BERMUDA: An Introduction

Introduction  

Bermuda is an archipelago of islands situated in the North Atlantic Ocean, approximately 600 nautical miles from the east coast of the United States. Bermuda is a British Overseas Territory that is self-governing with its own parliamentary government, dating from 1620, and its own constitution. The jurisdiction’s legal system is based on the common law of England & Wales and, accordingly, decisions of the English courts are highly persuasive in Bermuda. As a dependent territory of the United Kingdom, Bermuda’s highest appellate court is the Privy Council in London, whose decisions are binding in Bermuda. Bermuda’s motto, Quo fata ferunt (“whither the Fates lead”), aptly characterises the spirit of phlegmatic pragmatism that has served Bermuda so well as it has provided solutions to global problems, particularly in the (re)insurance space, grounded in the quality of its intellectual capital and its highly regarded regulator, the Bermuda Monetary Authority (the “Authority”).

Economy  

Bermuda is a highly reputed and sophisticated offshore financial centre, with a stable political environment and effective regulation. The largest contributor to Bermuda’s GDP is international business. Bermuda is a global reinsurance hub, being the third-largest reinsurance market in the world. It is also a leading captive insurer market (the concept of the “captive insurer” was first invented in Bermuda in the 1960s) and the largest insurance-linked securities market globally. Bermuda is one of only two jurisdictions to have been awarded full equivalence under the Solvency II regime of the EU, applicable to (re)insurance companies. This means that Bermuda-registered commercial (re)insurers and insurance groups are able to compete on an equal footing with EU carriers when writing business in the EU. The National Association of Insurance Commissioners (NAIC) in the United States has also granted Bermuda “qualified jurisdiction” status, resulting in less onerous collateral requirements for Bermuda reinsurers operating in relevant US jurisdictions. The combination of Solvency II equivalence and NAIC recognition is a unique proposition. In addition to (re)insurance, a number of investment funds and investment businesses operate in Bermuda. Bermuda has also developed a regulatory framework to regulate and encourage the growth of digital asset business. It also operates the largest offshore aircraft registry globally and a highly regarded ship registry. Other contributors to Bermuda’s GDP include tourism and the local economy. Bermuda’s economy is closely linked to the United States, particularly given that the Bermuda dollar is pegged 1:1 to the US dollar.

Doing Business in or from Bermuda 

Generally, Bermuda prohibits local companies that intend to operate in the local economy in Bermuda from being majority owned and controlled by non-Bermudians. However, Bermuda permits exempted companies to carry on business from Bermuda, which means carrying on business internationally and, in selected cases or otherwise with permission, may include carrying on business with other exempted entities. Exempted companies are “exempted” from the requirement imposed on local companies that at least 60% of the total voting rights in the company and at least 60% of the directors must be Bermudian. Exempted companies may therefore be 100% foreign owned and controlled. The majority of companies incorporated in Bermuda operate as exempted companies. Similar restrictions apply to other entities, such as limited partnerships and limited liability companies.

Certain financial sectors such as (re)insurance, banking, investment funds, investment business and digital asset business are specifically regulated by the Authority, and businesses operating in such sectors must adhere to the relevant laws and regulations imposed.

Bermuda is a tax-neutral jurisdiction and, other than the proposed global minimum tax on certain multinational enterprises (MNEs) as discussed below, no taxes are imposed on profits, income or capital gains, nor is there any withholding tax, estate tax or death duty. No stamp duty is applicable for transactions involving exempted undertakings and non-residents. If exempted companies employ employees in Bermuda, payroll tax is payable by both the employer and the employee on the employees’ remuneration up to a certain annual limit.

Bermuda adheres to strict international standards of tax transparency, anti-money laundering/anti-terrorist financing and sanctions. In line with this commitment, Bermuda introduced economic substance laws (the “ES Laws”) effective 31 December 2018 (since amended and developed further), in response to the concerns of the EU that jurisdictions assessed by the EU did not have a legal substance requirement for entities doing business in or through Bermuda. The purpose of the ES Laws is to ensure that Bermuda does not facilitate the use of structures which attract profits but which do not reflect real economic activity undertaken in Bermuda. In summary, entities undertaking a “relevant activity” (as defined in the ES Laws) and which are not tax-resident in another approved jurisdiction, fall within the scope of the ES Laws and must demonstrate, annually, that they are managed and directed in Bermuda and that their core income-generating activities take place in Bermuda.

Key Recent Developments 

In common with much of the world, Bermuda has emerged from the restrictions imposed by the COVID-19 global pandemic and there are currently no longer such travel or other restrictions in force. In particular, where regulated entities are required to hold directors’ and other meetings physically in Bermuda and, where relevant, to assist compliance with the economic substance requirements described above, in 2024 entities are encouraged to return to in-person meetings in Bermuda.

The Personal Information Protection Act (PIPA) received royal assent on 27 July 2016 but is largely still not yet operative, although this is expected to change. Once the operative provisions are in force, PIPA will provide the overarching framework for the processing of “personal information” in Bermuda. A privacy commissioner has been appointed and is in the process of developing the Privacy Commission and supporting regulations and guidance. PIPA is expected to become fully operative in 2025.

In the last few years, Bermuda has seen significant growth in the establishment of long-term business (predominantly life and pension annuities) (re)insurers. Some commentators predict that by 2025 the long-term business sector in Bermuda will have USD1 trillion in assets under management. Related to the growth of the long-term (re)insurance market, further to the consultations in 2023, the Authority is in the process of implementing enhancements to Bermuda’s supervisory and regulatory regime for commercial insurers. The targeted enhancements primarily focus on the regulatory and supervisory frameworks for long-term business (re)insurers, which include revisions to the scenario-based approach (SBA), risk modelling in the Bermuda Solvency Capital Requirement model (BSCR), the application process for BSCR modifications and changes to the fee structure for long-term (re)insurers (to bring such fees in line with general business fees). The Authority’s intent is to ensure the regime remains fit for purpose, in line with international standards and in step with market developments. The philosophy of risk-based regulation is embedded in Bermuda’s regulatory DNA and has been a critical factor in the continuing development of the jurisdiction.

The Corporate Income Tax Act 2023 received royal assent on 27 December 2023. This act applies a 15% corporate income tax to Bermuda businesses that are part of MNEs with annual revenues above EUR750 million in at least two of the four preceding fiscal years, subject to certain exemptions. The tax will apply generally for tax years beginning on or after 1 January 2025.

Finally, the Bermuda government is making changes to the legislative framework governing intellectual property rights in Bermuda, following a report produced by an Intellectual Property Task Force empanelled by the government. The Trade Marks Act 2023 received royal assent on 17 October 2023 and, once enacted, is designed to modernise and align Bermuda’s IP regime governing trade marks, patents, designs and copyrights with the UK and global standards and best practices. The government is concentrating first on updates to the Trade Marks Act 1974, with amendments to the legislation governing patents, designs and copyrights to follow. It is anticipated that these changes should encourage more entities to register IP rights in Bermuda.