Executive summary

On 15 November 2023, the Government of Bermuda began its third public consultation on a proposal to introduce a 15% corporate income tax (CIT) that would apply to Bermuda businesses that are part of multinational enterprise groups (MNE Groups) with annual revenue of €750m or more (Third Consultation Paper). The Third Consultation Paper follows two prior public consultations, which ran from 8 August 2023 through 8 September 2023 (First Consultation Paper) and from 5 October through 30 October 2023 (Second Consultation Paper), respectively.¹

The Third Consultation Paper addresses certain comments submitted to the Bermuda government in prior consultations, includes the initial draft legislation of the CIT regime (Draft Legislation) and outlines the scope of topics that are expected to be covered in forthcoming guidance. The Draft Legislation contains additional coordination and ordering rules among the various elections described in the Second Consultation Paper, including a limitation on the availability of certain tax losses arising prior to 1 October 2023 if the so-called "economic transition adjustment" is applied.

The Bermuda government anticipates that the CIT legislation will be formally presented for consideration in the House of Assembly in December 2023, with an effective date for tax years beginning on or after 1 January 2025. The period for public comment on the Third Consultation Paper is open until 30 November 2023. Further amendments to the draft legislation may be made before submission of a final Bill to Parliament for debate (including amendments made in response to comments provided as part of the third public consultation process). Additional public consultation regarding administrative matters is also expected, with a separate bill to address matters such as structure, governance, operation, assessment, audit and administration of tax collection. Certain aspects of the CIT regime will be further addressed in guidance starting in 2023 and expected in regulations intended to be published in 2024 and subsequent periods.

The likely enactment of a CIT in Bermuda has significant implications for multinational groups with a presence in Bermuda generally, and for multinational insurance and reinsurance groups with a presence in Bermuda in particular. The proposed CIT regime contains numerous elections that have interrelated effects. With a fast-approaching intended enactment date by 31 December 2023, multinational groups with a Bermuda presence should consider the impact of enactment on their deferred tax accounting, and implications of enactment on determinations under the Global Anti-Base Erosion (GloBE) Rules.

The purpose of this Alert is to summarize the Draft Legislation, with a focus on the refinements and changes relative to the framework presented in the Second Consultation Paper. For an overview of the Second Consultation Paper, see EY Global Tax Alert, Bermuda's proposed corporate income tax takes shape with release of second public consultation, dated 17 October 2023.

Detailed discussion

Scope of the CIT

In Scope MNE Group

The CIT would apply to each Bermuda Constituent Entity Group within an "In Scope MNE Group." An In Scope MNE Group is generally an MNE Group that, for a Fiscal Year beginning on or after 1 January 2025, had annual revenue of at least €750m in the Consolidated Financial Statements of the Ultimate Parent Entity (UPE) for at least two of the four immediately preceding Fiscal Years (Revenue Test). The Draft Legislation provides additional rules on applying the Revenue Test that addresses mergers and demergers and are generally consistent with Art. 6.1 of the Organisation for Economic Co-operation and Development (OECD) Pillar Two GloBE Rules.²

The Draft Legislation introduces an election (In Scope Continuation Election) that would be available to treat an MNE Group as an In Scope MNE Group where (i) the MNE Group was an In Scope MNE Group in the immediately preceding Fiscal Year; and (ii) it would otherwise cease to be an In Scope MNE Group due to either failing to meet the €750m revenue requirement or qualifying for the Limited International Footprint Exclusion (described below).

An "Annual Election" specified in the Draft Legislation is defined as an election available to a Bermuda Constituent Entity on an annual basis that, once made, applies for the Fiscal Year in respect of which the election is made and all subsequent Fiscal Years, unless and until the election is modified or revoked. The In Scope Continuation Election would be an Annual Election but must be applied to the entire MNE Group.

EY observes: The In Scope Continuation Election could provide MNE Groups with greater flexibility to avoid potentially volatile CIT outcomes (e.g., if the group were to fall out of scope sporadically).

