Bermuda Economic Substance: A Practical Guide for CSPs and Their Clients

Bermuda's Economic Substance Framework

Bermuda introduced the Economic Substance Act in 2018, with regulations following in 2019. Like its BVI and Cayman counterparts, the Bermuda framework was developed in response to the EU Code of Conduct Group's concerns about harmful tax practices in British Overseas Territories and Crown Dependencies. The framework requires entities registered in Bermuda that carry on a "relevant activity" to demonstrate genuine economic substance in the island — qualified personnel, premises, management decisions, and expenditure that correspond to the scale and nature of the activity.

Bermuda's approach has several distinctive features: the regime is administered by the Bermuda Monetary Authority (BMA), reporting is annual through the BMA's BOSS system, and Bermuda's economic substance standard has been calibrated to reflect the island's position as a major insurance and reinsurance centre — reflected in the prominence of insurance, banking, and fund management in the list of relevant activities.

Relevant Activities Under Bermuda's ESA

A Bermuda entity that conducts one or more of the following relevant activities is subject to the full economic substance requirements:

• Banking business
• Insurance business (including reinsurance)
• Fund management business
• Financing and leasing business
• Headquarters business
• Intellectual property (IP) business
• Distribution and service centre business
• Holding entity business
• Shipping business

The holding entity category is broad — it captures entities whose principal function is holding shares in other entities — and it means that even passive holding companies without employees or operational activity may be within the ESA's scope. However, the ESA recognises that pure holding entities (those that only hold shares and receive dividends) have a reduced substance standard: they must demonstrate management and control in Bermuda (through adequate board meetings held on the island) but are not required to demonstrate the same level of local payroll or premises as an operating entity.

The Core Income-Generating Activities (CIGA) Requirement

For each relevant activity, the ESA specifies what constitutes a core income-generating activity — the specific functions that must be conducted in Bermuda to satisfy the substance test. For a fund management entity, CIGAs include taking decisions on holdings and risk, managing risk, determining investment strategies, and making investments. For an IP business, CIGAs include R&D activity, creating IP, exploiting IP rights, and taking strategic decisions on IP development and protection.

The CIGA requirement is where most substance compliance failures occur. It is not sufficient to have Bermuda-based directors or to hold board meetings on the island — the substantive management of the relevant activity must genuinely occur in Bermuda. For entities that are managed from another jurisdiction and merely incorporated in Bermuda, the CIGA test cannot typically be satisfied without genuine structural changes.

"Bermuda economic substance compliance is not a paperwork exercise. The BMA has demonstrated through its enforcement activity that it will look behind the filings and assess whether genuine substance exists. Entities that file declarations without the underlying substance are taking real enforcement risk."

Annual Reporting: The BMA Declaration

Entities subject to the Bermuda ESA must file an annual economic substance declaration with the BMA through the BOSS portal. The declaration covers the financial year just ended and must be filed within six months of the financial year end. For December 31 year-end entities, this means a June 30 filing deadline.

The declaration requires detailed information about:

• The relevant activities conducted during the year
• The number of full-time employees or part-time equivalents engaged in the relevant activity in Bermuda
• The physical address of the premises used for the relevant activity
• The operational expenditure incurred in Bermuda in connection with the relevant activity
• The income and assets associated with the relevant activity
• Whether the entity's management and control were exercised in Bermuda, with dates and locations of board meetings

Penalties and Enforcement

The BMA has established a clear penalties regime for economic substance failures:

• First-year non-compliance: Financial penalties up to $50,000 for failure to meet substance requirements, and up to $10,000 for failure to file a declaration.
• Continuing non-compliance: Penalties increasing for each year of continued non-compliance, with escalation to the BMA board for persistent failures.
• Information sharing: The BMA shares information about non-compliant entities with the tax authorities of the entity's tax residence jurisdiction — which can trigger tax investigations in the home jurisdiction.

The information-sharing mechanism is particularly powerful: the consequence of failing Bermuda's economic substance test is not just the Bermuda penalty — it is potential exposure in the jurisdiction where the entity's profits are being taxed, which may have far larger financial implications.

How CSPs Can Add Value

CSPs administering Bermuda entities are well-positioned to help clients maintain economic substance compliance on an ongoing basis. The key value-add areas are:

• Maintaining a live substance profile for each entity — tracking employee headcount, premises, board meeting dates and locations, and operational expenditure against the ESA requirements.
• Preparing the annual declaration from entity management system data rather than asking clients to compile information from scratch each year.
• Proactively flagging to clients when their substance position has changed — a reduction in local headcount, a board meeting held overseas, a year with unusually low local expenditure — that might create a compliance risk.
• Coordinating with the entity's local Bermuda-based service providers (auditors, lawyers, registered office) to ensure the supporting documentation for the declaration is consistent and complete.