Key Takeaways
- Entities carrying on any of the nine relevant activities in Bermuda fall within the economic substance regime and must meet its requirements.
- Pure equity holding entities and certain non-resident entities face reduced or different obligations depending on their tax residence and structure.
- Meeting the substance test depends on core income-generating activities, adequate people, premises, and expenditure, plus being directed and managed in Bermuda.
- Failing the economic substance test carries consequences, so foreign owners should confirm their scope and arrange compliance accordingly.
Understanding Economic Substance Regulations in Bermuda
Economic Substance Regulations in Bermuda require certain companies, limited liability companies, and partnerships to show that the income they book in the jurisdiction reflects real activity carried on there. The regime rests on the Economic Substance Act 2018 and the Economic Substance Regulations 2018, supplemented by Guidance Notes issued by the Minister of Finance. It applies to any in-scope entity that carries on one or more of nine defined "relevant activities," whether or not the owners are resident in Bermuda.
This article explains who falls within the rules, what the substance test demands, how to file, and what happens when a business does not comply. It is most relevant to foreign owners and their advisers managing a Bermuda holding company, financing vehicle, or licensed financial business from abroad.
Why the Economic Substance Regime Exists: Legal Basis and Origins
The substance rules trace directly to international pressure on jurisdictions seen as facilitating profit without activity. Both the OECD Forum on Harmful Tax Practices and the EU's Code of Conduct Group on Business Taxation pressed offshore centres to require that mobile income be matched by real operations on the ground.
Bermuda responded with the Economic Substance Act 2018, operative from 31 December 2018 and effective from 1 January 2019. The aim, in plain terms, is to ensure the territory does not host structures that attract profits but reflect no genuine economic presence.
Administration of the regime has shifted. With effect from 31 March 2026, the Economic Substance Amendment Act 2026 transferred monitoring and enforcement from the Registrar of Companies to the Bermuda Corporate Income Tax Agency (the "CIT Agency"), aligning substance oversight with the body responsible for international tax compliance.
Despite the change of regulator, Declaration Forms are still submitted through the Registrar's e-Portal at www.registrarofcompanies.gov.bm until further notice.
The Registrar retains the right to enforce any notice, fine, or penalty it issued before the handover that has not yet been settled. For new matters, the CIT Agency is the competent authority.
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The Nine Relevant Activities in Scope
The regime targets nine business sectors viewed as more likely to generate geographically mobile income. Carrying on any one of them, however small the revenue, brings an entity within the substance requirements.
The relevant activities are:
- Insurance
- Banking
- Fund management
- Financing and leasing
- Headquarters
- Shipping
- Intellectual property (IP)
- Distribution and service centre
- Holding entity
There is no de minimis threshold. Any gross revenue from a relevant activity, no matter the amount, triggers the obligation, and even an entity with no revenue must still file a "nil" Declaration Form for that period.
Intellectual property carries a tougher test. An entity conducting "high risk intellectual property business" is presumed not to meet the substance requirements unless it can show it actively controls the development, exploitation, maintenance, protection, and enhancement of the asset through an adequate number of full-time staff who live and work in Bermuda.
The specific activities that count for each sector, known as core income-generating activities, are set out in the Schedule to the Regulations. An entity need not perform a particular activity that does not apply to its business, but where one does apply and is being performed, it must be performed in Bermuda.
Which Entities Are In Scope and Which Are Out of Scope
The rules apply to Bermuda "registered entities." That covers companies under the Companies Act 1981 (including permit companies and overseas companies), limited liability companies under the Limited Liability Company Act 2016, and partnerships that have elected separate legal personality under the Partnership Act 1902.
Bermuda-registered branches of overseas companies, LLCs, and partnerships are caught as well. Tax residence in the territory is not a precondition for being in scope, so a foreign-owned vehicle is captured purely by reason of its registration.
An entity that carries on a relevant activity and earns gross revenue from it must satisfy the substance requirements. A registered entity that conducts no relevant activity files only an annual declaration confirming that fact, and an entity that is not a "relevant entity" at all carries no obligations under the regime.
