Bermuda - A Secure Offshore Port In Stormy Seas?
By Lowtax Editorial
08 July, 2016
Bermuda is one of the most prominent of the international offshore financial centers, with particularly strong insurance, investment fund and trusts sectors, and with a very well-developed advisory and financial infrastructure. Having introduced legislation to introduce limited liability companies modelled on the Delaware format, and a further bill to enhance its partnership regime, Bermuda is determined to remain relevant to international investors in an increasingly uncertain world, and is the subject of this special focus.
Where is Bermuda?
Bermuda is a mid-Atlantic archipelago 1,000 km (approx. 600 miles) from the USA, Cape Hatteras in North Carolina being the nearest point of landfall on America's eastern seaboard. Contrary to what many people think, Bermuda isn't in the Caribbean, which is 1,500km to the south!
Bermuda Standard Time is one hour ahead of US Eastern Time, and four hours behind GMT.
Bermuda Is Self-Governing, But Not Independent
Bermuda is a self-governing British Overseas Territory and forms part of the Commonwealth. Its legal system is based on English common law. The Crown appoints the Governor and Britain is responsible for the Island's external affairs, defense, internal security and the police. Bermuda has an elected House of Assembly and an appointed Upper House.
In a 1995 vote, the island's population rejected a proposal to become independent, partly perhaps out of concern for Bermuda's highly successful financial services industry.
Bermuda's Population Is Rising
Since 1950 the resident civilian population has steadily increased to more than 70,000 people (according to a July 2015 estimate) of mostly English, Portuguese and West Indian descent.
The Bermudian economy has been highly successful, with tourism and international business being the two main sources of revenue. However, the economy has struggled since the global financial crisis, and estimates suggest that in 2015, Bermuda registered its first year of positive GDP growth since 2008.
Nevertheless, despite the recession, Bermuda remains relatively wealthy. GDP in 2013 was an estimated USD5.2bn, giving a GDP per head of USD85,700 – the fifth highest in the world according to the CIA's World Factbook.
The development of Bermuda's thriving financial sector began in the 1950s. A wide variety of financial services are represented, with the captive insurance sector being the world leader. Fund and trust management are also prominent.
Bermuda financial services entities have a sizeable and significant share of foreign portfolio holdings (65 percent of Bermuda's financial services assets) amounting to USD516bn in 2014, a 16 percent increase from 2013, attributed to the growth of the financial services industry in Bermuda, according to the results of Bermuda's Coordinated Portfolio Investment Survey. Foreign portfolio holdings in Bermuda consist mainly of debt securities, amounting to USD423bn, representing 82 percent of total holdings.
Geographically, US holdings dominated Bermuda's foreign portfolio investment assets, accounting for 52 percent of total holdings; issuances by Canada and the UK accounted for 5 percent each; Cayman Islands, Ireland and Luxembourg followed with a 4 percent share each, with remaining countries' shares of 2 percent or less each. The insurance subsector heavily dominated foreign portfolio holdings with an ownership share of 82 percent (or USD426bn); investment funds were the second-largest subsector accounting for 16 percent, followed by banking with 2 percent.
Supervision of the financial sector is in the hands of the Bermuda Monetary Authority (BMA), an independent agency which inherited regulatory and supervisory powers from the Government.
The unit of currency is the Bermuda dollar (BMD) which has parity against the US dollar, which is widely accepted throughout the island.
Certain exchange controls apply to Bermudian citizens and to "local" companies, but there are no capital or exchange controls applying to non-residents or to offshore entities.
Bermuda Is A Low Tax Jurisdiction
In Bermuda there are no taxes on profits, dividends or income (personal and corporate); there is no capital gains tax, no withholding tax and no sales tax.
The main tax impinging on companies is payroll tax. In 2016, the rates vary from 7.25 percent to 15.5 percent, depending on the level of the company's total payroll.
Bermudian employers must pay social insurance contributions in respect of every employee over 16 years old, and who works more than four hours per week; half of the amount paid may be deducted from the employee's pay.
