The new Bermuda corporate income tax (CIT) will apply to multinational enterprises (MNEs) in scope of Pillar Two. How will this impact UK intermediate entities?
Bermuda is a global insurance and reinsurance hub, due to its robust regulatory framework and strong solvency regime. This means a number of (re)insurance groups are headquartered there.
This British overseas territory has never before imposed taxes on corporate income. The implementation of Pillar Two (discussed in our previous article) across various jurisdictions worldwide changes the picture. It opens up the possibility of an in-scope MNE’s undertaxed Bermuda profits being taxed in another jurisdiction in which the MNE operates.
In response to this, Bermuda has introduced a corporate income tax (CIT) which applies specifically to Bermuda entities that are part of an MNE with annual revenue of €750m – ie, those in scope of Pillar Two. The rate of CIT has been set at 15% (in line with the Pillar Two minimum rate) and will apply from 1 January 2025. The effect of the CIT is to enable the territory to collect taxes on Bermuda income that could otherwise be collected by another jurisdiction under Pillar Two.
Bermuda is not itself implementing Pillar Two. Therefore, the administrative burden of making Pillar Two calculations and meeting its compliance obligations may fall to UK subsidiaries of Bermuda-headed MNEs if such subsidiaries are considered the intermediate parent entity.
What is the current situation?
CIT legislation was enacted in December 2023, and in August 2024, draft administrative provisions were shared for public consultation.
Further guidance is expected to be provided early in Q1 2025, but based on the responses to the consultation, it is likely that an in-scope entity will need to register for CIT as part of its annual filing of returns with the Registrar of Companies. Upon filing and declaration, two additional questions will need answering:
- Is the company in scope of the CIT? If the answer is no, the entity must confirm why (by selecting from a provided list of responses).
- If the answer to the above is yes, it must provide the details of a Bermuda tax resident company which will act as the “representative entity”, ie be a point of contact. (This can be the entity itself).
It is likely that an in-scope entity will need to:
- File a CIT return by the 15th day of the 10th month following the end of its financial year (eg an entity with a 31 December 2025 year-end would need to file its return for that year by 15 October 2026; and
- Pay its CIT liability in two instalments during the financial year, with a final “top-up” payment (if needed) when the CIT return for that year falls due.
A number of elections are available that can override certain aspects of the core CIT rules. Companies have the option to make many of these elections now, or they can make these elections within their CIT returns.
The elections are broadly categorised as follows:
- Annual elections – once made, these can be revoked (or once revoked, they can be re-elected) at will from year to year.
Example: the de minimis exemption, which mirrors the Pillar Two threshold test in our previous article. This reduces an MNE’s CIT liability to nil for a given year if both of these conditions are satisfied across its Bermuda group members:
- Average revenue is less than €10m
- Average net taxable income is less than €1m (or is a loss).
- Five-year elections – once made, these cannot be revoked (or once revoked, they cannot be re-elected) for a five-year period.
Example: an election to determine the financial accounting net income or loss (FANIL) and starting point of the taxable income calculation, based on an approved financial accounting standard other than that used to prepare the ultimate parent entity’s consolidated financial statements.
- Other elections – once made, these cannot be revoked at all.
Example: an election to forgo the economic transition adjustment (ETA). The Bermuda CIT introduces an ETA which requires companies to calculate the tax basis of assets and liabilities based on their fair values at 30 September 2023 and determine an opening tax loss based on amounts generated after this date. If entities elect to forgo the ETA, companies instead calculate their opening tax loss based on net cumulative losses in the preceding five years.
Interaction with Pillar Two
CIT is a tax on profits, so it is a covered tax for Pillar Two purposes. This means it is included in the calculation of a Bermuda company’s effective tax rate (ETR) under Pillar Two.
Certain elections, once made, might reduce a company’s CIT liability in Bermuda and thereby the ETR in Bermuda. If the ETR in Bermuda is below the 15% minimum rate of tax, the MNE may need to pay a top-up tax for the difference in another jurisdiction. Bermuda won’t collect the top-up tax itself, as it has not implemented Pillar Two.
What is our advice?
Care must be taken in deciding whether to make any of the Bermuda CIT elections. This process should include modelling the impact on the group’s Pillar Two calculations.
If you would like further information or advice relating to the issues covered by this article, please contact Mimi Chan and Jannat Moyeen.
