Choice of business entity
Corporations registered in Bermuda are either ‘local’, ‘exempted’, or ‘permit’ companies. International businesses are normally exempted companies and partnerships.
Local companies are incorporated by Bermudians to trade primarily in Bermuda. To meet requirements of a local company, the overall shares must be at least 60% Bermudian owned. We note there are proposals that are reconsidering this 60% requirement.
Exempted companies are often international businesses incorporated by non-Bermudians to conduct business outside Bermuda. Exempted companies are classified as an exempted undertaking and routinely apply for Tax Assurance Certificates. Exempted companies must meet the requirement to retain a minimum of one director, secretary, or representative who is resident in Bermuda.
Permit companies are overseas companies that have received a permit to carry on business in or from within Bermuda. A permit is obtained through application to the Minister of Finance to be able to engage in and carry on any trade or business in Bermuda. A mutual fund is exempt from obtaining a permit if a person who is resident in Bermuda is engaged to be the fund’s administrator to perform duties such as corporate secretarial, accounting, administrative, registrar, and transfer agency, or dealing with shareholders.
Foreign exchange controls
Exempted companies and permit partnerships are considered as non-residents for exchange control purposes, unless 80% or greater of the total issued share capital is beneficially owned by Bermudians, or one half or more of the partners are resident in Bermuda. This allows these entities to make dividend payments, distribute capital, open and maintain foreign bank accounts, maintain bank accounts in any currency, and purchase securities without tax or governmental controls. See Foreign Currency Purchase Tax in the Other taxes section for a description of the tax.
Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS)
Bermuda has entered into a Model 2 Intergovernmental Agreement (IGA) with the United States (US) to facilitate the implementation of the US’s FATCA reporting requirements. This convention provides for both automatic and on-request exchange of information, as well as procedures for tipping off and search and seizure. Further details on the implementation of FATCA was delineated in a separate, highly detailed agreement, which specifies rules and procedures for the reporting of financial accounts held by US persons. With a Model 2 IGA, applicable Bermuda foreign financial institutions (FFIs) must file directly with the Internal Revenue Service (IRS) rather than via the Bermuda Portal utilised for CRS and CbC reporting purposes.
It is important to note that Bermuda also had a similar agreement with the United Kingdom (UK) to facilitate the implementation of the UK’s FATCA reporting requirements; however, UK FATCA has now transitioned to the CRS.
In 2014, Bermuda committed to the early adoption and implementation of the CRS, a multilateral automatic exchange of information regime developed by the Organisation for Economic Co-operation and Development (OECD).
CRS reporting requirements have been introduced for financial accounts in existence from 1 January 2016. Applicable newly formed financial institutions will need to register or notify the Bermuda government by 30 April, and reporting is due by 31 May of the following year unless otherwise extended. A CRS Compliance Form is required to be submitted no later than 30 September following the end of the reporting period.
Country-by-country (CbC) reporting
Bermuda has agreed to CbC reporting as part of the Base Erosion and Profit Shifting (BEPS) Action Plan set forth by the OECD. With the goal of promoting transparency and accuracy in tax reporting, CbC reporting requires applicable multinational enterprises to include detailed financial and tax information relating to the global allocation of their revenue, profits, and taxes, among other indicators of economic activity.
Bermuda’s competent authority will annually exchange, on an automatic basis, the CbC report received from each reporting entity that is resident for tax purposes in Bermuda with all such other competent authorities of jurisdictions with respect to which Bermuda has an agreement in effect and in which, on the basis of the information in the CbC report, one or more constituent entities of the multinational group of the reporting entity are resident for tax purposes or are subject to tax with respect to the business carried out through a Bermuda permanent establishment (PE).
CbC reporting is in effect for fiscal years beginning on or after 1 January 2016. The due date for reporting is 12 months after the fiscal year end and notification is required no later than the last day of the reporting fiscal year.
Bermuda has a tax treaty with the United States, which was signed in 1986 and entered into force in 1988. The agreement limits its applicability to insurance enterprises and specifically exempts insurance business profits of qualified Bermuda insurance companies from US taxation, unless the company has created a PE in the United States. Of note, the treaty provides no relief for US federal excise tax (FET) on insurance or reinsurance premiums. In brief, the requirements to maintain this tax benefit include greater than 50% direct or indirect ownership by Bermuda residents or US citizens, and that the income is not substantially used to make distributions to non-Bermuda residents or non-US citizens. For further guidance in this complex area, please consult your tax adviser.
Bermuda also has a Mutual Legal Assistance Treaty with the United States, which entered into force in 2012. This agreement provides for cooperation in the area of criminal investigation, including economic crimes and money laundering, and for mutual assistance in document service, search and seizure, evidence production, and potential freezing and forfeiture of assets, which may be the proceeds or instruments of crime.
Tax information exchange agreements (TIEAs)
Bermuda has an extensive tax agreement network via its bilateral TIEAs and participation in the OECD’s Convention on Mutual Administrative Assistance in Tax Matters, which includes over 100 countries.
The Economic Substance Act 2018 ('the Act' or 'ESA') was passed by the Bermuda government in response to concerns raised by the European Union’s Code of Conduct Group (Business Taxation). The Act is effective from 1 January 2019 and addresses the issue of economic substance for relevant businesses by defining 'relevant activity', and, for each such activity, the 'core income generating activities' that are to be examined.
'Relevant activity' means carrying on as a business any one or more of: (i) banking, (ii) insurance, (iii) fund management, (iv) financing, (v) leasing, (vi) headquarters, (vii) shipping, (viii) distribution and service centre, (ix) intellectual property, and (x) holding entity.
Under the Regulations, an in-scope entity is to satisfy requirements that:
- Core income generating activities are undertaken in Bermuda with respect to the 'relevant activity'.
- The entity maintains adequate physical presence in Bermuda.
- There are adequate full-time employees in Bermuda with suitable qualifications.
- The entity incurs adequate operating expenditure in Bermuda in relation to the 'relevant activity'.
Affected entities in existence prior to 31 December 2018 were required to comply with the provision of the Act by 1 July 2019, and to file an annual Economic Substance Declaration (ESD) with the Bermuda Registrar of Companies (ROC). The first ESD filings were due in 2020. Affected entities formed after 31 December 2018 are subject to the ESA from inception. The annual ESD filing is due six months after an applicable entity's financial year end.