On the 26th November, 2019 the Commercial Entities (Substance Requirements) Amendment No. 2 Act 2019 (the “CESA Bill”) was circulated for industry consultation. While the CESA Bill has not yet entered into force and may be subject to change, our update below provides an overview of the proposed legislative developments.
In response to the EU Code of Conduct Group’s assessment of the tax regimes of global financial centers, all global financial centres were asked to commit to eliminating certain regimes and implementing other global standards by way of legislation and The Bahamas likewise made commitments. One such commitment was to require that substantial economic presence is demonstrated for entities involved in certain business activities. The purpose of this requirement is to ensure that tax advantages (in this case The Bahamas’ no tax platform) are aligned with real economic activity within the jurisdiction. In 2018 the Commercial Entities (Substance Requirements) Act, 2018 (“CESA”) came into force.
CESA applies to certain commercial entities incorporated or registered in The Bahamas to the extent such commercial entity conducts a Relevant Activity in the Bahamas and is considered an Included Entity. An Included Entity is required to demonstrate economic substance on a two-pronged test: -
a. That its core income generating activities (CIGA) are conducted in The Bahamas (including if outsourced in The Bahamas) which presupposes adequate amounts of annual operating expenditure, levels of qualified full-time employees, physical offices and levels of board management and control within The Bahamas; and
b. Direction and management in The Bahamas which is fulfilled by demonstrating all of the following: an adequate number of board meetings in The Bahamas given the level of decision making required; that a quorum of the Board of Directors is physically present in The Bahamas during the meetings; that strategic decisions made at such meetings are recorded in minutes; that books and records of minutes are kept in The Bahamas; and that the Board of Directors has the necessary knowledge and expertise to discharge its duties.
In response to industry recommendations, the CESA Bill is intended to provide further clarification and guidance on the applicability of the legislation to Bahamas commercial entities.
The CESA Bill redefines the definitions of Relevant Activities further clarifying the commercial activities which are subject to economic substance in The Bahamas. Of particular note, the definition of financing and leasing business have been clarified to definitively exclude real estate leasing business, the definition of fund management by reference to the Investment Funds Act, 2019 and shipping business to include the operation of a ship anywhere in the world but excluding pleasure yacht ownership not used for commerce.
The definition of holding company has changed to include either a pure equity holding company or a passive holding entity but explicitly excludes a collective investment vehicle.
The definition of a pure equity holding company has been redefined as a legal entity whose primary function is to acquire and hold a controlling equity participation in other legal entities and which only earns dividends and capital gains or incidental income from that equity participation.
The CESA Bill has codified the requirement for all commercial entities to obtain a Tax Identification Number (“TIN”) from the Bahamas Department of Inland Revenue and the Forms A through D contained in First Schedule to the Act have been amended to include reference to TINs.
The Government of The Bahamas has opened the electronic reporting portal to the industry for review and testing. However, official reporting has not yet begun.
The above summary on the CESA Bill does not constitute legal advice. This summary is intended to be general and non-exhaustive in nature and may not cover all material aspects of the legislation which could impact you or your clients. Please contact us at Graham Thompson if you have any questions on the legislation or require specific advice.
About the Authors
Aliya Allen is a Partner in the law firm of Graham Thompson, and member of the firm’s Corporate and Financial Services Practice Group. She is a former CEO and Executive Director of the Bahamas Financial Services Board. In that position she provided industry leadership on a host of initiatives including FATCA, CRS, AML/CFT and the development of the Investment Condominium (ICON) legislation and travelled globally promoting the jurisdiction in Latin America, Asia and Europe. Aliya is recognised for her expertise in capital markets, investment funds and regulatory practice and has consistently played a leading role in the development and revision of industry defining legislation. Including her leadership of Graham Thompson’s consulting team to the Securities Commission on the Investment Funds Act, 2019. She has contributed to crafting and promoting policy initiatives on FinTech, Blockchain and digital assets.
Aliya specializes in banking, investment funds, securities, securitisation and capital markets, Technology, FinTech, Blockchain and digital assets. She has written for highly regarded publications co-writing a chapter in Chambers Law and Practice, 2019 on Investment Funds and has released a whitepaper, “The Bahamas’ place in a Crypto-Graphic World” which was cited in 2018 by the U.S. Law Library of Congress.