Limited International Footprint Exclusion as an exception to In Scope MNE Group status

The Draft Legislation incorporates the exclusion from the scope of the CIT referred to in the Second Consultation Paper as the "Exclusion for Groups with Limited International Presence,"³ but adds a new qualifying requirement in addition to those in Art. 9.3.2 of the GloBE Rules (the exclusion referred to hereinafter as the Limited International Footprint Exclusion).

An MNE Group would not be treated as an In Scope MNE Group for a Fiscal Year in which (i) the MNE Group has Constituent Entities located in five or fewer jurisdictions outside the Reference Jurisdiction; (ii) the sum of the net book values of tangible assets of all Constituent Entities located in all jurisdictions other than the Reference Jurisdiction does not exceed €50m; and (iii) as introduced in the Draft Legislation, no Parent Entity is required to apply an IIR with respect to any Constituent Entity of the MNE Group located in Bermuda.⁴

The Limited International Footprint Exclusion would not apply to an MNE Group for any Fiscal Year that begins more than five years from the later of (i) the first day of the MNE Group's first Fiscal Year that begins on or after 1 January 2025; or (ii) the first day of the first Fiscal Year when the MNE Group meets the Revenue Test. The five-year period, once commenced, would not be suspended by any circumstances.

Consistent with the Draft Legislation, the Third Consultation Paper clarifies that an MNE Group that qualifies for the Limited International Footprint Exclusion for a Fiscal Year, then fails to qualify for a Fiscal Year within the five-year period so as to become an In Scope MNE Group, may make an In Scope Continuation Election if in a subsequent year within the five-year period it again qualifies for the Limited International Footprint Exclusion but wants to remain an In Scope MNE Group.

In assessing whether the MNE Group is in five or fewer jurisdictions outside the Reference Jurisdiction, the Draft Legislation provides rules for determining the location of a non-Bermuda Constituent Entity (which are generally consistent with the location determination rules in Art. 10.3 of the GloBE Rules); clarifies that the five or fewer jurisdictions located outside the Reference Jurisdiction are not required to be the same jurisdictions throughout the five-year period during which the exclusion could potentially apply; and expressly provides that Stateless Constituent Entities, Investment Entities that are not Excluded Entities, and Joint Ventures and Joint Venture Subsidiaries are not taken into account for purposes of determining the jurisdictions in which an MNE Group has Constituent Entities, while Minority-Owned Constituent Entities are taken into account.

For purposes of determining whether the €50m Tangible Asset requirement is satisfied, the Draft Legislation provides that Tangible Assets of Stateless Constituent Entities are considered held by Constituent Entities located in a jurisdiction other than the Reference Jurisdiction, except to the extent the MNE Group demonstrates that those Tangible Assets are physically located in the Reference Jurisdiction; and expressly provides that Tangible Assets of Investment Entities that are not Excluded Entities, Joint Ventures and Joint Venture Subsidiaries are not taken into account, while Tangible Assets of Minority-Owned Constituent Entities are taken into account.

The Draft Legislation provides coordination rules on how MNE Groups that qualify for the Limited International Footprint Exclusion make determinations with respect to the Opening Tax Loss Carryforward and Economic Transaction Adjustment (both of which are discussed in more detail below).

EY observes: Incorporating into the requirements to qualify for the Limited International Footprint Exclusion the requirement that no Parent Entity is required to apply an IIR with respect to any Constituent Entity of the MNE Group located in Bermuda appears consistent with the Bermuda government's stated policy objective in the prior public consultations that the CIT should result in a reduced likelihood of Top-up Tax being imposed under an IIR. This is because an MNE Group that meets the requirements of Art. 9.3.2 of the GloBE Rules is only exempted from the imposition of Top-up Tax (as defined in the GloBE Rules) under the UTPR and not the IIR. Accordingly, an MNE Group satisfying the requirements of Art. 9.3.2 remains subject to Top-up Tax imposed on a Parent Entity that is required to apply an IIR with respect to a Constituent Entity located in Bermuda.