There are also taxes on property and stamp duty on assets at death.
Customs duties can be quite high for immigrants.
But Is Grappling With A Budget Deficit
As a consequence of Bermuda's shrinking economy since the financial crisis, Government debt-to-GDP increased from a low of 5.9 percent at the end of the 2007-08 fiscal year to 43 percent by the end of 2014-15. External debt in 2015 was USD2.435bn.
The Government has resisted the temptation to introduce income tax to help plug the budget gap. However, some taxes have been increased in recent budgets. The 2015/16 Budget, announced in February 2015, included increases to the payroll tax, fuel duty, land tax on commercial properties, the corporate services tax and the Airport Departure Tax. The 2016/17 Budget further increased rates of payroll tax and created a five percent general services tax, which is expected to apply from April 2017.
As well as proposing a number of tax hikes, Bermuda is seeking technical assistance from the International Monetary Fund's Caribbean Regional Technical Assistance Center to study measures that would broaden Bermuda's tax base, with a view to balancing the territory's finances within three years.
The Bermudian Government is, however, keen to avoid any fiscal measures which could endanger the international business sector as well as the jurisdiction's financial independence.
"The Government deficit and growing debt threatens our ability to fight for ourselves because if we lose the confidence of international credit markets we will likely have to revert to the UK for backing," warned Finance Minister Bob Richards in his 2015/16 Budget address.
However, he went on to assert that: "This Government will do everything in its power to prevent that woeful day from happening. Therefore, we will have to redouble our efforts and determination to eliminate the Government deficit as soon as possible."
Bermuda Is Clean And Responsible
As Richards went on to observe in his budget address, Bermuda "has had to work hard to differentiate itself from the dirty, shady offshore financial centers." The Government has therefore cooperated with ongoing international regulatory and tax transparency initiatives.
The Multilateral Convention on Mutual Assistance in Tax Matters was extended to Bermuda as of March 1, 2014 at the request of the Bermudian Government.
On December 19, 2013, Bermuda signed an intergovernmental agreement with the United States on the implementation of the Foreign Account Tax Compliance Act.
In April 2016, the Government signed a Declaration to the Multilateral Competent Authority Agreement for the exchange of Country-by-Country Reports (CbC). Accordingly, multinational entities headquartered in Bermuda will be required to file the new CbC regime documentation with the Minister for Finance by December 31, 2017, for the 2016 fiscal year.
Bermuda has a growing network of tax information exchange agreements (TIEAs), including with 90 percent of the G-20, 76 percent of OECD countries, and 52 percent of EU member states.
However, Bermuda has bluntly refused to accept the need for a public register of beneficial ownership of companies registered in the jurisdiction, as has been introduced in the UK. The Government has said that it will only introduce such measures when other nations do the same for their companies.
As Michael Dunkley, Bermuda's Premier, observed after the Overseas Territories Joint Ministerial Council in December 2015, Bermuda exceeds beneficial ownership transparency standards in most other countries by requiring companies to submit the personal declarations of all ultimate beneficial owners holding a 10 percent or more interest in the entity. "Bermuda has had for over 70 years a world-leading, government-held central register of beneficial ownership that long pre-dates those in most developed countries, including the UK, and has at every opportunity shared the information requested by legitimate international authorities, within 24 hours," he said.
Nevertheless, Bermuda has agreed to support an initiative on the automatic exchange of beneficial ownership information spearheaded by the five largest economies in the European Union – the UK, France, Germany, Italy and Spain (the G5).
Bermuda Is Synonymous With Insurance
Bermuda is a significant player in the global insurance market. This is partly due to legislation which provides greater flexibility than that of most other jurisdictions.
On May 4, 2015, the Bermuda Monetary Authority released statistics showing the continued significance of the Bermuda (re)insurance marketplace and underlining its major role in the world's risk transfer industry.
According to these figures, the insurance sector recorded USD163bn in gross premiums in 2013 (the latest year for which complete data is available at the time of writing) – an increase of 35.3 percent year on year. Overall, the market recorded aggregate total assets of USD607.6bn and held aggregate capital and surplus of USD191.6bn.
