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Substance Act seen as ‘paradigm shift’

Paradigm shift: the Economic Substance Act addressed European Union concerns over companies that lack physical presence in Bermuda

The EU Substance Act represents “as much a paradigm shift as I have ever seen”, says an expert who has assisted the Bermuda Government in its response to the legislation.

Michael Frith, an independent director and former partner at Conyers, Dill and Pearman, was speaking on a panel at the Bermuda Captive Conference this week, Captive International reported.

The EU legislation has its roots in the Organisation for Economic Co-operation and Development’s base erosion and profit-shifting initiative, Mr Frith said, adding that the implications of the EU Act will be profound.

“It is a new regime, it is universal, it applies to any jurisdiction offshore — and many onshore,” he told the audience. “And broadly speaking its principles will be applied equally.

“It will represent a change in how we do business, but Bermuda is probably as well positioned as any jurisdiction to meet this challenge, get its legislative framework right and then take advantage of opportunities this will present.”

He said the next phase for Bermuda will be an assessment of the island’s legislation designed to deal with the new paradigm. “This remains a developing topic,” Mr Frith said.

For existing entities, formed or incorporated before this year, the requirements will be applicable from July 1, just over two weeks away.

Mr Frith told conference attendees that companies will need to consider criteria such as where board members are based, what a company outsources and where and to whom, its physical footprint, and its expenditures in a domicile.

Companies registered in Bermuda, Mr Frith said, will be required to submit an economic substance declaration form annually, which will be assessed by the Registrar of Companies. He said the criteria and assessment are subjective.

“Every entity will have different facts and paint a different picture,” he said. “The key will be ensuring enough is on the right side of the balance. There is no bright line test for this and my personal view is that is a good thing since it would have always been too high or too low for companies. Therefore this will remain a subjective assessment.”

Mr Frith, who said the Registrar of Companies will have a “monumental task” on its hands, compared the EU legislation to the Code of Conduct introduced in Bermuda nine years ago. He said service providers rallied around to provide clarity and helped the market adjust.

He added: “I recall the anxiety then but Bermuda is well positioned to offer the guidance needed and demonstrate its strength. This should be a positive long term.”