THIS ARTICLE HAS BEEN UPDATED. [UPDATE Bahamas Legislation, EU Economic Substance Requirements]
Download PDF version of this update here, New Legislation Update: Economic Substance Requirements
In 2017, the European Union Code of Conduct Group extended its work on tax matters from its Member States to assessing the tax regimes of a number of other jurisdictions. All of the leading global financial centres committed to eliminating certain domestic regimes and implementing other global standards by the end of 2018, and The Bahamas made commitments to address the following by way of legislation:
- Removing ring fencing – where advantages are ring fenced from the domestic market so that they do not affect the national tax base.
- Requiring substantial economic presence for entities involved in certain business activities to ensure that tax advantages are aligned with real economic activity.
- Implementing the Base Erosion and Profit Shifting (BEPs) minimum 5 standards established by the Organization for Economic Cooperation and Development (OECD) /G20.
A high-level summary of the new legislation follows (Download the PDF version of this update here, New Legislation Update: Economic Substance Requirements):
1. The Register of Beneficial Ownership Act, 2018 (“ROBO”)
Commencement Date: 20th December 2018
Who does it apply to?
The ROBO applies to legal entities incorporated, registered, continued or otherwise established in accordance with the Companies Act or the International Business Companies Act.
What are the main obligations?
An entity to which ROBO applies must, within 15 days of identifying any person as a beneficial owner, inform the Registered Agent or the Registrar General of any person who is identified as a beneficial owner or a registrable legal entity.
It should be noted that there are also entities which do not have to identify their beneficial owners. They are “exempt persons,” defined as an entity meeting one or more of the following criteria:
a. Listed on a regulated securities exchange.
b. A licensee (licensee or registrant of the Central Bank of The Bahamas, Insurance Commission, Securities Commission).
c. A wholly owned subsidiary of a licensee.
d. Any other legal entity that the Minister exempts by regulations.
When do I have to comply?
The time period for compliance is 1 year the date from the commencement of ROBO for entities incorporated prior to commencement. The time period for compliance is 1 year from the commencement date for existing entities. Newly incorporated entities must comply immediately. The information is to be maintained in a secure database which will be accessible by designated persons, who are persons designated by the Competent Authority. The Designated Person will be able to search the secure system at the request of regulatory authorities, such as the Office of the Attorney General, the Financial Intelligence Unit, the Central Bank of The Bahamas, the Compliance Commission, the Securities Commission and the Insurance Commission.
Download the PDF version of this update here, New Legislation Update: Economic Substance Requirements
THIS ARTICLE HAS BEEN UPDATED. [UPDATE Bahamas Legislation, EU Economic Substance Requirements]
2. Commercial Entities (Substance Requirements) Act, 2018 (“CESA”)
Commencement Date: 31st December 2018
Who does it apply to?
The CESA applies to companies incorporated under the International Business Companies Act (IBCs) and Companies Act (domestic companies) which are engaged in relevant activities in The Bahamas (an “Included Entity”). A relevant activity is defined as follows:
a. Banking business.
b. Insurance business.
c. Fund management business.
d. Financing and leasing business.
e. Headquarters business.
f. Distribution and service centres business.
g. Shipping business.
h. Commercial use of intellectual property.
i. Where a holding company engages, or where one or more of its subsidiaries is engaged in one of the activities listed under paragraphs a- h.
An entity which is an IBC or a domestic company which does not engage in relevant activities is considered a passive holding entity. CESA also applies in a limited manner to passive holding entities.
What are the main obligations?
An “Included Entity” and will now have to demonstrate economic substance on a two pronged test:-
a. That its core income generating activities (“CIGA”) take place in The Bahamas (including if outsourced in The Bahamas).
b. Management and control is in The Bahamas which is fulfilled by demonstrating all of the following:
i. An adequate number of board meetings in The Bahamas given the level of decision making required.
ii. That a quorum of the Board of Directors is physically present in The Bahamas during the meetings.
iii. That strategic decisions made at such meetings are recorded in minutes.
iv. That the books and records of minutes are kept in The Bahamas.
v. That the Board of Directors has the necessary knowledge and expertise to discharge its duties.
Passive holding entities are not required to demonstrate the main economic substance requirements noted above; instead, they are subject to a reduced substance requirement – namely, that the passive holding entity’s strategic decisions must be made in The Bahamas by persons with the necessary knowledge and expertise to make such decisions.
When do I have to comply?
The time period for compliance with CESA is 6 months from the date of commencement of CESA for entities incorporated prior to commencement. Newly incorporated entities must comply immediately.
There is a separate annual reporting requirement with which all entities must comply.
The timeline for reporting to the Minister of Finance, (the “Competent Authority”) is within 9 months of the previous financial year end following commencement of CESA. The Competent Authority may conduct audits and is empowered to report on the audit findings of any included entity and must report on any included entity that engages in high risk Intellectual Property activities, and fails to satisfy substance.
THIS ARTICLE HAS BEEN UPDATED. [UPDATE Bahamas Legislation, EU Economic Substance Requirements]
Download the PDF version of this update here, New Legislation Update: Economic Substance Requirements
3. Removal of Preferential Exemptions Act, 2018 (“RPEA”)
Commencement Date: 31st December, 2018
Who does it apply to?
The RPEA addresses the removal of ring fencing provisions and applies to companies or entities the operations of which are, or are intended to be, exclusively carried on outside of The Bahamas, and which are entitled to preferential exemptions and such exemptions are not afforded to a company/entity the operation of which is carried out in The Bahamas or the company or entity is not authorized to operate in The Bahamas.
What are the main obligations?
International Business Companies, Executive Entities, Exempted Limited Partnerships and Investment Condominiums on the Bahamas Company Register prior to the commencement of the RPEA and which were deemed non-resident for exchange control purposes and thus previously enjoyed an exemption from all taxes from the date of incorporation/registration for a period of 20 years, will now lose such exemption/s effective 3 years from the date of commencement of the Act. Newly incorporated entities will have no express statutory exemption from taxation in The Bahamas.
The Government has issued a clarifying circular which indicates that certain entities (likely operating in the domestic commercial sphere) will be required to register for a business licence and pay business licence tax at a rate of between 0% and 2.5%. All entities which are regulated financial institutions will be exempt from business license tax, but they will pay a flat registration fee which will be set on a sliding scale between B$2,250.00 and B$250,000 per annum.
THIS ARTICLE HAS BEEN UPDATED. [UPDATE Bahamas Legislation, EU Economic Substance Requirements]
Legislative Guidance Notes to the above Acts have not yet been issued by the Government and the above summary does not reflect modifications or interpretative assistance which we anticipate will be contained in the Notes. The above summary does not constitute legal advice and is general and non-exhaustive in nature. It may not cover all material aspects of the legislation which could impact you or your clients. Please contact Graham Thompson if you have any questions on the legislation or require specific advice.