By Lowtax Editorial
17 July, 2017
The undisputed leader of the offshore insurance industry, Bermuda also has significant investment fund and trust sectors, and is the subject of this special Lowtax.net feature.
Introduction to 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.
Bermuda Standard Time is one hour ahead of US Eastern Time, and four hours behind GMT.
Bermuda is a self-governing British Overseas Territory, forms part of the Commonwealth, and 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 fully independent, partly perhaps out of concern for Bermuda's highly successful financial services industry.
The Bermudian economy has been highly successful, with tourism and international business being the two main sources of revenue. Indeed, international business, which consists primarily of reinsurance and other financial services, is the bedrock of Bermuda's economy, accounting for about 85 percent of the island's gross domestic product.
However, the economy has struggled since the global financial crisis, and the economy entered its seventh-straight year of recession in 2015.
As a consequence of these unfavorable economic trends, the Government has been grappling with a budget deficit and rising debt. The public 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, and these fiscal pressures have forced the Government to find new sources of revenue.
By and large however, Bermuda's low tax environment has remained intact, as explained in the next section.
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 2017, the payroll tax system underwent reform, creating two separate employer and employee contribution rates. At the time of writing, the employer contribution depended on economic sector and the value of annual payroll, and was charged between 0 percent and 10.25 percent. In 2017/18, the employee portion is charged at 4.75 percent on annual remuneration up to USD48,000, rising progressively to 8.75 percent on annual remuneration in excess of USD235,000.
There are also taxes on property and stamp duty on assets at death.
Customs duties can be quite high for immigrants.
However, there has been upward pressure on taxation in recent years as a result of the aforementioned fiscal crisis.
In 2016, a new General Services Tax was announced. To be levied at five percent, the tax will apply to turnover from the provision of most services by service providers to the public from April 1, 2018. Banking, insurance, and money services businesses will be exempt.
In April 2017, a new Financial Services Tax was introduced which is payable by banks, local insurance companies, and money services businesses. Banks will pay the new tax at a rate of 0.02 percent on their assets, while local insurance companies will pay the tax at a rate of 2.5 percent on gross premiums earned, excluding premiums from health insurance. Money services businesses will pay the tax at a rate of five percent on their aggregated incoming and outgoing transmission volume.
Tax Transparency And BEPS
Bermuda strongly refutes suggestions that it falls into the category of a "tax haven," pointing out that it is compliance with all existing international standards in the area of taxation.
"Bermuda has spent a great deal of time and money adjusting our laws, regulations and business practices to stay ahead of, or on the leading edge of, the curve as it relates to international taxation and information sharing," Minister of Finance, Bob Richards, said in June 2017. "We have been early adopters of all the initiatives coming out of agencies that set international standards. Yet there are those out there that choose, for their own reasons, to ignore our record."
Earlier in the month, Bermuda launched a new online tax reporting portal for financial institutions and other reporting entities to comply with international tax information exchange reporting standards. The Automatic Exchange of Information portal will receive returns due under the OECD's Common Reporting Standard as well as country-by-country reports, due under the OECD's base erosion and profit shifting (BEPS) Action Plan.
That same month, Richards confirmed the island had begun bilateral negotiations to implement the BEPS minimum standards in relation to its double tax treaties.
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.
And on December 19, 2013, Bermuda signed an intergovernmental agreement with the United States on the implementation of the Foreign Account Tax Compliance Act.
The Insurance Industry
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.
The Insurance Department of the Bermuda Monetary Authority (BMA) is responsible for the supervision, regulation and inspection of Bermuda's insurance companies and for the licensing of all insurance companies, brokers, agents and managers. The Insurance Act 1978 provides the Authority with substantive licensing and intervention powers.
The BMA has a dedicated licensing and authorizations team that reviews all proposals to set up new businesses. In addition to internal staff review, applications are subject to independent review and decision by a committee of senior Authority staff. Applications are closely vetted for the fitness, propriety and underwriting experience of the management, the plausibility of the proposed business plan and the level of capitalization relative to the proposed risk profile, amongst other factors.
Bermuda has a multi-license system of regulation which categorizes general insurance companies into six classes, long-term insurance companies into five classes, a class for Special Purpose Insurers and provides for composite companies, as follows:
CLASS 1: A single-parent captive insurance company underwriting only the risks of the owners of the insurance company and affiliates of the owners. Class 1 insurers are required to maintain minimum capital and surplus of USD120,000.
