Bermuda Enacts a Corporate Income Tax

By Andy DeGregorio and Mariana Betancourt

TAXING TIMES, November 2024

Introduction

Bermuda has historically not imposed taxes on profits, income, capital gains, dividends, interest, or royalties. Instead, the Government of Bermuda’s annual operating budget has been funded primarily by payroll taxes, duties, and various other taxes and fees. On Dec. 27, 2023, however, the Bermuda Corporate Income Tax Act 2023 (the Act) was enacted. The Act, which was formulated in response to changes in the global tax landscape and after public consultation with stakeholders, introduces a 15% corporate income tax (CIT) on Bermuda businesses that are part of multinational enterprise (MNE) groups with annual revenue of EUR 750 million or more. Some entities, such as investment funds, those less than 80% owned by an Ultimate Parent Entity (UPE),[1] or those that qualify for the branch exemption election,[2] may fall largely outside the scope of the CIT. 

The Bermuda CIT is effective for tax years beginning on or after Jan. 1, 2025.

The Bermuda CIT rules incorporate key foundational definitions from the Organization for Economic Cooperation and Development’s (OECD) Pillar Two GloBE model rules[3] but differ notably from Pillar Two: the CIT framework does not incorporate the Pillar Two income inclusion rule (IIR) and does not include the undertaxed profits rule (UTPR). Moreover, the CIT is not expected to function as a qualified domestic minimum top-up tax (QDMTT).

The Government of Bermuda has previously issued tax assurance exemption certificates to Bermuda resident entities. The government has confirmed the CIT regime will supersede any existing tax exemption held by entities within the scope of the Bermuda CIT.[4] Nonetheless, such exemptions would continue to apply for entities outside the scope of the CIT and would continue to be issued to such entities going forward, although new assurances issued following the enactment of the CIT will be adjusted to ensure consistency with CIT provisions.

Elections

The Act includes various elections, which are designed to provide flexibility to taxpayers, and in some cases to help taxpayers avoid uneconomic outcomes. A taxpayer will be expected to make elections as part of the tax return filing process. Some elections are made annually, others every five years, while certain elections, due to specific circumstances, are not classified as either and are irrevocable once made.

The Government of Bermuda also has released frequently asked questions (FAQs) providing additional guidance with respect to the Act, and a form that allows certain elections to be made in advance of filing a Bermuda CIT return.

Among the available elections are the following:

• Matching election: Election to adjust taxable income or loss to exclude unrealized gains or losses on a funds withheld asset related to an insurance contract. A matching adjustment could not be applied to periods prior to Oct. 1, 2023, unless an election not to apply the Economic Transition Adjustment (ETA) is made.
• IFRS 17 and LDTI adjustments: If an entity implements IFRS 17 or accounting standards relating to long-duration targeted improvements (LDTI) and such implementation gives rise to a change in equity, an election to adjust taxable income or loss for any cumulative adjustment to retained earnings may be available.
• Realization election: Entities are permitted to elect to treat assets and/or liabilities on a realization basis for tax purposes, so that all gains or losses attributable to fair value or impairment accounting with respect to an asset or liability would be excluded from the computation of taxable income or loss.
• Reducing Financial Accounting Net Income or Loss (FANIL): An election to reduce the FANIL of a Bermuda Constituent Entity (Bermuda CE) treated as a controlled foreign corporation (CFC) for U.S. tax purposes, by an amount corresponding to the proportionate ownership interest of the constituent entity-owner.
• Classification of entities as fiscally transparent:[5] In general, entity classification elections are available to treat any entity as fiscally transparent or not fiscally transparent for CIT purposes.

Annual elections provide flexibility and may be revoked and/or subsequently re-elected with respect to any fiscal year by the electing entity.[6] Annual elections generally apply for the fiscal year in which the election is made and all subsequent fiscal years, unless and until the election is modified or revoked.

Five-year elections have less flexibility on when they can be revoked and, if revoked, when they can be re-elected.[7]

Bermuda CIT Mechanics

MNE groups with limited international presence that satisfy certain requirements outlined in the CIT rules would not be considered within the scope of the CIT for five years. This effective date delay would apply to MNE groups operating in six or fewer jurisdictions, with tangible assets of EUR 50 million or less in in all jurisdictions other than the reference jurisdiction.[8] A Bermuda entity would generally not meet the criteria for five-year deferral if it is subject to the Pillar Two income inclusion rule (IIR) of another jurisdiction.