Bermuda Constituent Entities and Bermuda Constituent Entity Groups

Each Bermuda Constituent Entity Group would comprise one or more Bermuda Constituent Entities of an In Scope MNE Group. A Bermuda Constituent Entity is either a Bermuda Tax Resident Entity or a Bermuda Permanent Establishment (PE) that is a Constituent Entity of an In Scope MNE Group.⁵

The Draft Legislation incorporates the exclusions to status as a Bermuda Constituent Entity for an Excluded Entity (defined consistent with Art. 1.5 of the GloBE Rules) and an Entity that is less than 80% owned (by value), directly or indirectly, by the UPE (Exclusion for Partially-Owned Entities). Consistent with the Second Consultation Paper, the Draft Legislation provides an election to disapply the Exclusion for Partially-Owned Entities. As with certain other elections contained in the Draft Legislation, the election would be a "Five-Year Election." Once made, the election would apply for the Fiscal Year in which it is made and the four succeeding Fiscal Years, after which the election would continue to apply unless and until the election is modified or revoked. If revoked, the election would not be available with respect to the revocation year or four succeeding Fiscal Years following the revocation year.

The default grouping of Bermuda Constituent Entities into separate Bermuda Constituent Entity Groups outlined in the Second Consultation Paper is retained in the Draft Legislation. The Draft Legislation clarifies that the election to modify the composition of Bermuda Constituent Entity Group(s) is an Annual Election made by a Bermuda Constituent Entity.

Entity classification

As foreshadowed in the Second Consultation Paper, the Draft Legislation provides default entity classification rules for certain Bermudian and non-Bermudian entities as well as a provision to allow a Filing Bermuda Constituent Entity an Annual Election to regard an Entity that otherwise would be regarded as Fiscally Transparent as not Fiscally Transparent and vice versa. The Draft Legislation would not permit an entity classification election with respect to a PE.

Notably, the Draft Legislation provides that a company registered under the Segregated Accounts Companies Act 2000 (SAC) will be regarded as a single entity that is not Fiscally Transparent as the default classification. A Bermuda Constituent Entity may make an Annual Election to treat any segregated accounts within a SAC as separate Bermuda Constituent Entities and, as such, may further make an Annual Election to treat any given segregated account as Fiscally Transparent or not Fiscally Transparent. A similar provision is provided for a company which has registered under the Incorporated Segregated Accounts Act 2019 (ISAC) as well as for a non-Bermudian company subject to laws of a jurisdiction which has substantially similar characteristics as a SAC or ISAC.

EY observes: The default entity classification rules and elections, including the specific provisions addressing the classification of SACs and ISACs, should provide clarity to MNE Groups (particularly in the insurance industry) in making determinations under the CIT regime and GloBE Rules.

Calculation of Taxable Income or Loss

Starting point: Financial Accounting Net Income or Loss (FANIL)

Consistent with the First and Second Consultation Papers, the computation of taxable income or loss for CIT purposes (Taxable Income or Loss) would generally begin at each Bermuda Constituent Entity's FANIL as determined under the accounting standard adopted by the UPE in preparing its Consolidated Financial Statements.

The Draft Legislation includes a Five-Year Election to instead base the Taxable Income or Loss computation on an Approved Financial Accounting Standard (which includes Bermuda statutory accounting principles and statutory accounting principles set forth by the United States (US) National Association of Insurance Commissioners). If the use of an Approved Financial Accounting Standard would result in permanent differences in excess of €1m compared to the result under the default rules, an adjustment to the treatment of relevant items under the Approved Financial Accounting Standard is required.

Provisions in the Draft Legislation address the treatment of adjustments attributable to purchase accounting for an acquired business, as well as items of income and expense not attributable to purchase accounting that are reflected in the consolidated accounts of the MNE Group but not the separate accounts of the Bermuda Constituent Entity, which generally follow the treatment of such items in the GloBE Rules.

Adjustments to FANIL to determine Taxable Income or Loss

The required adjustments to FANIL described in the Second Consultation Paper are retained in the Draft Legislation, and new required adjustments are incorporated into the Draft Legislation:

• Gain or loss from a disposition of assets and liabilities in certain reorganizations would be excluded from Taxable Income or Loss (discussed in more detail below).
• Amounts recognized as an increase or decrease to the equity of a Bermuda Constituent Entity attributable to distributions in respect of Additional Tier One Capital are included in the computation of taxable income or loss, in a manner that is generally consistent with Art. 3.2.10 of the GloBE Rules.
• The required adjustment for certain transactions not reflected in accordance with the Arm's Length Principle follows more closely Art. 3.2.3 of the GloBE Rules. An Annual Election would also be available to apply, in a manner consistent with Art. 3.2.8 of the GloBE Rules, consolidated accounting treatment to transactions between Bermuda Constituent Entities of the same In Scope MNE Group.