Investment funds and collective investment vehicles sit outside the holding-entity definition because they are generally treated as carrying on commercial activity. Provided they do not also conduct another relevant activity, they fall out of scope.
The legislation currently reaches only partnerships that have elected separate legal personality, though it is anticipated the rules will be extended to all partnerships.
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Pure Equity Holding Entities and Reduced Substance Requirements
A pure equity holding entity exists for one purpose: to acquire and hold shares or equitable interests in other entities. Its primary function is holding participations, it performs no commercial activity, and it holds the majority of voting rights or the right to appoint or remove the board of another entity.
Where holding is the only relevant activity, the full substance test does not apply. Instead the vehicle meets a lighter standard known as the minimum economic substance requirements.
Those minimum requirements are three:
- Comply with the corporate governance rules of the governing legislation, such as the Companies Act 1981.
- Have adequate people in Bermuda to hold and manage equity participations.
- Have adequate premises in Bermuda.
The Guidance Notes accept that a registered office in Bermuda, combined with management of participations by local directors or through Bermuda-based corporate service providers, may satisfy the people and premises tests. A Declaration Form is still required for any period in which the holding business is carried on.
The Registrar has flagged entities that filed as pure equity holding companies while also running intra-group financing, which constitutes the "financing and leasing" activity. The mistake is usually spotted when financial statements show interest income.
Local Entities and the Minimum Requirements
A separate carve-out applies to genuinely domestic businesses. A "local entity" is a local company or LLC owned and controlled by Bermudians, trading only within the territory, and not part of a multinational group as defined in the Act.
Such an entity remains in scope but is not required to demonstrate compliance with the full substance requirements. It satisfies its obligations by meeting the minimum standard, namely compliance with the corporate governance rules of the relevant company, LLC, or partnership legislation.
A qualifying local entity is not required to submit an economic substance declaration. This carve-out has limited relevance to foreign owners, since the ownership and control conditions, including the requirement to be at least 60% Bermudian-owned, will rarely be met by an externally held structure.
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Non-Resident Entities and Tax Residence Outside Bermuda
A registered entity that can show it is tax resident outside Bermuda falls out of scope and is treated as a "non-resident entity." This route can matter to a foreign owner whose vehicle is genuinely taxed elsewhere.
The relief is conditional. The jurisdiction of tax residence must not appear on Annex 1 of the EU list of non-cooperative jurisdictions, and it must not be a place that either has no corporate tax regime or fails to impose equivalent substance obligations.
On that second limb, residence in jurisdictions such as Anguilla, the Bahamas, Bahrain, Barbados, the British Virgin Islands, the Cayman Islands, the Turks and Caicos Islands, or the UAE may not qualify. The principle also reaches tax-transparent entities, which can be treated as non-resident where all relevant-activity income is attributable to and taxable on their members or partners.
A filing duty survives the relief. An entity claiming non-resident status must still submit a Declaration Form and file evidence or confirmation of its foreign tax residence with the competent authority.
| Entity status | Substance test | Declaration Form |
|---|---|---|
| Relevant entity, earning revenue | Full test applies | Required |
| Relevant entity, no revenue | Test not required | "Nil" form required |
| Pure equity holding entity | Minimum requirements | Required |
| Qualifying local entity | Minimum requirements | Not required |
| Non-resident entity | Out of scope | Required, with tax-residence evidence |
The Economic Substance Test: Core Income-Generating Activities, People, Premises, and Expenditure
Every in-scope entity must satisfy five cumulative criteria for each relevant activity it carries on. The standard is proportionate, judged against the nature, scale, and complexity of the business rather than fixed numerical floors.
The criteria are:
- Core income-generating activities in Bermuda. The activities of central importance to earning the relevant income must be performed in the territory. Outsourced CIGA must also be carried out there, while back-office functions such as IT, payroll, or legal services may be sourced abroad.