The determination of taxable income for Bermuda groups begins with FANIL, based on accounting standards such as GAAP or IFRS. MNE groups will be annually taxed under the Bermuda CIT on their net taxable income after considering any applicable tax credits.

The CIT rules provide an ETA meant to provide an equitable transition into the CIT system for Bermuda CE and to align the starting point for the tax regime more closely with its economic position prior to the application of the CIT. The ETA applies with respect to each asset and liability (with the exception of goodwill) recognized by a Bermuda CE as of Sept. 30, 2023. The amount of the ETA would be the difference between the fair market value (FMV) and the carrying value of each asset and liability (with the exception of goodwill) on Sept. 30, 2023. Taxable income or loss is increased or decreased by 10% of the ETA annually for 10 years with respect to intangible assets and the basis is adjusted to reflect the fair value as of Sept. 30, 2023, for all other assets and liabilities. The ETA cannot decrease taxable income by more than 80% in any given year. Any excess of the ETA over 80% of taxable income may be carried forward to subsequent tax years.

In respect of insurance contract liabilities, the FAQs include three alternative methods on which the ETA may be determined:

• Actual method: Determined based on the actual run-off experience of the underlying type of liability (i.e., if a reserve balance for unpaid claims for a policy is settled in 2026, the ETA relating to that contract would also unwind in 2026)
• Fair value run-off pattern: computed using a set run-off pattern based on the estimated run-off pattern for the purposes of the Sept. 30, 2023, fair value determination.
• Safe harbor: Amortization on a straight-line basis over 15 years, beginning Oct. 1, 2023.

A Bermuda CE may elect to forego the ETA and, if such election is made, the Bermuda CE would be allowed an opening tax loss carryforward equal to the net taxable losses, if any, arising in the five fiscal years preceding the date for which the Bermuda CE becomes subject to the CIT. Tax loss carryforwards do not expire; however, the amount of tax loss carryforward that may be used against taxable income in a given fiscal year is limited to 80% of the taxable income determined prior to the tax loss carryforward deduction.

A Bermuda CE may elect to reduce, in whole or in part, the amount of the tax loss carryforward deduction otherwise available for the year. The amount of tax loss carryforward deduction that is reduced pursuant to this election remains part of the carryforward available for future utilization.

When calculating a foreign tax credit (FTC) for purposes of the CIT, the adjusted creditable foreign taxes of a Bermuda CE generally equal the sum of:

• The non‐Bermuda current tax expense or benefit accrued in its financial accounting net income or loss and
• Non‐Bermuda deferred tax expense or benefit (adjusted to 15%) accrued in its financial accounting net income or loss, with certain adjustments.

Unused FTCs for the year may not be carried back to prior years or carried forward to future periods.

For MNEs with a captive insurance company domiciled in Bermuda, the impact of Bermuda CIT will depend on a number of factors. Insurance premium taxes that are imposed in substitution for a corporate income tax will be creditable as a FTC. For Bermuda insurance companies that have elected to be taxed as a U.S. corporation under IRC Sec. 953(d), U.S. taxes of 21% should be creditable against Bermuda CIT. If additional Bermuda entities exist, those entities generally will be considered as part of the overall Bermuda MNE Group and the blended rate of IRC 953(d) and non-IRC 953(d) entities would determine whether additional tax would be due.

Additionally, Section 31(1) of the Act allows insurance companies to exclude from the computation of taxable income or loss amounts charged to policyholders for taxes paid by the insurance company in respect of returns to the policyholders.

ASC 740 Implications

ASC 740 applies to all taxes imposed on an entity by a taxing authority that are based on the entity’s income. The CIT is a tax based on income and should be accounted for within the scope of ASC 740. The effect of a change in tax law or rate is recognized in the period that includes the enactment date. Entities that expect to be subject to the CIT should record deferred tax assets (DTAs) and liabilities (DTLs) in the period of enactment for temporary differences expected to reverse or carryforwards that can be used after the CIT commencement date, i.e., Jan. 1, 2025. In the period of enactment (i.e., Q4 2023), an entity should consider the deferred tax impact related to the Bermuda CIT based on all information available.

Administrative Guidance Released

The Government of Bermuda announced on Aug. 8, 2024, the release of a public consultation paper that aims to provide Bermuda stakeholders with a high-level summary of the proposed taxpayer compliance framework for the CIT that will apply to in-scope MNE groups with respect to fiscal years beginning on or after Jan. 1, 2025.