Economic Transition Adjustment (ETA)

In a change from the Second Consultation Paper, the ETA would become a mandatory required adjustment, but a Bermuda Constituent Entity could elect not to apply the ETA (ETA Opt-Out Election). The Draft Legislation contains additional rules on the ETA. Notably:

• In the absence of an ETA Opt-Out Election, the ETA would apply with respect to a Bermuda Constituent Entity that (i) is included in the Bermuda Constituent Entity Group during the first Fiscal Year of the Bermuda Constituent Entity that begins on or after 1 January 2025; and (ii) would have been a Bermuda Tax Resident Entity or Bermuda PE on 30 September 2023, had the CIT been in effect on that date (ETA Applicability Criteria).
• The Draft Legislation provides a definition of "identifiable intangible asset."⁶
• For a Bermuda Constituent Entity that fails to meet the ETA Applicability Criteria because the MNE Group of which it is a member either failed to meet the Revenue Test or did not include at least one Entity or PE that was located outside the UPE's jurisdiction during the first Fiscal Year of the Bermuda Constituent Entity that begins on or after 1 January 2025, the ETA would still be applied in any subsequent Fiscal Years for which the Bermuda Constituent Entity is part of an In Scope MNE Group.
• For a Bermuda Constituent Entity that fails to meet the ETA Applicability Criteria because the MNE Group of which it is a member qualifies for the Limited International Footprint Exclusion, the ETA would still be applied in the Bermuda Constituent Entity's Fiscal Years in which the Limited International Footprint Exclusion no longer applies (either because it failed to meet the Limited International Footprint Exclusion requirements or because the exclusion's five-year applicability period expired).

EY observes: The additional provisions governing the ETA included in the Draft Legislation should provide greater clarity to MNE Groups in assessing how the ETA operates (particularly for MNE Groups that are not In Scope MNE Groups as of 1 January 2025) and whether to make the ETA Opt-Out Election. Based on the Draft Legislation, the amortization period for identifiable intangible assets is the fixed 10-year period beginning with the first Fiscal Year of the Bermuda Constituent Entity beginning on or after 1 January 2025, regardless of whether the Bermuda Constituent Entity failed to meet the ETA Applicability Criteria and becomes in-scope in a later year (e.g., because the MNE Group satisfies the Revenue Test in a Fiscal Year subsequent to the first Fiscal Year beginning on or after 1 January 2025, or because the Limited International Footprint Exclusion applied). Amortization deductions for Fiscal Years preceding years in which the Bermuda Constituent Entity is in-scope would appear to still be taken into account, however, when computing the Opening Tax Loss Carryforward (discussed further below).

The other adjustments described in the Second Consultation Paper as elective are retained in the Draft Legislation with certain refinements and additional parameters summarized below.

Matching Election

The election to make matching adjustments (Matching Election) would be available with respect to the following circumstances:

• When a Bermuda Constituent Entity has entered into a funds-withheld or funds-modified co-insurance contract as the assuming company, and the funds withheld asset is accounted for at fair value in the determination of FANIL, the Bermuda Constituent Entity may make a Matching Election to adjust Taxable Income or Loss to exclude unrealized gains or losses on the funds withheld asset. The election would not apply to the extent that the Bermuda Constituent Entity has elected to account for the overall contract, including the funds withheld asset and insurance liabilities, at fair value through FANIL. The exclusion to FANIL applied under the Matching Election would be reduced to the extent that the assuming company's funds withheld asset is offset and changes in unrealized gain or loss in the determination of FANIL are reduced as a result of accounting for a retrocession of the reinsured risk.
• When a Bermuda Constituent Entity has entered into a funds withheld or modified co-insurance contract as the ceding company, and the funds withheld liability is accounted for at fair value in the determination of FANIL, the Bermuda Constituent Entity may make a Matching Election to adjust Taxable Income or Loss to exclude unrealized gains or losses on the funds withheld liability to the extent that the unrealized gains or losses on the corresponding funds withheld assets are not accounted for through FANIL.