- Adequate employees in Bermuda. Staff must be sufficient in number and suitably qualified. Headcount is measured on a full-time-equivalent basis, with a full-time job deemed to be 1,540 hours a year; hours of contractors and directors performing CIGA may count, but no hours may be double-counted.
- Adequate physical premises in Bermuda. Premises may be owned, leased, or accessed through a service provider that itself occupies adequate space. Space may be shared, provided each entity can show its share is sufficient and no premises are double-counted.
- Adequate expenditure in Bermuda. Spending on the relevant activity must be sufficient relative to the business, typically covering employment costs and fees for goods and services paid locally.
- Managed and directed in Bermuda, addressed in the next section.
What qualifies as "adequate" turns on the facts. A vehicle relying on thin staffing, minimal premises, or low expenditure relative to its activity will be assessed as higher risk.
Records matter throughout. An entity should keep evidence of hours spent by each person on each relevant activity, along with details of qualifications and experience, plus records of the resources used and expenditure incurred.
Detailed minutes of key meetings must be kept readily available for inspection in Bermuda, in either electronic or paper form. No fixed statutory retention period for substance records was identified, so it is sensible to take local advice on how long to keep them under the relevant entity legislation.
The Directed and Managed Requirement in Bermuda
The fifth criterion asks where the entity is actually run. Its key decisions and strategic oversight must take place within Bermuda.
There are no prescriptive rules on the number or frequency of meetings. In its assessment the competent authority looks at whether an adequate number of meetings at which strategic decisions are made are held in the territory, and whether enough suitably qualified senior people are present there to oversee or execute the activity.
In practice this points to holding board, manager, or partnership meetings in Bermuda within each financial period, with detailed minutes recording the strategic, risk, and operational decisions taken. Records may be stored and accessed remotely, and the data centre itself need not sit in Bermuda.
The authority can weigh ordinary commercial practice for a given activity. Where a non-tax reason requires part of an activity to be performed cross-border, such as a ship's master managing crew at sea or a loss adjuster working where the insured property lies, that is taken into account.
How to Meet the Substance Requirements in Practice
The filing obligation is annual. Every Bermuda-based entity carrying on a relevant activity, and every entity claiming non-resident status, must lodge an Economic Substance Declaration Form with the CIT Agency.
The form is due within six months of the entity's financial year-end. An entity with a 31 December 2025 year-end must therefore file by 30 June 2026, with submission made through the Registrar's e-Portal until further notice.
A Declaration captures the substance picture in detail. It includes gross revenue and expenses per relevant activity, the nature and frequency of meetings, the residency of employees and directors, the location of premises, any outsourced CIGA, and details of ownership and beneficial ownership.
Several practical measures help an entity satisfy the test:
- Appoint local resident directors and hold regular board meetings in the territory.
- Engage Bermuda accountants or corporate service providers to manage elements of the relevant activity.
- Keep key personnel attending Bermuda meetings to take formal decisions on the activity.
- Outsource CIGA only to providers that perform the work in Bermuda, retaining suitably qualified people to oversee them.
CIGA can never be outsourced abroad. Where any part of the activity is outsourced, the entity must keep responsibility for oversight and assessment of that work.
Entities licensed under the Banks and Deposit Companies Act 1999 or the Insurance Act 1978 are generally regarded as operating with adequate substance, and their compliance with those statutes is taken into account. Even so, a Declaration Form remains mandatory.
A separate Annual Declaration, filed with the Registrar by 31 January each year, requires the entity to state which relevant activity it carried on. The authority may cross-check that filing against the substance Declaration to test for consistency.
Note that no specific government fee for the Declaration Form was confirmed in the available sources. Check the e-Portal or the CIT Agency directly before filing.
