On 20 December 2021, the OECD published its draft Global Anti-Base Erosion Model Rules ("
GloBE Rules") which were aimed at ensuring that multinational enterprises ("
MNEs") would be subject to a global minimum 15% tax rate from 2023.
As a response to that initiative, the Bermuda government passed the Corporate Income Tax Act 2023 (the "CIT Act"), which will become fully operative on 1 January 2025.
Implications of the Corporate Income Tax Act (“CIT Act”)
Under the CIT Act, a corporate income tax of 15% will be payable by Bermuda entities that are part of MNE groups with €750 million or more in annual revenues, as shown in the consolidated financial statements of the ultimate parent entity, for at least two of the four fiscal years immediately preceding the fiscal year in question ("
Bermuda Constituent Entity Group").
A "group" is defined for the purposes of the CIT Act as a collection of entities that are related through ownership or control such that the assets, liabilities, income, expenses and cash flows of those entities are included in the consolidated financial statements of the ultimate parent entity, or are excluded from the consolidated financial statements of the ultimate parent entity solely on size or materiality grounds, or on the grounds that the entity is held for sale.
International Shipping Exclusion
Consistent with the OECD's original Pillar II proposals, the CIT Act provides for an exclusion for relevant shipping income from the calculation of a MNEs taxable income or loss.
International shipping income for these purposes includes, among other things, income derived from the transportation of passengers or cargo by ships and income derived from the leasing of ships to be used for these purposes (or leasing ships on a bareboat charter basis to another entity in the MNE group). However, there must be an international element to the income: income obtained from the transportation of passengers or cargo by ships via inland waterways within the same jurisdiction is specifically excluded from the definition of "
international shipping income" in the CIT Act.
Importantly, a Bermuda constituent entity claiming the exclusion must demonstrate that the strategic or commercial management of all ships concerned is effectively carried on from or within Bermuda.
From an economic substance law perspective, entities conducting the relevant activity of 'shipping' must also demonstrate that they have adequate economic substance in Bermuda relative to the nature, scale and complexity of the shipping business being conducted in or from Bermuda. This includes the requirement to be 'managed and directed' in Bermuda.
Walkers is experienced in assisting companies with aligning the requirements for 'strategic management' under the CIT Act and to be 'managed and directed' in Bermuda for economic substance purposes including identifying and implementing the synergies under both regimes.