The Matching Election would be an Annual Election available with respect to any or all reinsurance agreements. The election can be made applicable either prospectively to any Fiscal Year beginning on or after 1 January 2025 or retroactively if made for the first Fiscal Year which begins on or after 1 January 2025 (and prior to 1 January 2026). However, for a Bermuda Constituent Entity that applies the ETA (i.e., does not make the ETA Opt-Out Election) and makes the Matching Election with retroactive effect, the Matching Election would not apply to any period prior to 1 October 2023, and the CIT basis of the funds withheld asset or liability would be adjusted in accordance with the ETA.

If a Matching Election is revoked, generally the cumulative fair value gain or loss that had been previously excluded from Taxable Income or Loss (including any Tax Loss Carryforward) as a result of the Matching Election must be included in Taxable Income or Loss.

EY observes: The Matching Election should reduce the potential for distortive and/or non-economic CIT outcomes for Bermuda Constituent Entity reinsurers that enter into funds withheld or modified co-insurance contracts.

Realization Basis Election

The election to account for assets and liabilities on a realization basis (Realization Basis Election) would be an Annual Election that can be applied to any specified assets and liabilities — other than assets and liabilities subject to a Matching Election — that are subject to fair value or impairment accounting in the Consolidated Financial Statement. If the election is subsequently revoked, the difference between the fair value of each asset/liability subject to the election and their respective carrying values is included in Taxable Income or Loss for the revocation year.

EY observes: The coordination rule between the Matching Election and Realization Basis Election should provide some clarity for MNE Groups making determinations under the CIT regime.

Other elective annual adjustments

• The election to amortize certain amounts related to adopting International Financial Reporting Standards (IFRS) 17/ Long Duration Targeted Improvements (LDTI) would be made separately for each Bermuda Constituent Entity that implemented IFRS 17 or LDTI. If the election is made, amounts amortized as an adjustment to Taxable Income could only offset up to 80% of Taxable Income (determined prior to the application of Tax Loss Carryforwards), with any unamortized amounts taken into account as Tax Loss Carryforwards.⁷
• The election to substitute the amount of stock-based compensation expense recognized in FANIL with an alternative amount (described in the Second Consultation Paper and carried over to the Draft Legislation) would be an Annual Election, but if made, must be applied consistently to the stock-based compensation of all Bermuda Constituent Entities which are members of the same Bermuda Constituent Entity Group. The Draft Legislation clarifies that the stock subject to the election does not need to be stock issued by the Bermuda Constituent Entity that incurred the relevant compensation expense, and additional rules are provided to prevent certain double counting and other coordination issues.
• The election to exclude from Taxable Income or Loss of a Bermuda Constituent Entity the FANIL attributable to a PE (Branch Exemption Election) would be an Annual Election that is made with respect to any or all of the PEs through which the business of a Bermuda Constituent Entity is carried out. For this purpose, the definition of PE follows the definition contained in the GloBE Rules. To determine the FANIL that is allocated to the PE under this election, generally the Draft Legislation follows Arts. 3.4.1-3.4.3 of the GloBE Rules.

EY observes: The Second Consultation Paper noted that a requirement for insurers and reinsurers to adjust Taxable Income or Loss for an amount reflecting discounting of insurance reserves was under consideration. While the Draft Legislation contains no such required adjustment, the Third Consultation Paper does not state whether such an adjustment remains under consideration.

