Reporting obligations in the Bahamas – Introduction
The CESRA was enacted in The Bahamas in response to certain pressures that were imposed by The Council of European Union to monitor business tax reporting globally.
In 1997 the Council adopted a resolution on a Code of Conduct for business taxation; the Report of the Council and the Representatives of the Governments of the Member States, meeting within the Council, provides details on the commitments made by member states and including The Bahamas (click here)
The CESRA sets out reporting requirements for entities that fall within a certain criterion. It also provides clarity on how companies can demonstrate their substance requirements.
The Act defines “Commercial Entities” as those entities that are incorporated, registered or continued under the Companies Act, Ch. 308, or an International Business Company incorporated under the International Business Companies Act, Ch. 309.
The Act excludes from this definition of Commercial Entities those entities that are resident owned; and that conduct core income generating activities in The Bahamas.
Nonetheless, all entities incorporated under the Companies Act, 1992, International Business Companies Act, 2000, Exempted Limited Partnership Act, Partnership Limited Liability Act and Partnership Act, must carry out a level of reporting to the Authority in a prescribed form within 9 months of its fiscal year end. Part II of this commentary provides links and details on filing for entities.
Note that the government of The Bahamas has issued a public Notice (click here) which indicates that filing deadline of substance requirements for companies incorporated pursuant to any of the above stated Acts, which have been in existence since 2019 is 31st December, 2020.
To aid in determining where your business entity may fall with respect to reporting requirements, Capital Law Associates takes a deep dive into the CESRA to shed some light on your obligations and penalties for breach of same.
Please always seek appropriate legal guidance when reviewing any of the articles put forward by us for your general information and insight, as matters may be very different for your unique circumstance.
Regulated entities are defined by the Act as those companies regulated in accordance with:
- Banks and Trusts Companies Regulations Act, Ch 316;
- The Securities Industry Act;
- The Insurance Act, Ch 347;
- The External Insurance Act, Ch 348;
- The Financial and Corporate Services Providers Act, Ch 369; and
- The Investment Funds Act, 2018
The Act defines “Non-Included Entities” as an entity incorporated or registered under the Companies Act, Ch. 308; or the International Business Companies Act, Ch. 309, which is not an Included Entity.
The Act further defines “Included Entities” as a commercial entity engaged in the following “relevant activities”:
- Banking business;
- Insurance business;
- Fund Management business;
- Financing and leasing business;
- Headquarters business;
- Distribution and service centres business;
- Shipping business;
- Commercial use of Intellectual Property;
- Holding company engaged, or where one or more of its subsidiaries is engaged in one of the activities listed above.
Another important definition is that of “core income generating activities” (CIGA). CIGA itself is not defined by the Act however, the Act advises that CIGA presupposes that the following ensues in The Bahamas by “included entities” –
There is adequate:
- amount of annual operating expenditure;
- levels of fulltime, qualified employees;
- physical offices;
- levels of board management and controls.
Furthermore, the Act states that where any of the above CIGA are outsourced there must be present in The Bahamas and capable of proper monitoring and control by the included entity, adequate:
- amounts of annual operating expenditure;
- levels of fulltime qualified employees; and
- physical office space.
Included entities are not permitted to outsource these activities outside of The Bahamas.
Third-party service providers that provide outsourcing to included entities are captured under the Act insofar that they are required to report on an annual basis to the Minister of Finance (MOF) nature of outsourcing services, number of qualified employees and qualification levels, number of clients by service.
Included entities demonstrate substance requirements when the following are present:
- an adequate number of meetings of the Board of Directors for the company are conducted in The Bahamas given the level of decision making required;
- there is a quorum of the Board physically present in The Bahamas;
- strategic decisions made at the meeting are recorded in the minutes of the said Board meetings;
- all included entity records are kept in The Bahamas; and
- the Board as a whole has the necessary knowledge and expertise to discharge their duties as Directors.
Passive Holding Entities:
The Act makes two distinctions under this section – it defines an “equity participation entity” and a “passive holding entity”.
