the provisions of the Companies Act 1981 apply (including local companies, permit companies and overseas companies) Companies formed under the Limited Liability Company Act 2016 Partnerships (exempted, exempted limited or overseas) which have elected to have separate legal personality under s4A of the Partnership Act 1902 The following entity types are excluded from the legislation: Trusts and Foundations Foundations Funds and Collective Investment Vehicles Charities Non-resident entities (subject to

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