Allocation of Taxable Income or Loss

Consistent with the Second Consultation Paper, the Draft Legislation contains provisions that require allocating Taxable Income or Loss among Entities in a manner that is generally consistent with the provisions in the GloBE Rules for allocating income under Articles 3.4, 3.5, 7.1, and 7.4. These provisions provide for the allocation of Taxable Income or Loss to Permanent Establishments, non-Constituent Entity Owners of Flow-through Entities and Constituent Entity Owners of Tax Transparent Entities, as well as between Bermuda Constituent Entities and their owners, to the extent the Bermuda Constituent Entity is a Flow-through Entity that is also the UPE of the MNE Group, an Investment Entity or an Insurance Investment Entity. The Draft Legislation includes a Five-Year Election to account for an Ownership Interest in a Constituent Entity that is an Investment Entity or an Insurance Investment entity on a mark-to-market basis for CIT purposes, as well as a Five-Year Election to apply a Taxable Distribution Method to a Bermuda Constituent Entity's ownership in certain Investment Entities or Insurance Investment Entities.

Calculation of Net Taxable Income or Loss

Net Taxable Income or Loss of a Bermuda Constituent Entity Group would be determined by (i) aggregating the Taxable Income or Loss of each Bermuda Constituent Entity member of the group; and (ii) if the aggregate amount in (i) is positive, reducing the amount in (i) by the Tax Loss Carryforward deduction.

Tax Loss Carryforward deduction

The parameters of the Tax Loss Carryforward deduction described in the Second Consultation Paper are generally carried over to the Draft Legislation; namely, the limitation that a Tax Loss Carryforward deduction can only reduce up to 80% of pre-Tax Loss Carryforward Net Taxable Income and the allowance of the Opening Tax Loss Carryforward. The Draft Legislation contains the following notable refinements and changes to the Tax Loss Carryforward deduction described in the Second Consultation Paper-

• A Filing Bermuda Constituent Entity may elect to reduce, in whole or in part, the amount of the Tax Loss Carryforward deduction otherwise available for the Fiscal Year (Tax Loss Carryforward Reduction Election). The amount of Tax Loss Carryforward deduction that is reduced pursuant to a Tax Loss Carryforward Reduction Election remains part of the Tax Loss Carryforward available for future utilization.
• A separate election would be available to a Filing Bermuda Constituent Entity to permanently disregard, in whole or in part, amounts that are part of the Opening Tax Loss Carryforward or Taxable Loss of a Bermuda Constituent Entity arising in Fiscal Years in which it is a member of an In Scope MNE Group (Disregard Tax Loss Carryforward Election).
• The amount of Opening Tax Loss Carryforward of an In Scope MNE Group would be computed in the following manner:
• The Opening Tax Loss Carryforward would be based on a five-year look-back period (the "Look-Back Period" and each year within the Look-Back Period a "Look-Back Year"). The Look-Back Period would be the five-year period which precedes the later of: (i) 1 January 2025; or (ii) the first day of the first Fiscal Year in which the In Scope MNE Group satisfies the Revenue Test and is not subject to the Limited International Presence Exclusion.
• For each Look-Back Year, all Bermuda Constituent Entities would be treated as part of a single Bermuda Constituent Entity Group, and Net Taxable Income or Loss would be computed by aggregating the Taxable Income and Loss of each Bermuda Constituent Entity. Taxable Income or Loss of each Bermuda Constituent Entity would be computed in the same manner as would have been required if the CIT were applicable in the Look-Back Year, except the 80% Taxable Income limitation with respect to the ETA and IFRS 17/LDTI Adjustment Election would not apply. Furthermore, there would be no Tax Loss Carryforward deduction applied, regardless of whether the sum of Taxable Income of each Bermuda Constituent Entity exceeds the sum of Taxable Loss of each Bermuda Constituent Entity.
• Once the Net Taxable Income or Loss is computed for each Look-Back Year, Net Taxable Losses are reduced by Net Taxable Income, but only to the extent of Net Taxable Income arising in Fiscal Years subsequent to the Fiscal Year in which the Net Taxable Loss was incurred.
• In a significant change from the Second Consultation Paper, if the ETA is applied to a Bermuda Constituent Entity (i.e., an ETA Opt-Out Election is not made), the Net Taxable Loss arising with respect to the Bermuda Constituent Entity prior to 1 October 2023 is deemed zero.
• Once the amount of the Opening Tax Loss Carryforward is determined, it would be allocated among the Bermuda Constituent Entities of the In Scope MNE Group in a manner determined by the UPE, provided that the portion of the Opening Tax Loss Carryforward allocated to a specific Bermuda Constituent Entity cannot exceed the aggregate Taxable Losses incurred by the Bermuda Constituent Entity during the Look-Back Period.

