Bermuda has implemented a new tax that targets businesses operating within multinational enterprise groups (MNEs) with annual revenues exceeding EUR750 million. This tax aligns with the international agreement known as Pillar Two, endorsed by over 140 nations in October 2021 and sponsored by the OECD for a global minimum corporation tax.
Described as the “most fundamental tax reform in Bermuda’s modern history,” the proposed tax underwent a three-stage consultation in 2023. Initially perceived as a potential challenge for Bermuda, the government highlighted its efforts to maximise benefits under the legislation, set to take full effect in January 2025. The tax is designed to qualify as a ‘covered tax,’ mitigating top-up tax payments to other jurisdictions regarding profits earned in Bermuda.
Adjustments were made to the draft legislation following the November 2023 consultation. Notably, there is no longer an allowance for foreign tax credits associated with certain foreign taxes of non-Bermuda entities related to income earned by Bermuda entities. This includes the exclusion of foreign tax credits for US taxes paid by US persons on Subpart F/global intangible low-taxed income from Bermuda entities classified as controlled foreign corporations (CFCs). Additionally, a limited two-year election has been introduced to exclude specific income of a Bermuda entity that qualifies as a CFC for US federal income tax purposes.
The complexity of the new tax regime is evident through the incorporation of 24 interrelated elections. The Bermuda Ministry of Finance has released additional guidance and a frequently asked questions document to provide clarity on scoping determinations and interpretations of certain provisions. These guidelines cover aspects such as the making of elections, determination of tax losses, and computation of the economic transition adjustment.
Tax advisors, such as EY, emphasise the substantial implications of this enactment for MNEs with a presence in Bermuda, particularly within the insurance and reinsurance sectors. They recommend that multinational groups with Bermuda operations carefully assess the impact on deferred tax accounting and consider the ramifications under the OECD Pillar Two rules.