Equity Participation Entities are defined as a company which only holds equity participations and earns only dividends and capital gains or incidental income; and
Passive Holding Entities are defined as an entity which does not by itself or does not by any of its subsidiaries conduct any relevant activity and includes a collective investment entity or equity participation entity.
Passive Holding Entities are not required to comply with the substance requirements, however, the strategic decisions of the passive holding entity must be made in The Bahamas by persons with the necessary expertise to make such a decision.
It must be noted however, that if the company conducts any business that are subject to substance requirements (i.e. relevant activity as defined above), the passive holding entity must comply with the substance requirements.
Intellectual Property Income Generating Included Entities (Ipigie):
Included entities whose business activities involves low risk Intellectual Property (IP) must satisfy the substance requirements above and must also demonstrate the following are carried out in The Bahamas:
- taking the strategic decisions and managing and bearing principle risks relating to the development and exploitation of the IP asset; or to the third-party acquisition and subsequent exploitation of the IP asset; or
- carrying on the underlying trading activity through which the IP asset are exploited and which lead to the generation of revenue from a third-party.
For those included entities whose business activities involves high-risk IP must also meet the substance requirements laid out above, as well as they must demonstrate the following are carried out in The Bahamas:
- taking strategic decisions and managing principle risks;
- Carrying on underlying trading activities within The Bahamas;
- A high degree of control over the development, exploitation, maintenance and enhancement, and protection of the IP asset.
To provide proof of the aforementioned the included entity must provide detailed business plan outlining certain information; employee information detailing certain information; verification that the decisions are being taken in The Bahamas.
In conclusion, the Authority to which reports are made has the right and ability to provide such reports to the reportable jurisdiction of the beneficial owner or to a relevant reportable jurisdiction the findings of any inspection or audit conducted or commissioned in respect of any report made by entities. Reportable jurisdiction of legal or beneficial owner of the entity is a jurisdiction whom he Bahamas has entered into an agreement for the purposes of forwarding reports made in accordance with the provision of the Act.
Onsite inspections may be undertaken by the Authority at the expense of the reporting entity.
Entities found to be in breach of the substance requirements may elect to pay its assessed taxation to the reportable jurisdiction and remain on the relevant register in The Bahamas; and must produce evidence of compliance with the tax requirements of the relevant reportable jurisdiction. Where the entity cannot produce evidence of compliance that entity may be struct off the applicable register of incorporation.
The entity in breach has a period of 90 days to comply with the substance requirements of the Act and satisfy the Authority of such compliance if after 90 days the status quo remains the Authority shall direct that a formal audit be carried out at the entity’s expense. Should an audit not be commenced within 60 days after directives are given, the entity shall be subject to an administrative penalty of $150,000.
If the audit reveals deficiencies within 30 days the Authority shall issues a notice of non-compliance to the entity stating the areas that must be addressed within 30 days. Failure to comply here will result in an administrative penalty of $350,000 and subject to strike off from the applicable register.
Committing an Offence:
An offence may be committed pursuant to the Act by an individual who fails to make the necessary reporting requirements, who obstructs the Authority in performing its functions under the Act, who alters, destroys, mutilates, defaces, hides or removes information in a way that causes the person or another person to contravene the Act in relation to the information; who authorizes, advises or counsels another person to do anything to contravene the Act by not preserving information, who provides inaccurate information when filing a report and knows its inaccurate or discovers the inaccuracy after providing the information to the Authority and fails to advise of same.
Where a person commits an offence the Authority may impose an administrative penalty of $150,000 to be paid within 30 days of such imposition where a person carries out any of the aforementioned offences. Where the offence is continuing an administrative penalty of $1000 for every day the offence continues.
It is noted that an individual who is required to pay an administrative penalty imposed under the Act shall not be subsequently or simultaneously charged with an offence under this Act in relation to the same facts. Further administrative penalty payable under this Act may be recovered by the Attorney General in a court as a civil debt.
An individual found to have committed an offence under the Act is liable on summary conviction to a fine of $10,000 or to imprisonment for a term of 6 months or both, subject to certain provisions.
Appeals may be brought in the Supreme Court and such appeals shall act as a stay of the enforcement of the administrative penalty.
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