In addition to the various technical provisions relevant to the determination of the Bermuda CIT liability for a Bermuda CE group, the Act introduced a requirement for a Bermuda CIT return to be filed by a Bermuda CE on behalf of the Bermuda CE group. The consultation paper addresses specific procedural requirements related to registration, tax return filing and payment of taxes.

Conclusion

The Government of Bermuda has enacted a 15% CIT on Bermuda businesses that are part of multinational enterprises with annual revenues equal to or in excess of EUR 750 million, effective Jan. 1, 2025. The CIT guidance issued includes practical examples and illustrates the intended operational mechanics of the Act. Nevertheless, further clarification is anticipated to allow taxpayers to fully comprehend and comply with the Act and to ensure the effective implementation of the CIT.

This article contains general information only and Deloitte is not, by means of this article, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this article.

The views expressed herein are solely those of the authors. Any errors are those of the authors and should not be ascribed to any other person. This content is for general information purposes only and should not be used as a substitute for consultation with professional advisors.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.

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Andy DeGregorio, CPA, is a tax partner at Deloitte Consulting Ltd and may be reached at andy.degregorio@deloitte.com.

Mariana Betancourt, LL.M, is a tax associate at Deloitte Consulting Ltd and may be reached at mabetancourt@deloitte.com.

Endnotes

[1] The Bermuda CIT defines UPE as (a) an entity that (i) owns, directly or indirectly, a controlling interest in any entity; (ii) is not owned, with a controlling interest, directly or indirectly by another or (b) the main entity of a group.

[2] "Branch exemption election” means an annual election made by a Bermuda Constituent Entity to allocate financial accounting net income or loss of the Bermuda CE to a specific permanent establishment through which the business of the Bermuda CE is carried out.

[3] The Pillar Two Model Rules (Global Anti-Base Erosion, or GloBE Rules) were released on Dec. 20, 2021. The GloBE rules were designed to ensure large MNEs paid a minimum level of tax on the income arising in each jurisdiction where they operated. Pillar Two provides for a system of taxation based on financial accounts applying a minimum rate of fifteen percent on a jurisdictional (country-by-country) basis and adds another layer of minimum taxes to ensure the income of MNEs is taxed in each jurisdiction in which the MNE operates. Many jurisdictions have agreed to adopt Pillar Two and others have already enacted legislation or proposed legislation. Application of Pillar Two is expected to raise effective tax rates (ETRs) worldwide.

Pillar Two consists of three related taxes aimed at reducing base erosion and profit shifting of MNEs that have annual revenues equal to or in excess of EUR 750 million:

• Income Inclusion Rule (IIR): tax levied by the home jurisdiction of the ultimate parent entity on a jurisdiction-by-jurisdiction basis.
• Undertaxed Profits Rule (UTPR): Tax on constituent entities whose ultimate parent entity or affiliates are in low-taxed jurisdictions and not otherwise subject to a “top-up” tax.
• Qualified Domestic Minimum Top-Up Tax (QDMTT): levied by the jurisdiction on their domestic corporations to bring an entity’s tax liability up to the 15 percent rate.

[4] Section 4(4) of the Act states that a Bermuda Constituent Entity’s liability for tax pursuant to the Act shall apply notwithstanding any assurance given pursuant to the Exempted Undertakings Tax Protection Act 1966.

[5] Fiscally transparent mean, in respect of an entity (other than a Bermuda Constituent Entity), that the income, expenditure, profit or loss of such entity shall be treated as if it were derived or incurred by the direct owner of such entity in proportion to the direct owner’s interest in such entity.

[6] The annual elections available pursuant to the Act include the branch exemption election, unclaimed accrual election, de minimis exemption, modification of Bermuda CE Group composition, treatment of MNE Group as an In Scope MNE Group, fiscal transparency election, treatment of segregated accounts as separate Bermuda CE, treatment of a company and its segregated accounts as one Bermuda CE, stock-based compensation, matching election, realization principle election, and election to apply consolidated accounting treatment.

[7] The five-year elections available pursuant to the Act include the treatment of an <80% owned entity as a Bermuda CE, the treatment of an excluded entity as a Bermuda CE, the election to determine financial accounting net income or loss in accordance with an approved financial accounting standard, the fair value basis of taxation with respect to ownership interest in an investment entity, and the taxable distribution method of taxation with respect to ownership interest in an investment entity.

[8] In accordance with the Act, “reference jurisdiction” means the jurisdiction where the MNE Group has the highest total value of tangible assets for the fiscal year in which the MNE Group first meets the requirements of section 11(1), as determined without regard to the application of section 13 of the CIT.