December 22, 2023
Bermuda Parliament passes legislation to enact a 15% corporate income tax
On 15 and 18 December 2023, the Bermuda House of Assembly and Senate, respectively, passed final legislation (the "Final Legislation") to enact a 15% corporate income tax (CIT) that would apply to Bermuda businesses that are part of multinational enterprise (MNE) groups with annual revenue of €750m or more. Enactment of the Final Legislation is expected to immediately follow in 2023.
The Final Legislation is largely consistent with the initial draft legislation released on 15 November 2023 as part of the third public consultation on the introduction of a CIT (the "Initial Draft Legislation"). Notable changes in the Final Legislation include: (i) the removal of the allowance of a foreign tax credit (FTC) associated with certain foreign taxes of non-Bermuda entities related to income earned by Bermuda entities (including no longer allowing an FTC with respect to United States (US) taxes paid by US persons on Subpart F/global intangible low-taxed income (GILTI) inclusions from Bermuda entities that are controlled foreign corporations (CFCs)); (ii) a limited two-year election available to exclude from the Bermuda CIT base certain income of a Bermuda entity that is a CFC for US federal income tax purposes; and (iii) a rule on the ordering of FTC determinations.
On 18 December 2023 the Bermuda Ministry of Finance released additional guidance concerning frequently asked questions on certain determinations for the CIT (the "FAQs"). The FAQs provide guidance on scoping determinations and how certain provisions are to be interpreted or otherwise intended to operate, including the making of elections, determination of tax losses, and computation of the economic transition adjustment (ETA).
The enactment of a CIT in Bermuda in 2023 has significant implications for multinational groups with a presence in Bermuda. The CIT regime contains numerous elections that have interrelated effects. 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 Organisation for Economic Co-operation and Development (OECD) Pillar Two Global Anti-Base Erosion (GloBE) Rules.1
The purpose of this Alert is to summarize the changes in the Final Legislation compared to the Initial Draft Legislation, as well as provide an overview of the guidance contained in the FAQs. For a detailed overview of the Initial Draft Legislation, see EY Global Tax Alert, Bermuda government releases draft legislation for adoption of a 15% corporate income tax, dated 22 November 2023 (the "November CIT Alert").
Significant changes in the Final Legislation compared to Initial Draft Legislation
FTC ordering rule
The Final Legislation provides that Creditable Foreign Taxes must be determined in accordance with the relevant laws and regulations of the taxing foreign jurisdiction, except the determination is made prior to consideration of any tax credits that would otherwise be permissible in the foreign jurisdiction with respect to the Bermuda CIT (referred to hereinafter as the "General FTC Ordering Rule").2 The General FTC Ordering Rule does not apply with respect to Bermuda Source Income. For this purpose, Bermuda Source Income means:
EY observes: The General FTC Ordering Rule should reduce uncertainty faced by MNE Groups in determining how to coordinate the mathematical interdependencies arising between the FTC rules in Bermuda and other jurisdictions (sometimes referred to colloquially as the "circularity problem"). The General FTC Ordering Rule does not apply to Bermuda Source Income. Consequently, it appears that the determination of Creditable Foreign Taxes with respect to Bermuda Source Income requires considering the allowance of tax credits in the foreign jurisdiction with respect to the Bermuda CIT.
Elimination of certain allocations of Adjusted Creditable Foreign Taxes
In a change from the Initial Draft Legislation, the Final Legislation no longer permits an FTC with respect to Adjusted Creditable Foreign Taxes of: (i) a non-Bermuda Main Entity related to the Taxable Income or Loss allocated to a Bermuda Permanent Establishment (PE); (ii) Constituent Entity-Owners related to the Taxable Income or Loss of a Bermuda Constituent Entity that is a Hybrid Entity (as was defined in the Initial Draft Legislation); (iii) a direct Constituent Entity-Owner of a Bermuda Constituent Entity related to distributions from the Bermuda Constituent Entity; and (iv) direct or indirect Constituent Entity-Owners of a Bermuda Constituent Entity under a Controlled Foreign Company Tax Regime.
Also removed from the Final Legislation are provisions that would have allocated Adjusted Creditable Foreign Taxes from a Bermuda Constituent Entity to: (i) a PE for which the Branch Exemption Election has been made, if the taxes relate to Taxable Income or Loss of the PE; (ii) a Hybrid Entity (as was defined in the Initial Draft Legislation) for which the Bermuda Constituent Entity is a Constituent Entity-Owner, if the taxes relate to Taxable Income or Loss of the Hybrid Entity; and (iii) a Constituent Entity of which the Bermuda Constituent Entity is a direct Constituent Entity-Owner, if the taxes relate to distributions from the Constituent Entity.
