The purpose of requiring economic substance is to ensure that companies have an economic purpose in the jurisdiction where they are incorporated.
The main purpose of these rules is to prevent companies from taking advantage of the tax benefits of the jurisdiction where they are incorporated even without maintaining a physical, administrative, and employment structure there.
Activities that require economic substance are determined by each jurisdiction, in line with OECD principles. However, for the most part, economic substance is not required for companies aimed at personal investment purposes (“private investment companies”).
Therefore, with the intention of lining up with international standards, The Bahamas has brought to the attention of the local Legislative Chamber a proposed amendment to the legislation to amend its economic substance regime.
Although the Bahamas already have an economic substance requirement on certain activities carried out by companies incorporated there, the OECD influenced The Bahamas to improve its regime throughout its standards.
Another reason behind this update was the inclusion of The Bahamas in the European Union (“EU”) blacklist of non-cooperative jurisdictions for tax purposes.
In addition, the EU’s intention with the blacklist is to stimulate a regime reform in the blacklisted jurisdictions to ensure greater tax transparency, fair taxation, as well as to prevent base erosion and profit shifting.
If the supposed amendments in the legislation occur, the entities that do not comply with the established criteria will have 28 days to adjust, correct the pending issues, or conduct an audit, as the case may be.
Furthermore, failure by the company to comply within the established deadline may result in an administrative fine of up to 300,000 dollars and, as a last resort, compulsory removal from the Business Register.
In order to make an effective regime change, the Bahamian government also intends to improve the Corporate Registry’s electronic portal. This will allow Bahamian domiciled entities to file their economic substance reports through the Department of Internal Revenue.
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Published on May 15, 2023