Leeway given on economic substance rules
As the deadline for companies to make economic substance filings moves nearer, the ability of some to meet requirements, such as holding board meetings on the island or ensuring the appropriate number of employees are located in Bermuda, is likely to be impacted by travel disruption and other restrictions.
However, the “extraordinary circumstances” arising from the global response to Covid-19 has been acknowledged by the Registrar of Companies, which assesses compliance with the economic substance regulations.
The issue was raised during a webinar on economic substance regulations, presented by the Institute of Directors Bermuda branch, Carey Olsen Bermuda, and KPMG Bermuda.
The event looked at what companies must do to meet to comply with Bermuda's economic substance requirements, and in preparing for their first Economic Substance Declaration, the filings of which are due by the end of June.
Economic substance requirements have been driven by the Organisation for Economic Co-operation and Development and European Union, and affect all the so-called offshore “2.2 jurisdictions” — including Bermuda. Registered entities that are not tax resident elsewhere, must have demonstrable economic substance in their offshore jurisdiction. This includes being managed and directed there, to have core income-generating activities performed in the jurisdiction, have adequate full-time employees, adequate physical presence and adequate operating expenditure in relation to a relevant activity.
Companies will make an economic substance declaration annually, and in Bermuda that declaration will be monitored and enforced by the Registrar of Companies.
During the webinar on Tuesday, when asked if, due to the Covid-19 situation, company board members unable to fly to Bermuda for meetings would see their company penalised by the Registrar of Companies for holding an annual general meeting with directors phoning in from various countries, Michael Frith, senior counsel at Carey Olsen Bermuda, said: “Definitely not. The Registrar is not looking to penalise anyone, other than those that do not in good faith seek to comply with the requirements.”
He said the Registrar had issued a notice, indicating it was going to take into account all relevant circumstances, and he added: “Clearly quarantine and travel restrictions, all the things that are going on at the moment, are going to have a very significant impact on the ability to hold board meetings, or any other meetings, or indeed possibly having your employees located where you would like them to be located. All of that will be taken into account.”
He urged companies to keep records so that if they are asked at a later date why meetings did not take place in Bermuda they are able to show, for example, that travel restrictions prevented directors from attending.
This is reflected in a statement by the Registrar of Companies which, anticipating the likelihood of disruptions and difficulties that the pandemic would cause for companies trying to comply with the regulations, last month said: “As such, where meetings or other similar compliance measures are not possible due to necessary travel or quarantine restrictions, this may be taken into account. As with all information evidencing compliance, entities should keep careful records of all such circumstances.”
The webinar also featured Will McCallum, managing director, head of tax, at KPMG Bermuda, and Rochelle Simons, chairwoman of the IoD Bermuda Branch, as host.