EY observes: The disallowance of an Opening Tax Loss Carryforward with respect to Bermuda Constituent Entities that apply the ETA presents a potentially significant tradeoff for MNE Groups in assessing whether to make the ETA Opt-Out Election. MNE Groups should carefully consider the ramifications of applying the ETA on their Opening Tax Loss Carryforward computation.

The Draft Legislation provides greater clarity on how the Opening Tax Loss Carryforward is determined. MNE Groups that are expected to become In Scope MNE Groups in a later year (e.g., due to qualifying for the Limited International Footprint Exclusion) would compute their Opening Tax Loss Carryforward generally based on the rolling five-year window that immediately precedes the year in which they become an In Scope MNE Group. The Disregard Tax Loss Carryforward Election — an addition in the Draft Legislation that was not part of prior consultations — could potentially have implications for MNE Groups that are required to consider the interaction between the proposed CIT regime and loss disallowance regimes in other jurisdictions (such as the so-called "dual consolidated loss" rules under the US Internal Revenue Code (IRC)).

Foreign Tax Credits (FTCs)

The FTC framework outlined in the Draft Legislation generally follows what was outlined in the Second Consultation Paper.

The Draft Legislation contains a provision that mirrors Art. 4.3.2(c) of the GloBE Rules and provides for an FTC with respect to taxes imposed on a non-Bermuda Constituent Entity-Owner under a Controlled Foreign Company (CFC) Tax Regime. There would be a limitation, analogous to Art. 4.3.3 of the GloBE Rules, on the amount of CFC Regime Taxes that is eligible for the FTC to the extent that the CFC Regime Taxes are in respect of Passive Income earned by the Bermuda Constituent Entity. The Third Consultation Paper notes that the Bermuda government continues to consider whether it is appropriate to allocate CFC Regime taxes in the manner specified in the Draft Legislation, and if so, the appropriate allocation and ordering rules and potential simplification measures for such allocations.

EY observes: The Draft Legislation does not incorporate the statement in the Second Consultation Paper that FTCs for Bermuda CIT purposes should be determined before considering any FTC a foreign jurisdiction might allow for the Bermuda CIT. MNE Groups with Bermuda Tax Resident Entities that are taxed under a CFC Regime or incur income taxes in jurisdictions that would also allow for a FTC with respect to the Bermuda CIT should closely monitor continued legislative drafts and other guidance released by the Bermuda government that could addresses the treatment of CFC Regime taxes and ordering of FTC determinations. For Bermuda reinsurers that are CFCs, or for Bermuda reinsurers that have made an election under IRC Section 953(d), the creditability of residual Bermuda CIT (if any) against US federal income tax liability (of the US shareholder in the case of a CFC, or at the entity level if an IRC Section 953(d) election has been made) could be limited under IRC Section 904 to the extent the reinsurer assumes US-source risk.

Treatment of reorganizations and other restructurings

The Draft Legislation incorporates special rules for restructurings involving Bermuda Constituent Entities that generally follow the treatment of transfers of assets and liabilities under Art. 6.3 of the GloBE Rules, including tax-free treatment for certain qualifying reorganizations (defined in a similar manner as in the GloBE Rules) and an election to treat an otherwise tax-free reorganization as a taxable reorganization.

Additional provisions in the Draft Legislation, consistent with Art. 6.2 of the GloBE Rules, address acquisitions or disposals of a Bermuda Constituent Entity, including an election to treat a disposal of a Controlling Interest in a Bermuda Constituent Entity as a transfer of its assets and liabilities.

