Bahamas Economic Substance: A Look At Requirements & Reporting Guidance

In this article, we will guide in-scope Bahamas companies on how to navigate and maintain compliance with these economic substance requirements. Let’s explore the details with BBCIncorp!

The overview of Bahamas Economic Substance

For many reasons, the Bahamas “tax haven” has become one of the most-searched terms by entrepreneurs around the world.

In fact, the country was blacklisted by the European Union as a non-cooperative jurisdiction for tax purposes in 2019. However, the EU removed the Bahamas from the list in 2020 by fully complying with EU tax standards.

In reaction to the EU and OECD approaches in curbing harmful tax practices caused by many “profit shifting through offshore tax structure” jurisdictions, the Bahamas introduced The Commercial Entities (Substance Requirements) Act, 2018 (CESRA). After CESRA comes the Guidelines, which were then released in February 2019, in the Gazette.

This is one of the stand-out efforts of the Bahamas government to enhance their commitment towards the EU’s policies regarding substance matters. Entities that engage in business activities within the Bahamas must adhere to the regulations set out in the Act.

The Bahamas CESRA walks through the applicability of the Bahamas economic substance, reporting requirements for commercial entities, and possible penalties for non-compliance entities.

In what follows, we will delve into how to apply, and how to comply with the Bahamas economic substance rules.

The scope of Bahamas Economic Substance

The Bahamas Economic Substance Act applies to commercial entities that carry on one or more relevant activities. Such “included entities” are required to satisfy certain substance requirements in the Bahamas.

According to the Bahamas CESRA, commercial entities are companies incorporated, registered, or continued under the following legislation:

• The Company Act & includes a foreign entity registered under Part VI thereof
• International Business Company Act
• Partnership Act
• Partnership Limited Liability Act
• Exempt Limited Partnership Act

The relevant activities include nine categories of business activities as below:

• Banking Business
• Insurance Business
• Fund Management Business
• Finance and Leasing
• Headquarters Business
• Shipping Business
• Distribution and Service Center Business
• Intellectual Property Business
• Holding Business

An Intellectual Property Business entity in the Bahamas is typically classified into “low-risk” and “high-risk”.

This classification leads to a bit different and more complicated ES requirements that would be applied to in-scope IP businesses in the Bahamas, compared to other general relevant activities.

An Intellectual Property business is deemed “high-risk” if its property meets any of the following conditions:

• The property is acquired from a related party; or
• The property is not obtained through research and development activities within the Bahamas; or
• The property is licensed or sold to a related party; or
• The property is monetized through activities performed by a related party outside of the Bahamas

The Bahamas Economic Substance general requirements

In the Bahamas, there are three general Economic Substance requirements:

• Board management and control requirement;
• Adequate requirement, and
• Core income-generating activities (CIGAs) requirements.

For holding companies and IP businesses, different ES requirements are applied.

Requirement 1: Board management and control

To meet this requirement, the entity must demonstrate the following:

• Ensure an adequate number of board meetings are held in the Bahamas;
• Record strategic decisions made during these board meetings in the meeting minutes;
• Ensure a minimum number of board members are physically present in the Bahamas during meetings;
• Store all records and meeting minutes in the Bahamas;
• Maintain a board of directors with the required expertise and knowledge for their responsibilities.

Requirement 2: Adequate level

To fulfill this requirement, the entity must:

• Have an adequate number of full-time qualified employees engaged in the relevant activities;
• Have an adequate amount of operating expenditure concerning the business in the Bahamas;
• Have adequate physical offices in the Bahamas.

Requirement 3: CIGAs

Core income-generating activities (CIGAs) are essential activities that entities must perform to show their substantial economic presence in the Bahamas. The required CIGAs vary depending on the industry as follows:

Banking

• Raising funds by managing risk, including credit, currency, or interest risk;
• Taking hedging positions;
• Providing loans, credit, or other financial services to customers; or
• Managing regulatory capital and preparing regulatory reports and returns.

Insurance

• Predicting or calculating risk;
• Insuring or re-insuring against risk; or providing clients services.

Fund Management

• Taking decisions on the holding and selling of investments;
• Calculating risk and reserves; or
• Taking decisions on currency or interest fluctuations and hedging positions.
• Preparing relevant regulatory or other reports for government authorities and investors

Financing and leasing

• Agreeing on funding terms;
• Identifying and acquiring assets to be leased (in the case of leasing);
• Setting the terms and duration of any financing or leasing;
• Monitoring and revising any agreements; or
• Managing any risks.

Distribution and service center

• Transporting and storing goods;
• Managing stocks; taking orders; or
• Providing consulting or other administrative services.

Shipping

• Managing crew (including hiring, paying, and overseeing crew members);
• Overhauling and maintaining ships;
• Overseeing and tracking deliveries;
• Determining what goods to deliver and when to deliver them, and organizing and overseeing voyages;

Headquarters

• Taking relevant management decisions;
• Incurring expenditures on behalf of group entities; and
• Coordinating group activities.

In addition, an entity can outsource core income-generating activities provided that the outsourcing provider is located within the Bahamas. An entity has to demonstrate the ability to supervise and control the provider.

One outsourcing provider can only be counted one time if outsourcing services are provided to more than one entity. Entities also need to file a report with the authorities in case of using outsourced activities.

For holding companies

A pure holding company is a company that only holds equity and earns income from dividends and capital gains.

Pure holding companies in the Bahamas would be subject to reduced economic substance requirements as follows:

• Comply with all laws and regulations in the Bahamas.
• Maintain sufficient human resources and premises within the Bahamas for managing equity participation.

For IP businesses

A “high-risk” IP business must meet the following enhanced ES requirements:

• Fulfilling the general requirements mentioned above; and
• Demonstrating the following activities conducted within the Bahamas:
  • The strategic decisions and management of principal risks.
  • The underlying trading activities
  • A high degree of control over the development, exploitation, maintenance, enhancement, and protection of the intellectual property asset.

Reporting deadline for Bahamas Economic Substance

Following CESRA, applicable entities are required to annually prepare and submit documents to the Competent Authority.

The annual report must be filed within nine months after the fiscal year end. Entities can have report submissions via an electronic portal.

Prescribed forms for certain commercial entities subject to the Bahamas ES include:

• Form A: For Outsourcing services provider.
• Form B: For included entities and regulated entities.
• Form C: For a holding company
• Form D: For non-included entities.

The offenses for non-compliance entities

The enterprises are subject to certain penalties if they fail to meet the requirements of economic substance and reporting obligations. The offense will cost one hundred and fifty thousand dollars for the first time. The amount must be paid in thirty days.

In the next time penalty, the entity is forced to pay one thousand dollars for every day that the offense has continued. Summary conviction of an entity that is non-compliance with ES requirements will carry a penalty of five or ten thousand dollars or be sent to jail in term of six months or both.

Key takeaway

Below are a few important highlights you should understand regarding the Bahamas Economic System:

• Commercial entities in the Bahamas that carry out the relevant activities have to comply with the Bahamas Economic Substance requirements.
• High-risk IP companies and holding companies shall be subject to comply with different ES requirements, compared to the general businesses.
• The non-compliance entities are subject to penalties as per the law.

Are you thinking of establishing a Bahamas business for its various benefits and opportunities? Don’t hesitate to discuss further with our team or send an email to BBCIncorp via service@bbcincorp.com. We look forward to working with you!

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