This quarter continues to see significant developments in economic substance requirements in the offshore jurisdictions. The Cayman Islands has now been formally removed from the EU's list of non-cooperative jurisdictions in tax matters (the "EU's blacklist"). Bermuda issued an updated version of the economic substance guidance notes, providing more clarity and examples for the industry. In addition, further guidance has been provided by the relevant authorities in these jurisdictions in relation to the portals and the information required to be submitted.
BERMUDA
NEW ES GUIDANCE NOTES
The Ministry of Finance issued the Revised Guidance Notes – Economic Substance Requirements – General Principles (Guidance Notes) in relation to the Economic Substance Act 2018. The Guidance Notes became effective on 18 September 2020 and serve to clarify certain matters covered in the previous version. For instance, the Guidance Notes clarify that entities will be deemed to be carrying on a relevant activity whether or not any gross revenue is earned from that relevant activity, whilst reaffirming that an entity that earns no gross revenue from the activity in a relevant financial period will not be required to satisfy the economic substance requirements in respect of that activity for that period. Therefore, entities that do not earn any gross revenue will still need to identify any relevant activities in its annual returns although they would not be required to satisfy an economic substance test. There were further sector specific changes relating to insurance business, fund management business and headquarters business sectors.
A full copy of the Guidance Notes can be accessed here.
UPDATES TO PORTAL
The Registrar of Companies issued an industry notice on 26 November 2020 that the portal provided for the submission of Economic Substance Declaration (ESD) would be updated on 30 November 2020. Below is a summary of the relevant updates:
- Deletion of Existing Incomplete ESD Filings
Any incomplete ESDs on the portal would be deleted at the time of the update on Monday, November 30, 2020. Any entity with an incomplete ESD filing on the portal should have completed the filing prior to the update. - Allowance for Entities with Zero Gross Income to File a
Declaration
An entity that carries on a relevant activity is required to file a declaration, whether or not it earns any gross income in respect of the relevant activity. - Collection of Additional Data
In order to achieve greater clarity and facilitate the analysis process, additional data collection fields have been added to the 'Managed and Directed' and the 'Financial Information & Employees' sections of the declaration. - Self-Reporting of Non-Compliance with Economic Substance
Requirements (ESR)
An entity that responds 'No' to the question of compliance with ESR in the 'Declaration' section will be required to check the relevant box to indicate each requirement with which it failed to comply. - Filing Control – Financial Period
It will be mandatory for the entity to enter its year-end date before being allowed to proceed to file and/or save its ESD.
BRITISH VIRGIN ISLANDS
We reported in our last update that the Beneficial Ownership Secure Search (BOSS) system platform has integrated the Economic Substance Portal and has gone live for economic substance reporting.
The Beneficial Ownership Secure Search System (Access and Disclosure) Regulations, 2020 came into force on 15 October 2020. The regulations stipulate that the International Tax Authority shall have access to the economic substance information held on the BOSS system for the purposes of:
- enforcing and monitoring obligations placed on corporate and legal entities by the Economic Substance (Companies and Limited Partnerships) Act, 2018; and
- disclosing information held on registered agents' databases to the persons, in the circumstances and on the terms set out in schedule 4 to the Beneficial Ownership Secure Search System Act, 2017.
CAYMAN ISLANDS
In the last update we reported on the issuance of version 3.0 of the Economic Substance for Geographically Mobile Activities Guidance by Cayman Islands Tax Information Authority and the coming into force of the International Tax Co-operation (Economic Substance) Regulations, 2020.
On 12 November, the Department for International Tax Cooperation (DITC) issued an industry advisory (Advisory) containing sample economic substance returns and updated forms to be completed via the DITC portal, including those relating to pure equity holding companies, high risk intellectual property companies and tax residency exemptions. Information submitted by an entity will be used by the Tax Information Authority in determining whether or not any relevant economic substance test has been satisfied. In particular, even though the returns applicable to holding companies would elicit less information compared with other relevant activities, such companies will still be required to submit (among other things) a copy of their financial statements or books of account for the relevant financial year.
The Advisory notifies that economic substance reporting deadlines have been extended as follows:
- Entities with a financial year ending 31 December 2019 that are carrying on intellectual property business have until 31 January 2021 to make their filings.
- For all others, including entities tax resident in another jurisdiction, the deadline is 28 February 2021.
- If an entity's financial year for 2019 was something other than 31 December, then there is no extension and the reporting deadline remains 12 months from the end of the financial year.
The DITC is expected to release further user guide on the portal.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