EY observes: The narrowing of the rules for allocating Adjusted Creditable Foreign Taxes to or from a Bermuda Constituent Entity could have significant implications for MNE Groups, particularly MNE Groups that have Bermuda Constituent Entities owned through US corporations and are treated as CFCs for US federal income tax purposes. US taxes arising at the US-shareholder level on Subpart F/GILTI inclusions from a Bermuda Constituent Entity will not be allowed as a credit against Bermuda CIT. As noted below, consideration should be given to the CFC Income Exclusion Election. More generally, MNE Groups should consider the impact of this development in the Final Legislation on their Bermuda CIT determinations, including the interaction with determinations under the GloBE Rules.
Limited-time election to exclude certain income of Bermuda Constituent Entities that are CFCs for US federal income tax purposes
The Final Legislation contains an election to reduce certain of the Financial Accounting Net Income or Loss (FANIL) of a Bermuda Constituent Entity that is a CFC for US federal income tax purposes (referred to hereinafter as the "CFC Income Exclusion Election"). The CFC Income Exclusion Election is available to the extent that both:
Under the CFC Income Exclusion Election, FANIL corresponding to the proportionate Ownership Interest of the Applicable Constituent Entity-Owner is excluded from the Bermuda Constituent Entity's Taxable Income or Loss.
The CFC Income Exclusion Election is only available with respect to the first Fiscal Year of the Bermuda Constituent Entity which begins on or after 1 January 2025 and prior to 1 January 2016, and the immediately succeeding year.
EY observes: With the Final Legislation no longer allowing an FTC for US taxes attributable to Subpart F/GILTI inclusions of a US shareholder of a CFC that is a Bermuda Constituent Entity, MNE Groups with CFCs should carefully consider the implications of the CFC Income Exclusion Election for the two Fiscal Years it would be made available, as well as the implications for the Fiscal Years after which the election would no longer be available. For years in which the CFC Income Exclusion Election is no longer available (e.g., 2027 in the case of a calendar year Fiscal Year), MNE Groups should analyze whether any Bermuda CIT paid at the CFC level would be creditable for US federal income tax purposes as part of a deemed-paid foreign tax credit under US Internal Revenue Code (IRC) Section 960 (including taking into the foreign tax credit limitation in IRC Section 904). For Bermuda reinsurers that are CFCs, the creditability of residual Bermuda CIT could be limited under IRC Section 904 to the extent the reinsurer assumes US-source risk.
The below discussion is intended as a non-comprehensive summary of the guidance contained in the FAQs. MNE Groups are encouraged to study the FAQs in detail.
General applicability of the FAQs
As an introductory matter, the FAQs state they should be read in conjunction with the Final Legislation and is not intended to substitute or amend the provisions or definitions outlined in the legislation. Importantly, the FAQs clarify that the GloBE Rules (including any related Commentary or Administrative Guidance) is not imported by reference into the Final Legislation or any related regulations or other guidance unless expressly stated. Further, if the FAQs are significantly amended or expanded, consideration will be given to the fact that taxpayers may have relied upon the previous FAQs in arranging their affairs and, to the extent appropriate, a reasonable opportunity for taxpayers to make any changes will be afforded.
EY observes: The general guidance on the intent of the FAQs, including clarification on the relevance of the GloBE Rules to the CIT regime, should help bring clarity to MNE Groups in interpreting the Final Legislation and applying it to their structures.
Summary of elections
The FAQs organize the 24 elections contained in the Final Legislation by their classification in the Final Legislation as either Annual Elections, Five-Year Elections, or elections that are neither Annual Elections nor Five-Year Elections (referred to in the FAQs as "Other Elections"). In the Final Legislation, Annual Elections and Five-Year Elections as defined in the same manner as the Initial Draft Legislation and explained in the November CIT Alert, while the FAQs clarify that Other Elections, once made, cannot be revoked.3 The Appendix to this Alert contains a table reproducing the classification of the elections contained in the FAQs.
How elections are made
As a general rule, elections will be made in the Bermuda corporate income tax return of the Bermuda Constituent Entity Group of which the Bermuda Constituent Entity is a member that is filed for the Fiscal Year for which the election is intended to be effective. The FAQs state that it is anticipated that the return will include data fields that will allow the filer to provide a clear indication of all tax elections being made.
As an alternative to the general rule, and at the discretion of the decision-maker making the election, an election may be made in advance of filing a Bermuda corporate income tax return. A specific form (Form CT-ELP) and accompanying instructions have been made available to facilitate the making of elections prior to the filing of a Bermuda corporate income tax return. The FAQs state that elections made on Form CT-ELP may be modified and/or reversed in the Bermuda corporate income tax return or by filing of an amended Form CT-ELP. The FAQs clarify that there is no requirement under the Final Legislation to make elections in advance of filing a Bermuda corporate income tax return.
EY observes: The FAQs bring much-needed guidance to MNE Groups on the due dates and administrative parameters for making elections under the CIT regime. MNE Groups should consider the guidance in the FAQs and any tax accounting implications with respect to elections.
