New economic substance regimes in Bermuda, the British Virgin Islands and the Cayman Islands give rise to new considerations for counterparties transacting with offshore entities

Economic substance requirements have been enacted in all leading offshore financial centres in response to the EU Code of Conduct Group (Business Taxation) reports issued in June 2018. These set out the requirements for economic substance that relevant non-EU jurisdictions were required to adopt in order to avoid being blacklisted by the EU.

Scope of new regimes

The economic substance regimes enacted in Bermuda, the BVI and the Cayman Islands generally cover the same ground and in materially similar terms, although there are certain nuances across the jurisdictions. As of 1 July 2019, all ‘registered entities’ in Bermuda, ‘legal entities’ in the BVI and ‘relevant entities’ in the Cayman Islands carrying out or conducting certain prescribed ‘relevant activities’ must have and maintain adequate substance in such offshore jurisdiction.

Although not an exhaustive list, ‘relevant activities’ generally include banking business, insurance business, shipping business, regulated fund management business, finance/leasing business, distribution and service centre business, headquarters business, intellectual property business and certain holding company activities.

The exact scope of substance requirements varies by ‘relevant activity’ and offshore jurisdiction, although general requirements (in each case, being from or within the relevant offshore jurisdiction) include:

  • Direction and management of the ‘relevant activity’;
  • Having ‘adequate’ (an undefined and rather nebulous concept) premises and employees for the conduct of the ‘relevant activity’;
  • Incurring ‘adequate’ expenditure in connection with the ‘relevant activity’;
  • Conducting certain prescribed ‘core income generating activities’.

This article was first published in The Lawyer.

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