On 31 December 2018, the Bahamas enacted the Commercial Entities (Substance Requirements) Act, 2018 (Act) which is introduced in response to the European Union and the OECD BEPS Action 5 initiatives to prevent harmful tax practices and profit shifting. The Act requires commercial entities incorporated in the Bahamas to comply with the economic substance requirements effective from 1 January 2019. Commercial entities include companies and partnerships incorporated or formed under the Companies Act, International Business Companies Act, Partnership Act, Partnership Limited Liability Act, and Exempted Limited Partnership Act.
Existing companies and limited partnerships formed prior to 31 December 2018 were required to comply with the substance requirements within six months from 1 January 2019 (i.e., by 30 June 2019), and new companies are required to comply immediately.
The economic substance requirements depend on whether the commercial entity is an 'included entity' or a 'non-included entity.'
Economic substance requirements are imposed on included entities that are engaged in one or more of the following relevant activities:
- Head office activities;
- Distribution and other service activities;
- Financing activities and leasing activities;
- Asset management activities;
- Banking activities;
- Insurance activities;
- Shipping activities;
- Intellectual property activities; and
- Holding company or one or more of its subsidiary companies engaged in one of the activities listed above.
Included entities are required to demonstrate a substantial economic presence in the Bahamas by fulfilling the following two-pronged test:
- Entities are required to carry on core income-generating activities (CIGA) in the Bahamas which can be satisfied by having, within the Bahamas, adequate:
- amount of annual operating expenditure;
- level of qualified employees;
- level of physical offices; and
- levels of board management and control.
- Entities are directed and managed in the Bahamas. In order to satisfy this test, the entities need to ensure that:
- adequate number of meetings of the board of directors are conducted in the Bahamas, and quorum is present for the meetings;
- strategic decisions made at the meetings may be recorded in the minutes;
- records and minutes are kept in the Bahamas; and
- board of directors as a whole has the knowledge and expertise to discharge its duties.
Included entities are prohibited from outsourcing any of their CIGA to an entity or person outside the Bahamas but may outsource within the Bahamas pursuant to a demonstration of adequate supervision of the outsourced activity.
Included entities undertaking intellectual property activities are required to demonstrate similar substance requirements. However, substance requirements are reduced for pure equity holding companies which primarily hold equity participation, and earn only dividends, capital gains, or incidental income, and are required to satisfy the following conditions:
- Compliance with all applicable laws and regulations in the Bahamas; and
- Having adequate human resources and premises for holding and managing equity participation in other entities.
Non-included entities are not required to satisfy the economic substance requirements but are required to register and submit annual reports. Both included and non-included entities are required to prepare and submit the report within 9 months from the end of the fiscal year.
Failure to comply with the economic substance requirements attracts an administrative penalty of up to USD 150,000 with an additional penalty of USD 300,000.
Entities failing to comply with the requirements may also be removed from the Companies register.
In response to the COVID-19 pandemic, the Bahamas suspended the late penalty until 31 January 2021 for entities required to meet the economic substance requirements provided they meet their reporting obligations by the end of the month.