How legislative change has impacted The Bahamas investment funds

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In this feature Antoine Bastian pictured below left, MD, Genesis Fund Services discusses how The Bahamas has amended their investment fund rules and introduced commercial substance rules as a greater part of global fair play and global transparency amid changing international standards

Over the past three years, international financial centres, like the Bahamas amended their investment fund rules and introduced commercial substance rules as a greater part of global fair play and global transparency in response to international initiatives.

Europe's persistence to eradicate harmful taxes practices and prevent base erosion taking place in some  EU countries' international financial centres created an opportunity to provide clear and deliberate regulations to  mitigate against global harmful taxes practices and base erosion.

CESRA demonstrates The Bahamas’ seriousness to continuing as an important and viable global international financial centre," Antoine Bastian, MD, Genesis Funds

As a part of the continued commitment to a global tax transparency, the Bahamas revised and updated, the Investment Fund Act, 2019 (the IFA) and the Investment Fund Regulation, 2020 (the IFR) and further introduced the Commercial Entities (Substance Requirements) Act, 2018 (CESRA).

The legislative changes pertaining to IFA and CESRA were carved out of principles established by the OECD's Forum on Harmful Tax Practices and the EU's Code of Conduct.

While I can confidently say that the Bahamas has a long history of being a well-regulated jurisdiction, the updates of the IFA and IFR and the introduction CESRA based on those principles will ensure that as a jurisdiction, our product offerings  amplify the need to counter harmful tax practices.   

Prior to updating the IFA and IFR, there were no licensing or registration requirements of fund managers when performing management functions of Bahamian domiciled funds.

It was typical to incorporate a company to serve as investment manager of a fund and that company was ostensibly the entity that traded, introduced clients, collected fees, met clients, gave advice. The company did not need to have any sort of substance.

Yesteryear, there was simply not enough legislative focus on fund managers, but this was just how it was done.

Most of the vetting for ‘fit and proper' and suitability was left to the experience of service providers that used strong internal and industry standards to mitigate business risk; the IFA and IFR again added the legislative teeth to mitigate not only business risk but now regulator and jurisdictional risks.

The updated IFA, 2019 now requires an entity or a person to: 1) be licensed if they intend to manage a Bahamian standard fund (fund without sophisticated investors) or a fund in any other jurisdiction other than the EU, or 2) be registered, if the intention is to manage a Bahamian SMART fund or professional fund or similar funds offered to accredited investors in other jurisdictions other than the EU.

Fund managers that want to offer funds to the EU or manage EU funds must meet AIFM compliant requirements and are reportable quarterly to ESMA. 


Most funds established in The Bahamas have been SMART Funds (private label funds) and professional funds. The managers, whether domiciled in The Bahamas or in another jurisdiction, of both type funds will now, at a minimum, require registration.

The registration process is a formal application with the requirement to provide standard due diligence as we have become accustomed to over the past many years, e.g. passports, constitutive documents and certified due diligence on all directors and ultimate beneficial owners etc.

The IFA and IFR ensures not only from a tax perspective, offshore managers are now encapsulated in the global exchange of information through the Common Reporting Standards, but it also ensures that  fund managers interested in using The Bahamas have a real and tangible nexus to the jurisdiction.

The tenor of the IFA is to ensure that investors are protected from incompetency, anonymity and obscurity. The Bahamian fund manager is front and center of the structure and is not any longer a nebulous shell that can easily abscond from taxes or neglect regulations, or more importantly, abandon investors.

CESRA, the economic substance legislation, came in force in 2019 and is reportable to in 2020. This measure demonstrates The Bahamas' seriousness to continuing as an important and viable global international  financial center. Fund managers that are required to be licensed or to be registered must adhere to global substance requirement rules. While the CESRA focuses on several types of entities, for the purpose of this article, the focus relates only on fund managers operating or considering operating in The Bahamas.  

The determination as to what is considered substance is a matter of a few simple steps or question that should be asked with regard to fund management.

