First of all what is Economic Substance?
In December 2017, the European Community (EU) reclassified several countries that facilitated the attraction of profits that are earned in countries (with low taxation) but that do not maintain real economic substance in that country. The EU's main concern is the unfair competition of exchanging taxable activities to tax heavens.
As a consequence, from the end of 2018, countries such as the Bahamas, British Virgin Islands, Cayman Islands, Anguilla, Bermuda, Isle of Man, Jersey, Guernsey, Antigua and Barbados, have implemented legislation that requires that Companies domiciled in these countries, maintain local economic substance: management and/or employees, archives, and day-to-day activities.
This legislation will affect the vast majority of Companies in these tax heavens in 2020, as they will be subject to reporting and declarations. Although Investment Companies will not be required to maintain physical offices or employees in the countries, we note that eventually, they may be required to prove their situation/status under the legislation of economic substance. That is: even if you are not obliged to maintain a physical presence and other requirements of the legislation, it may be necessary to prove your activities.
How it will affect Entities incorporated in The Bahamas?
The Business Entities (Substance Requirements) Act of 2018 (“CESRA” or the “Act”), is effective in The Bahamas with effect from January 1, 2019. CESRA requires that business entities engaged in certain activities have economic substance in The Bahamas, they require of all Bahamian business entities whether or not they fall within the scope of the substance requirements and applies significant penalties for non-compliance with these rules.
Substance requirements will depend on whether a business entity is a “Included Entity” or a “Non-Included Entity”. In particular, an included entity is defined as a business entity that is engaged in one or more “relevant activities”.
Bahamas delegates this responsibility to the company (registration in the system and delivery of the annual report). Many companies are not current and therefore subject to penalties.
Dartmouth can help non-client companies (not yet served by Dartmouth as Corporate Secretary) who will be faced with the need to understand Bahamian law, classify the company's activities, file or file an economic substance report and prepare the corporate data needed to support the classification.
Contact us and let us help you!