Consequences of Failing the Economic Substance Test
Enforcement runs through a graduated civil penalty process. Civil penalties of up to BD$250,000 can be imposed across three stages, each tied to a notice to comply.
| Stage | Minimum | Maximum |
|---|---|---|
| First notice to comply | BD/US$7,500 | BD/US$50,000 |
| Second notice to comply | BD$25,000 | BD$100,000 |
| Third notice to comply | BD$50,000 | BD$250,000 |
A penalty decision can be appealed within 28 days. If the third notice is ignored, the authority may apply to the Bermuda courts under Section 16A of the Registrar of Companies (Compliance Measures) Act 2017 for an order regulating the entity's conduct, restricting its business, or striking it off the register.
False declarations carry a separate criminal sanction. Knowingly providing false information to the competent authority is an offence punishable on summary conviction by a fine of up to BD$10,000, up to two years' imprisonment, or both.
Enforcement has been active since early 2022, with information requests and penalties issued through the statutory notice process. The authority also "polices the perimeter," meaning it can request information and inspect records of entities that believe themselves out of scope, and it may attend a registered office to audit records.
Information gathered through the regime does not stay put. Under Bermuda's tax information exchange framework, details of non-compliant entities may be shared with foreign tax authorities.
Conclusion
The substance regime reaches further than many owners expect: there is no minimum revenue threshold, registration alone can pull a vehicle in, and even dormant or non-resident entities owe a filing. For a foreign owner, the practical risk is rarely the substance test itself but the missed or mis-categorised Declaration, particularly where intra-group lending quietly converts a holding company into a financing entity.
The next step is to confirm honestly which, if any, of the nine activities your Bermuda entity carries on, and to map that against its filing deadline before the six-month clock runs down.
How Expanship Can Help Your Business in Bermuda
Expanship supports foreign owners in classifying their Bermuda entity correctly, assessing which relevant activities apply, and preparing and filing the Economic Substance Declaration on time, alongside the wider compliance work a registered entity needs.
- Company formation and registration in Bermuda
- Registered agent and registered office services
- Ongoing compliance and annual filing management
- Accounting and bookkeeping support
- Economic-substance classification, declaration filing, and beneficial-ownership assistance
- Introductions to banking providers
To discuss your entity's substance position, speak with Expanship Bermuda.
Frequently Asked Questions
Yes. An entity carrying on a relevant activity must file a Declaration Form even with no gross revenue, though it submits a shorter "nil" form and is not required to satisfy the full substance test for that period.
The Declaration is due within six months of the entity's financial year-end. A company with a 31 December 2025 year-end must file by 30 June 2026, using the Registrar's e-Portal until further notice.
From 31 March 2026, the Bermuda Corporate Income Tax Agency took over monitoring and enforcement from the Registrar of Companies. The Registrar still enforces any notice or penalty it issued before that date and remains the route for submitting Declaration Forms for the time being.
A pure equity holding entity whose only relevant activity is holding shares is subject only to the minimum requirements: corporate governance compliance, plus adequate people and premises in Bermuda. It must still file a Declaration, and care is needed not to slip into the financing activity through intra-group lending.
It can be, if it shows tax residence in a qualifying jurisdiction outside Bermuda that is not on the EU non-cooperative list and imposes equivalent substance rules. Even then, a Declaration Form and evidence of foreign tax residence must still be filed.
Civil penalties escalate through three notices, from BD$7,500 up to a maximum of BD$250,000, with a 28-day appeal window. Persistent failure can lead to a court order restricting business or striking the entity off, and knowingly filing false information is a criminal offence carrying a fine of up to BD$10,000 or two years' imprisonment.
Legal Disclaimer
The information provided in this article is for general informational purposes only and does not constitute legal, tax, or professional advice. While we strive to ensure the accuracy and timeliness of the content, laws and regulations are subject to change, and the application of laws can vary widely based on specific facts and circumstances.
Readers should not act upon this information without seeking professional counsel tailored to their individual situation. Expanship and its authors disclaim any liability for actions taken or not taken based on the content of this article.
For specific advice regarding your business setup, compliance requirements, or any legal matters, please consult with qualified legal and tax professionals in the relevant jurisdiction.