Bermuda's captives wrote USD32.9bn in gross premiums and reported total assets of USD125.4bn. Reported capital and surplus for Bermuda's captives was USD53.3bn.
In 2014, licenses were granted to 89 new insurance entities, including 65 new insurers and 24 new intermediaries.
The most significant growth in 2014 was in the long-term (life insurance) sector. Growth in this area was supported by the decision of the National Association of Insurance Commissioners (NAIC) to grant conditional Qualified Jurisdiction (QJ) status to Bermuda effective on January 1, 2015.
The NAIC is the US standard-setting and regulatory support organization created and governed by the 50 US state insurance regulators, the District of Columbia, and five other US territories. Having QJ status allows reinsurers in Bermuda to reinsure US risk on a non-discriminatory basis and benefit from reduced collateral requirements.
In terms of the beneficial ownership of the new insurers, the US was far and away the most significant jurisdiction once again, with Bermuda and Europe second and third respectively. Two new insurers from Latin America and two captives from Canada were amongst the new registrants in 2014.
Alongside the addition of 10 new long-term insurers, Bermuda registered 16 new captives, 11 new commercial insurers writing general business, and 28 Special Purpose Insurers.
Shelby Weldon, BMA Director of Licensing and Authorizations, said: "The 2014 registration activity continues to demonstrate Bermuda's global position as a leading alternative risk transfer marketplace. We remain the global leader in both captives and Insurance Linked Securities and our international reinsurance sector remains one of the world's top reinsurance markets."
Bermuda registered 64 new (re)insurers in 2015 and the territory approved a greater number of applications from limited purpose insurers and captives. This was broadly in line with the 65 registrations reported in 2014. However, of the new companies, 22 were limited purpose insurers or captives (that is, class 1, 2, 3, A or B (re)insurers), up from the 16 new captives registered in 2014.
"Registration of captives is on the increase because they not only reduce insurance costs but are important components of the parent companies' burgeoning risk management programs," observed Weldon. "Captives registered between July and December 2015 cover a diverse range of risks, from oil and natural gas drilling in Canada to drivers' insurance in Peru. It is encouraging to see continuing registrations from Canada and Latin America, as these regions have been targeted by Bermuda's business development efforts. However, the US remained by far the greatest source of Bermuda's captive formations during the second half of 2015."
As well as the captive insurance sector, Bermauda's insurance-linked securities (ILS) sector is also the world's largest. According to BMA figures, ILSs issued from Bermuda represent 69 percent (USD18.4bn of USD26.5bn) of total outstanding ILS capacity. Bermuda is also host to foreign ILS listings, which augment the depth of the secondary market. There are 79 ILS deals (104 tranches) listed on the Bermuda Stock Exchange (BSX) with an aggregate nominal value of USD19bn. Six new ILS deals were listed on the BSX during the first quarter 2016 while nine matured.
The BMA's Bermuda Insurance-Linked Securities Market Report, published in June 2016, further shows that 2016 began with the highest first quarter issuance volume of catastrophe bonds since the BMA began tracking the market in 2009. A total of ten bonds were issued in the amount of USD2.2bn while 17 ILS deals matured with a notional value of USD2.1bn. The net issuance of bonds increased the total stock of outstanding capacity to USD26.5bn, an increase of 13 percent year over year.
In another significant development, Bermuda was granted equivalence with the European Union's "Solvency II" directive by the European Commission in November 2015. Solvency II requires that the solvency regime applied to reinsurance activities of third country undertakings such as Bermuda is equivalent to that laid down in the Directive. Bermuda's Solvency II equivalence ensures that insurers and reinsurers retain access to EU markets following the introduction of harmonization rules in 2016.
Mutual Funds Are Also Big Business
Bermuda is well behind the Cayman Islands in terms of the size of its investment fund sector, but fund management is nevertheless a strong component of the finance industry, assisted by the existence of a stock exchange.