Elections applicable for the period to compute the Opening Tax Loss Carryforward
The Final Legislation retains the special rules introduced in Section 49 of the Initial Draft Legislation on the availability and applicability of elections for purposes of determining the Opening Tax Loss Carryforward and ETA (referred to hereinafter as "Pre-Effective Date Elections"). The FAQs confirm that Pre-Effective Date Elections will be made in the Bermuda corporate income tax return filed with respect to the Bermuda Constituent Entity group of which the Bermuda Constituent Entity is a member for the first Fiscal Year beginning after the look-back period for which the Opening Tax Loss Carryforward is computed (referred to hereinafter as the "Pre-Effective Date Period"), unless it is desired to make an election prior to such date through the filing of Form CT-ELP. Consistent with the Final Legislation, the FAQs confirm that Pre-Effective Date Elections, if made, apply for the entire look-back period and cannot be made with respect to only a subset of Fiscal Years within the Pre-Effective Date Period.
Consistent with the Final Legislation, the FAQs clarify that for purposes of computing the Opening Tax Loss Carryforward, the election to reduce the amount of Tax Loss Carryforward Deduction (Section 6(1)(b) of the Final Legislation) and the election to create a separate Bermuda Constituent Entity Group (Section 8(3) of the Final Legislation) are not permitted.
EY observes: Because any Pre-Effective Date Election, if made, applies to the entire Pre-Effective Date Period (even if such election otherwise would be an Annual Election), MNE Groups should carefully consider the implications of making an election for the Pre-Effective Date Period on their Opening Tax Loss Carryforward.
Definition of Insurance Investment Entity
The FAQs confirm that the definition and interpretation of the term "insurance investment entity" should follow the interpretation in the Commentary to the GloBE Rules. An Insurance Investment Entity may be wholly owned by a single Entity, or by several Entities which are all part of an MNE Group. The definition is also intended to cover Insurance Investment Entities which are established in relation to liabilities under one or more insurance or annuity contracts.
Computation of Opening Tax Loss Carryforward and Tax Loss Carryforward Deduction
Numerical examples are provided that demonstrate both the computation of the Tax Loss Carryforward Deduction and the Opening Tax Loss Carryforward. Additional clarifications, which are consistent with the statutory language of the Final Legislation, are also provided on the operation of the Tax Loss Carryforward Deduction.
EY observes: The numerical examples and other guidance on the determination of the Tax Loss Carryforward Deduction should bring greater clarity to MNE Groups on applying the Tax Loss Carryforward Deduction rules.
Prior period errors and changes in accounting principles
The FAQs provide several points of clarification on the required adjustments in the computation of Taxable Income or Loss for prior period errors or changes in accounting principles (Section 28 of the Final Legislation):
Economic transition adjustment (ETA)
The FAQs provide the following guidance on the ETA:
A Bermuda Constituent Entity must select one of the above methods, and the chosen method must be utilized for all insurance contract liabilities of the Bermuda Constituent Entity and for all fiscal periods subsequent to the ETA Valuation Date (including periods included in the determination of the Opening Tax Loss Carryforward).
EY observes: The guidance on the determination of the ETA should help MNE Groups make required determinations for the ETA, including deciding whether to elect to forego the ETA. MNE Groups are strongly encouraged to carefully study the numerical examples presented on the computation of the ETA. The guidance on the treatment of insurance contract liabilities should provide flexibility to MNE Groups that will mitigate the potentially burdensome complexity associated with tracking the run-off and settlement of specific insurance liabilities.
Transfer pricing adjustments for purposes of calculating the Opening Tax Loss Carryforward
The Final Legislation generally requires that the Opening Tax Loss Carryforward be computed in the same manner as would have been required if each Bermuda Constituent Entity had been subject to the CIT during the look-back period, unless otherwise stated. To this end, an adjustment in the computation of Taxable Income/Loss is generally required under Sections 37(1)-(3) of the Final Legislation if certain transactions are not otherwise reflected consistent with the arm's-length principle. The FAQs state that, in acknowledgement of administrative complexity and the general expectation that cross-border related party transactions would have been subject to transfer pricing requirements in a foreign jurisdiction, a Bermuda Constituent Entity is not required to make adjustments under Sections 37(1)-(3) for purposes of determining the Opening Tax Loss Carryforward.
With the imminent enactment of the CIT regime, MNE Groups should revisit prior assessments of the impact to their structure in light of the changes to the regime reflected in the Final Legislation and additional guidance contained in the FAQ, including the impact on their deferred tax accounting and determinations under the GloBE Rules.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Bermuda Ltd
Ernst & Young LLP (United States), Financial Services Organization
Ernst & Young LLP (United Kingdom)
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 See EY Global Tax Alert, OECD releases Model Rules on the Pillar Two Global Minimum Tax: Detailed review, dated 22 December 2021.
2 Unless otherwise noted, capitalized terms used in this Alert are defined as in the Final Legislation.
3 An Annual Election is available on an annual basis and, 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. A Five-Year Election, once made, 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.
4 See FAQs, pg. 31.