Everything you need to know about the Commercial Entities (Substance Requirements) Act, 2018 (“the Act”)
LionPress October 2020 Issue
When did the Act come into force and what does it seek to do?
The Act came into force on 31 December 2018.
As per the Act, entities which claim to be tax resident in The Bahamas are required to have actual offices, an adequate number of full-time employees, adequate amounts of annual expenditure and an adequate level of control in The Bahamas.
Who does the Act applies to?
The Act applies to Bahamian entities incorporated, registered or continued under the Companies Act, the International Business Companies Act, the Partnership Act, the Partnership Limited Liability Act and the Exempted Limited Partnership Act of The Bahamas.
The Act can be divided into two parts, requirements applicable to an “included entity” and those applicable to a “non-included entity”.
What is an “included entity”?
An “included entity” is an entity which is not (a) beneficially owned 100%, directly or indirectly, by one or more natural persons who are (i) ordinarily resident and domiciled in The Bahamas or (ii) have been issued a certificate of annual or permanent residence and who physically resides in The Bahamas for a cumulative period of at least 3 months in every calendar year or (b) tax resident abroad, but either itself or if a holding company, where one or more of its subsidiaries, is engaged in a “relevant activity”.
What is a “relevant activity”?
A “relevant activity” is any of the following business activities: banking, fund management, financing and leasing, headquarters, distribution or service centers, shipping and commercial use of Intellectual Property.
How does the Act affect an “included entity”?
An “included entity” must conduct Core Income Generating Activities in The Bahamas and have substantial economic presence in The Bahamas.
What is meant by Core Income Generating Activities?
Core Income Generating Activities means having adequate amounts of annual operating expenditure, adequate levels of qualified full-time employees, adequate physical offices and adequate levels of board management and control within The Bahamas.
What is meant by substance requirements or substantial economic presence?
This means having an adequate number of board meetings in The Bahamas, ensuring that strategic decisions are made at such meetings, ensuring that meeting minutes are kept in The Bahamas and that the board has the necessary knowledge and experience to discharge its duties.
Can Board Meetings be held via teleconference?
In the case of an “included entity”, the Act requires that an adequate number of meetings be held in The Bahamas and that the quorum be physically in The Bahamas. Once the quorum is physically in The Bahamas, the remaining board members may attend the meeting via teleconference.
How is outsourcing affected?
If any of the Core Income Generating Activities or part thereof is outsourced, it must be outsourced in The Bahamas and the “included entity” must be able to monitor and control the carrying out of the outsourced activity by the service provider. There is no limit on the services that can be outsourced.
What else is required of an “included entity”?
Entities in existence as at the date the Act came into force which met the definition of an “included entity” and which were not already in compliance, were given a period of up to six (6) months from the enactment of the Act (i.e. until 30 June 2019) to meet the substance requirements under the Act.
As regards new entities, if they are an “included entity”, they are to ensure that they meet the substance requirements of the Act before they commence their relevant business activity.
With respect to reporting under the Act, reporting by an “included entity” is to be done annually within 9 months of the fiscal year end of the entity. The “included entity” is required to complete Form B. Form B requires the entity to report information such as the nature of the business, details of the controlling persons (directors and registered shareholders), to include the jurisdiction of tax residence of the registered shareholders as well as details on the amount and type of gross income of the entity.
If any of its activities are outsourced, the outsourcing service provider is also required to complete and file Form A annually which form requires the service provider to report information such as the description and nature of the outsourced activities and the number of clients by service.
As regards pure equity holding companies, they are to complete and file Form C annually which requires the entity to certify that it is a holding entity for the purposes of the Act.
What is a “non-included entity”?
A “non-included entity” is one which is not an “included entity” (that is, not engaging in a “relevant activity”) but is a company incorporated, registered or continued under the Companies Act, the International Business Companies Act, the Partnership Act, the Partnership Limited Liability Act and the Exempted Limited Partnership Act of The Bahamas.
How does the Act affect a “non-included entity”?
A “non-included entity” is not required to meet substance requirements under the Act.
However, all “non-included entities” are required to report under the Act. They are required to complete and file Form D annually within 9 months of the entity’s fiscal year end. Form D requires the entity to disclose information such as description and nature of the business, jurisdiction of tax residence, details of the controlling persons (directors and registered shareholders) to include the jurisdiction of tax residence of the registered shareholders. If an entity is claiming tax residence outside of The Bahamas, it must include as part of its filing, evidence of its registration and compliance with the foreign fiscal authority.
Which entities have reporting requirements and to whom?
All entities to which the Act applies (that is, both “included entities” and “non-included entities”), have reporting requirements to the Competent Authority, which for the purposes of the Act, is the Minister of Finance.
Who is the information shared with?
The Competent Authority is permitted to share the information submitted pursuant to the Act with the jurisdiction of tax residence of the legal or beneficial owner of the entity, provided that such jurisdiction is a “reportable jurisdiction” under the Act.
Tax Identification Number or Entity Identification Number – which one applies?
Entities reporting under the Act, will be required to have either a Tax Identification Number (“TIN”) (which would be applicable in the case of entities reporting for Value Added Tax Purposes) or an Entity Identification Number (“EIN”) (which would be applicable to all others).
How can EBT assist you?
EBT is able to assist you as follows:
- For those entities who already know their status, that is, whether they are an “included entity” or a “non-included entity” and are in compliance with the Act, EBT is able to assist with the completion of the relevant forms and filing of same with the Competent Authority as well as assisting with securing a TIN or EIN, as applicable.
- For entities who think they may fall within the category of an “included entity” and therefore required to meet substance requirements, we would be happy to assist you with meeting the requirements under the Act.