At the end of the third quarter of 2014, the total number of funds registered in Bermuda was 661, including 457 mutual funds, 40 umbrella funds, 65 segregated account companies, 62 unit trusts, and 47 umbrella trusts. The net asset value of these funds was just over USD175bn.
The Authority registered 83 new funds in 2015, slightly up from 80 in 2014. Included among the new 2015 funds were 32 Class A and Class B Exempt Funds (up from 25 the previous year).
In March 2014, the BMA confirmed the signing of a memorandum of understanding (MoU) with Germany's financial regulator, the Federal Financial Supervisory Authority, in relation to the European Union's Alternative Investment Funds Managers Directive (AIFMD).
The MoU, the 27th accord concluded with the Authority under the AIFMD, provides for mutual assistance between supervising managers of alternative investment funds who operate on a cross-border basis in both jurisdictions.
Jeremy Cox, CEO of the Authority said: "Germany is an important market for Bermuda, and this MoU will ensure that Bermuda fund managers have the opportunity to participate in the German market with the appropriate level of supervisory oversight. Marking this milestone also serves to reinforce Bermuda's competitive position as a jurisdiction that can accommodate a full spectrum of fund related activity within an internationally recognized regulatory framework."
But The Banking Sector Is Small (And Perfectly Formed?)
International banks were conspicuous by their absence due to the Government's policy of excluding non-domestic banks; then HSBC was allowed to buy the Bank of Bermuda in 2003. However local banks provide adequate services, and there has been a substantial development of "fringe" financing activities along with securities trading, and most recently a surge in Internet financial services.
The early decision of the Bermuda Government to exclude foreign banks may have owed more to self-interest than to fear of money-laundering or the OECD, but it turns out to have been very successful, leading not only to Bermuda's high reputation but to the establishment of strong, local banks, something that has eluded almost all other IOFCs. The unrestrained growth of the insurance and mutual fund sectors certainly doesn't seem to have been curtailed by any lack of banking variety. Indeed, the variety and quality of private banking services on offer has contributed strongly to the development of international business in and from Bermuda.
Four banks are currently licensed in Bermuda (July 2016). These include HSBC Bank Bermuda Limited, Bermuda Commercial Bank Limited, Clarien Bank Limited, and the Bank of N T Butterfield & Son Limited.
Trust Management Is Also Significant
Trust management has been a significant activity for Bermuda for more than fifty years. Originally the main sources of trust business were the UK, the USA and Canada, but more recently other parts of the world have become increasingly important, as understanding of the trust concept has spread more widely.
Successive tightenings of anti-avoidance legislation in the traditional markets have also tended to reduce volume. However, like other common law trust jurisdictions, Bermuda is tapping into new markets in Asia. For example, in 2012, the Bermuda Business Development Agency (BDA), the promotional agency for the island's financial services industry, used the opportunity of an annual Society of Trust and Estate Practitioners (STEP) Asia conference to build upon the territory's profile in Hong Kong.
Commenting following the visit, Cheryl Packwood, then Chief Executive Officer of the BDA, said: "Hong Kong is an important global player and a key partner for Bermuda, and this trip has been a huge success. In the last decade, more than 500 Asian companies have domiciled in Bermuda, which is increasingly becoming a destination for Asian companies looking to base in a jurisdiction with many advantages such as high quality regulation that also offers the ability to organize transnational investments between Asia and the United States or Europe."
The principle offshore company format used in Bermuda is the exempt company, which are formed under the Companies Act 1981 (as amended). This format provides exemption from the 60 percent local ownership requirement to a company which is does not engage in any activity on the island except with other exempt entities. Managing other exempt entities is also permitted, and, for mutual companies, so is the local distribution of their shares. Other activities may be permitted to exempt companies if a license is granted by the Minister of Finance.
An exempt company must have two individuals resident in Bermuda, either as directors, or one as secretary and one as director, or one as secretary and one as "permanent representative."
Exempt companies pay annual fees based on their "assessable" capital (authorized capital plus share premium account; or for a mutual company its authorized capital - a share premium account is not required).