Applicability of elections for computing the ETA and Opening Tax Loss Carryforward

The Draft Legislation provides rules on the availability and applicability of elections for purposes of determining the Opening Tax Loss Carryforward and ETA (Pre-Effective Date Elections). Pre-Effective Date Elections, if made, apply for a fixed period (Pre-Effective Date Period). The Pre-Effective Date Period:

• Begins on the later of: (i) 1 October 2023 (if the ETA Opt-Out Election is not made), or (ii) the first day of the fifth preceding Fiscal Year to the first Fiscal Year in which the In Scope MNE Group meets the Revenue Test and is not subject to the Limited International Presence Exclusion
• Ends on the later of (i) 31 December 2024, or (ii) the first day of the first Fiscal Year in which the In Scope MNE Group meets the Revenue Test and is not subject to the Limited International Presence Exclusion.

Implications

The Third Consultation Paper and Draft Legislation provides the closest representation yet of what a Bermuda CIT regime would entail. With the additional elections contained in the Draft Legislation, as well as coordination rules and other limitations with respect to the Opening Tax Loss Carryforward, ETA, Matching Election, and Realization Basis election, MNE Groups face the immediate task of assessing the impact of making or not making such elections and possible interactions between different elections.

The continued expectation that the Bermuda government will enact the CIT prior to 31 December 2023 will have implications for MNE Groups under the GloBE Rules, such as analyzing the need to recognize deferred tax assets associated with Opening Tax Loss Carryforwards and the ETA.

MNE Groups with a Bermuda presence are strongly encouraged to review the Draft Legislation in detail and consider the potential impact to their structures. As with the prior public consultations, the Bermuda government seeks comments on the Draft Legislation and other matters discussed in the Third Public Consultation. The consultation period for comments ends 30 November 2023.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Bermuda Ltd.

• James Dockeray, Global Compliance & Reporting, Hamilton | James.Dockeray@bm.ey.com

Ernst & Young LLP (United States), Financial Services Organization

• Chris Ocasal, ITTS, Washington | chris.ocasal@ey.com
• John Owsley, ITTS, Washington | john.owsley@ey.com
• Mike Shields, Insurance, Philadelphia | michael.shields02@ey.com

Ernst & Young LLP (United Kingdom)

• Jenny Coletta, International Tax Services | jcoletta@uk.ey.com
• Sarah Ho, EMEIA Financial Services — Tax | sho2@uk.ey.com
• Aran Mustafa, Global Compliance & Reporting | Aran.A.Mustafa@uk.ey.com

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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ENDNOTES

¹ Capitalized terms not otherwise defined in this Alert carry the same meaning as in the Third Consultation Paper.

² See EY Global Tax Alert, OECD releases Model Rules on the Pillar Two Global Minimum Tax: Detailed review, dated 22 December 2021.

³ See Section 1.5 of Part 3 of the Second Consultation Paper.

⁴ The "Reference Jurisdiction" would be defined consistent with the definition of the same term in the GloBE Rules: the jurisdiction where the MNE Group has the highest total value of Tangible Assets for the Fiscal Year in which the MNE Group first comes within scope of the CIT (determined without regard to the Limited International Footprint Exclusion). Tangible Assets are generally defined consistent with the GloBE Rules, and exclude cash and cash equivalents, intangibles and financial assets.

⁵ The Draft Legislation defines each type of Bermuda Constituent Entity generally consistent with the definition provided in the Second Consultation Paper. A Bermuda Tax Resident Entity is an Entity that is incorporated, formed or organized in Bermuda, unless the Entity is tax resident in another jurisdiction under the laws of that jurisdiction based on its location of management and control. A Bermuda PE is defined as a fixed place of business in Bermuda through which the business of an Entity not otherwise incorporated or formed in Bermuda is wholly or partly carried on as determined in accordance with Art. 5 of the OECD Model Tax Convention.

⁶ An identifiable intangible asset would mean an asset (not including a financial asset or goodwill) that lacks physical substance, provided either (i) the asset is capable of being separated or divided from the Entity and sold, transferred, licensed, rented, or exchanged, either individually, or together with a related contract, identifiable asset, or liability; or (ii) the asset arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

⁷ Consistent with the Second Consultation Paper, a similar 80% Taxable Income limitation applies with respect to the ETA. MNE Groups should monitor additional legislative drafts or other guidance released by the Bermuda government that may address the coordination of both Taxable Income limitations if both the IFRS 17 / LDTI Adjustment Election is made and the ETA is applied.