Substance definition ‘a moving target’

  • Matter of substance: pictured is finance minister Curtis Dickinson, back row, centre, who was joined on stage at a news conference yesterday by junior finance minister Wayne Furbert and senior members of the international business community, including Patrick Tannock, Albert Benchimol, John Huff, Will McCallum, Christian Luthi, Sean Moran, Richard Winchell and Craig Bridgewater (Photograph by Akil Simmons)
  • Forward strategy: Curtis Dickinson, Minister of Finance, held a press conference where he outlined proposed incentives in the EU Economic Incentive Programme. He was joined by a number of business leaders (Photograph by Akil Simmons)

Bermuda is confident it has done what is required to address the European Union’s concerns about the economic substance of companies registered on the island.

The Government of Bermuda has also revealed an incentive programme to make the island more attractive to companies that might be impacted by the new law’s requirements.

The stakes are high. Bermuda has many thousands of registered companies, and those that have little or no actual presence on the island must now change that situation or face penalties, as prescribed in the Economic Substance Act 2018, passed by Parliament last month.

The worry that some of the thousands of companies likely to be affected might go elsewhere, causing economic loss for the island, is being addressed with proposed incentives that involve work permit policy and payroll tax concessions. The aim of these is to encourage companies to increase their economic presence here and create jobs and opportunities.

But when does a company have economic substance in Bermuda, and when does it not?

The Government believes it has the answer, even if the requirements in the Act appear indistinct.

Time will tell if the EU agrees, and its answer may come as soon as next month.

To comply with Bermuda’s economic substance requirements, a company must be managed and directed from Bermuda and its core income-generating activities be undertaken here. Also, it should have “adequate” premises and employees on the island, and “adequate” expenditure incurred in Bermuda in relation to its activity.

What constitutes “adequate” will be assessed by the Registrar of Companies.

The Royal Gazette asked why there were no specific metrics included in the Act. Curtis Dickinson, Minister of Finance, said: “Companies based here will be required to make submissions to the Registrar of Companies. An assessment will be made based on the terms of their substance, based on the data they provide to us around revenue, employees, activity generated domestically. Then we will evaluate whether economic substance criteria has been met.”

When asked if there will be defined economic substance metrics in the future, he said: “Eventually there will be. This has been a bit of a moving target for us and other jurisdictions with respect for the EU’s criteria for what it is they wanted. The EU will transmit to us whether something is substantive or not, and we will make the necessary adjustments.”

The economic substance situation stems from efforts by the EU to curb harmful tax practices, and to secure co-operation from jurisdictions with low or zero rates of corporate income.

Bermuda is one of 13 countries and jurisdictions identified by the EU in 2017 as having tax regimes that facilitate offshore structures which attract profits without real economic activity. The island committed to addressing the concerns relating to economic substance by the end of last year.

Passing the Economic Substance Act was a move aimed at keeping Bermuda off any EU list of non-compliant jurisdictions. Being on such a list would have negative implications for the island’s status as an international business centre.

The Government has high hopes that the Act will find favour in Brussels. If it does not, it is not immediately clear what comes next.

The Royal Gazette asked what would happen if the EU said the Act is not acceptable.

“We haven’t contemplated that. We think we have done what we are required to do to meet the standard,” Mr Dickinson said.

Among the other countries and jurisdictions facing the same economic substance issues, and committed to addressing EU’s concerns, are Cayman Islands, British Virgin Islands, Jersey and the Isle of Man.

Mr Dickinson said Bermuda is trying to get its hands on the economic substance legislation the other jurisdictions have created. He added: “We have worked with a broad group of industry players and have been guided by some of their insights. But we expect that at some point once the EU makes its decision everyone’s information will be available to us.”

When questioned on what resources the Government will need in place to deal with the additional requirements of the Act, he said: “We will need to have incremental resources deployed in the Registrar of Companies. This is all very new and we are trying to come to terms with what additional complement of people we will require. But at a minimum it will require some additional people at the Registrar of Companies.”

Mr Dickinson also said some work has been done on best-case and worst-case scenarios for Bermuda, in relation to the potential impact of the economic substance requirements on companies registered here.

“There has been some work done on that, but I don’t feel comfortable disclosing that information,” he said.

“We won’t know until people make decisions about whether they want to establish substance here or not.”

Explaining the proposed incentives to keep companies affected by the Act in Bermuda, and encourage job creation, Mr Dickinson said the new EU Economic Incentive Programme includes the New Business Work Permit Policy, which is already in place, together with payroll tax relief.

“The Government’s plan encourages and rewards investment in Bermuda’s economy, encourages businesses already here to expand and stay, and our tax incentives will encourage job creation.”

He also said: “The Government understands that the two things foremost in the minds of most Bermudians are jobs and the protection of Bermudian opportunities within our own country.

“Closed or restricted job categories such as a front office receptionist, or which are entry level, graduate or trainee positions, will remain closed and continue to be protected, giving Bermudians the opportunity to earn employment in the new jobs created by these companies.”

Mr Dickinson said many Bermudians had lost such positions during the recession, and the Government “is committed to working with these companies to ensure that unemployed and underemployed Bermudians will be ready and able to fill these posts”.

The minister spoke at a press conference where he was joined by a number of the island’s business leaders.

The New Business Work Permit Policy has been in place since 2012, and allows an exempted company that is new to Bermuda to receive automatic approval of work permits for the first six months of obtaining its first new business permit. There is eligibility criteria, such as a business must be directed and managed from Bermuda, and it must show that it has adequate personnel and expenditure undertaken on island “thus creating jobs and opportunities within new or existing businesses offering support services”.

Mr Dickinson said the policy will include exempted companies already registered in Bermuda without employees and any new exempted company that decides to set-up in Bermuda with employees.

Businesses that need more than ten work permits within the first six months of operation will be required to present their Bermuda office staffing plan to the minister.

In May, the Government granted medium and large companies a three-year employer payroll tax concession for additional jobs created in Bermuda.

Mr Dickinson said: “With respect to this programme, the concession will last for two years and extend to companies that create or transfer jobs to Bermuda.”

He thanked a number of organisations for their support, including the Bermuda Monetary Authority, the Association of Bermuda International Companies, Association of Bermuda Insurers and Reinsurers, and government technical officers, and added: “Our goal is to have more companies and more jobs based in Bermuda, providing more employment and entrepreneurial opportunities for Bermudians.”

See Related Media for Mr Dickinson’s statement