A significant development in the history of company law in Bermuda occurred on July 1, 2016, when E. Grant Gibbons, Minister of Economic Development, tabled the Limited Liability Company Act 2016 in parliament – a piece of the legislation that would establish the first new commercial structure in Bermuda in more than 100 years.
"With the enactment of this legislation, we will create a structure that offers broad flexibility for both local and international use," Gibbons told parliament. "This new structure is a tremendous step toward ensuring that Bermuda has corporate products that are modern and innovative but also familiar to many prospective clients."
Limited liability companies (LLCs) are one of the most widely used business structures in the United States. These "hybrid" entities have characteristics similar to partnerships and corporations. They are similar to partnerships in that they are managed and operated pursuant to a contractual agreement amongst the members, who are the owners of the LLC. "This provides significant flexibility for LLC members to determine the most appropriate terms and conditions for administration and governance of the LLC," Gibbons observed.
However, LLCs also generally enjoy limited liability, meaning that liability is limited to the value of each member's capital contribution to the LLC. "In fact, the ability of the members to both manage the day to day operations of an LLC while retaining their limited liability are two cornerstones of this structure and are particularly attractive to investors," Gibbons added.
Almost 800,000 active LLCs are currently registered in Delaware, with more than 180,000 having been registered in the state since 2015. In the United States, they are generally used by private equity funds and as asset holding structures. However, they have also been incorporation into the company legislation of other offshore financial centers recently, including the Isle of Man, the Cayman Islands, Anguilla, and the Marshall Islands.
Gibbons explained that the Bermuda LLC legislation is modelled on existing US LLC laws, although Bermuda LLCs will be subject to the same transparency requirements for beneficial ownership that apply to existing Bermuda structures.
Bermuda is also considering reforms to its partnership regime that are intended to enhance and modernize the existing law. The Partnerships and Companies Amendment Bill 2016 introduces changes to the Exempted Partnerships Act 1992 to make the provisions governing relocation of partnerships into Bermuda consistent with those governing relocation of companies into Bermuda; and to provide clarity in relation to the effective date for de-registration of any Bermuda partnership.
The Limited Partnership Act 1883 is being amended to clarify that, subject to the partnership agreement, a partnership which has not elected separate legal personality is not dissolved by a change in any of the partners.
Bermuda And The Brexit
Unlike the UK's Crown Dependencies and certain of its Overseas Territories – namely Gibraltar – Bermuda has a much looser association with the European Union via its constitutional links to the UK. It is therefore thought that the economic fall-out from the UK electorate's decision to leave the EU will have little impact on Bermuda's key financial services industry. Indeed, senior representatives of the industry in Bermuda believe that the jurisdiction's "safe haven" status will be to its advantage as the Brexit unfolds.
"The result of [the] UK referendum in no way diminishes the unique strengths that have for decades anchored Bermuda as a world-class, well-respected, and robustly regulated financial center," stated Greg Wojciechowski, CEO of the BSX and Chairman of ILS Bermuda. "Bermuda's unique geographic position between two of the world's deepest capital markets and largest insurance centers has created commercial opportunity for the island as well as a solid platform to provide services to a global audience – and the Brexit result will not impact this. Bermuda will continue to provide a safe harbor amid uncertainty for the foreseeable future."
"Today, in fact, Bermuda is better placed than ever to cater to the contemporary needs of international business," noted Ross Webber, CEO of the BDA, the day after the referendum. "Attributes such as our stand-alone Solvency II equivalence with the EU and our progressive path towards Alternative Investment Fund Managers Directive passport rights in Europe may now appear even more attractive than they were a day ago. These are examples of regulatory votes of confidence given to Bermuda as a robust jurisdiction in its own right, and not contingent on our relationship with Britain."
At the time of writing however, it is impossible to predict how the consequences of the Brexit vote will play out. What it certain is that there will not be overnight change in the UK's relationship with the EU. However, whatever that change may be, Bermuda looks to be a strong position to deal with it.
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