  1. Are you a legal entity (Included Entity) that is tax resident in the Bahamas and conducts commercial activity through a:
    1. Company's Act, including foreign entities registered under Part IV thereof
    2.  International Business Companies Act 
    3.  Partnership Act 
    4.  Partnership Limited Liability Act
    5.  Exempted Limited Partnership Act
  2. Are you an Included Entity; and do you have adequate relevant commercial activities within the Bahamas? An Included Entity must have the following characteristics:
    1. Conduct Core Income Generating Activity (CIGA),
    2. Have adequate people, premises and expenditure, and 
    3. Be directed and controlled 
  1. Are you tax resident outside of The Bahamas? Substance requirements under CESRA are NOT relevant for entities that are tax residents outside the Bahamas and are managed and controlled outside the Bahamas. Like the United Kingdom, The Bahamas follows a common law legislative model and has adopted the interpretation of tax resident simply as where real business is conducted and moreover, where the conduct of real business happens, management abides and is controlled from that place. 

Fund managers who intend to manage Bahamian domiciled funds via a foreign entity are permitted to do so but must meet the legislative requirement of registrations and must demonstrate a foreign tax status in the jurisdiction that they organised in.

Further, the foreign fund manager must provide a tax ID, a tax certificate from the jurisdiction they operate from and should file these requirements with the Competent Authority in accordance with CESRA.

The new and updated substance legislative framework makes it clearer what should be defined as Core Income Generating Activity in an "Included Entity" for fund managers. In accordance with CESRA: 

    1. The taking on of decisions on the holding and selling of investments
    2. Calculating risks and reserves,
    3. Taking decisions on currency or the interest fluctuations and hedging positions; and
    4. Preparing relevant regulatory or other reports for government authorities and investors, CESRA is not exhaustive in the types of CIGA that a fund manager may carry out to be considered when measuring  substance and is intended only to express some guidance on activities that are considered CIGA. CESRA intimates that there may be other CIGA activities not listed or mentioned in the CESRA. In other words, even if the legislation does not explicitly spell out an activity as CIGA, the responsibility is on the fund manager to demonstrate that it conducts CIGA to the Competent Authority.


As it pertains to board of director functions, The EU and OECD guidelines emphasise direction and control with reference to board of directors meetings as a fundamental determination of substance, and CESRA mirrors this. Adequate board of directors meetings are to be held in the Bahamas.

While adequate is not defined in the CESRA, its guidance exclaims "as much or as good as necessary and sufficient for a specific need or requirement."  

What constitutes adequate is really dependent on the business and commercial activity of each fund manager.  CESRA is less concern with physical presence but the legislation wants  to ensure that board of directors with knowledge and experience govern fund structures in The Bahamas and a fund managers in the Bahamas are decision-taking bodies.


In today's covid environment, where travel seems to be at a stand-still and video conferencing is the new normal, this seems fitting and clear. Nonetheless, minutes, books and records must be maintained in The Bahamas.

As with all commercial business, outsourcing is a global solution to many companies that may have shortfall in human or financial capacity. Under the new legal regime fund managers are not able to outsource Core Income Generating Activities outside on The Bahamas. This is consistent with other international financial centres. Fund managers are allowed to outsource to third party service providers in the CIGAs only when:

      1. The fund manager is able to demonstrate adequate supervision of the outsourced CIGA;
      2. The outsourced CIGA  is conducted within The Bahamas; 
      3. The economic substance of the third party service provider will not be counted multiple times by multiple included entities when evidencing their own substance in the jurisdiction provided that the third party service providers will not be deemed to be counted multiple times by multiple included entities.

More importantly the core business of a) portfolio management function or  b) the risk management function, rests on the shoulder of the fund manager and those two activities can only be outsourced by the approval of the Securities Commission. The historical business practice of a fund manager being a "letter-box" no longer exist in the Bahamas.

While the rules for fund managers have change with regard to IFA, IFR and CESRA, the changes made are not  onerous or beyond what is now expected for any  global or international financial centre. The Bahamas will continue to enhance and develop legislative initiatives that will keep fund managers and other service providers domiciled here competitive and relevant for many years.

The Bahamas remains a clear choice for global cross boarder tax transparent and compliant structures and these new legislative updates are The Bahamas' true testimony of this. 

This article first appeared in the recent International Investment Bahamas Special Report 2020. To view the special report - released in association with The Bahamas Financial Services Board - click here.