CLASS 2: Multi-owner captives which are defined as insurance companies owned by unrelated entities, provided that the captive underwrites only the risks of the owners and affiliates of the owners and/or risks related to or arising out of the business or operations of the owners and affiliates. A Class 2 license will also apply to single-parent and multi-owner captives writing no more than 20 percent of net premiums from risks which are not related to, or arising out of, the business or operations of their owners and affiliates. Class 2 insurers are required to maintain minimum capital and surplus of USD250,000.
CLASS 3: Applies to insurers and reinsurers not included in Class 1, 2, 3A, 3B, or 4. This includes structured reinsurers' writing third party business; insurers writing direct policies with third party individuals; single-parent, group, association, agency or joint venture captives where more than 20 percent of net premiums written is from risks which are unrelated to the business of the owners; captive Insurers underwriting more than 20 percent and less than 50 percent unrelated business. Class 3 insurers are required to maintain minimum capital and surplus of USD1m.
CLASS 3A: Small commercial insurers whose percentage of unrelated business represents 50 percent or more of net premiums written or net loss and loss expense provisions and where the unrelated business net premiums are less than USD50m. Class 3A insurers are required to maintain minimum capital and surplus of USD1m.
CLASS 3B: Large commercial insurers whose percentage of unrelated business represents 50 percent or more of net premiums written or net loss and loss expense provisions and where the unrelated business net premiums are more than USD50m. Class 3B insurers are required to maintain capital and surplus of USD1m.
CLASS 4: Insurers and reinsurers underwriting direct excess liability insurance and/or property catastrophe reinsurance risks. Class 4 insurers are required to maintain minimum capital and surplus of USD100m.
SPECIAL PURPOSE INSURERS:
In order for a company to receive consideration for registration as an SPI, it would have to meet the following criteria:
- The insurer is carrying on insurance business in the area of insurance-linked securitizations;
- The insurer is established to enter into a single transaction or a single set of transactions;
- The insurer's obligations are fully collateralized; and
- Transactions are carried out with a limited number of sophisticated participants.
LONG-TERM – CLASS A:
A single-parent long-term captive insurance company underwriting only the long-term business risks of the owners of the insurance company and affiliates of the owners. Class A insurers are required to maintain minimum capital and surplus of USD120,000.
LONG-TERM – CLASS B:
Multi-owner long-term captives which are defined as long-term insurance companies owned by unrelated entities, provided that the captive underwrites only the long-term business risks of the owners and affiliates of the owners and/or risks related to or arising out of the business or operations of their owners and affiliates. A Class B license will also apply to single-parent and multi-owner long-term captives writing no more than 20 percent of net premiums from risks which are not related to, or arising out of, the business or operations of their owners and affiliates. Class B insurers are required to maintain minimum capital and surplus of USD250,000.
LONG-TERM – CLASS C:
Long-term insurers and reinsurers with total assets of less than USD250m; and not registrable as a Class A or Class B insurer. Class C insurers are required to maintain minimum capital and surplus of USD500,000.
LONG-TERM – CLASS D:
Long-term insurers and reinsurers with total assets of USD250m or more, but less than USD500m; and not registrable as a Class A or Class B insurer. Class D insurers are required to maintain minimum capital and surplus of USD4m.
LONG-TERM – CLASS E:
Long-term insurers and reinsurers with total assets of more than USD500m; and not registrable as a Class A or Class B insurer.
Bermuda remains the world leader in the captive insurance industry based on statistics covering 2016 recently released by the BMA. The figures show that Bermuda had 776 active captives licensed on its register, in line with 2015 levels.
In 2016, a total of 13 new captives registered in Bermuda, the majority of which originated from the US. However, two new captives were from the emerging markets of South and Central America.
Craig Swan, Managing Director – Supervision, said: "The Authority continues to ensure that Bermuda's captive sector which has made significant contributions to Bermuda's economy for well over 50 years remains appropriately regulated. The global companies that operate captives from Bermuda expect top quality regulatory standards. As such, the Authority ensures that its supervisory framework for captives, has remained aligned with the Insurance Core Principles of the International Association of Insurance Supervisors."
Ross Webber, CEO of the Bermuda Business Development Agency, which promotes the island's financial services sector, commented: "The Bermuda Monetary Authority figures reaffirm Bermuda's status as global leader in the captive insurance market, with more overall captives registered than any other jurisdiction."
"It's important to note that Bermuda held its number-one position atop captive domiciles despite challenging market conditions that have reduced the year-over-year global total of captives registered," Webber added.
Bermuda also remains the leading jurisdiction for the issuance of catastrophe bonds. A market report published by the BMA in January 2017 shows that the outstanding volume of catastrophe bonds and Insurance Linked Securities (ILS) bonds linked to natural catastrophes increased to USD25.4bn, with ILS issued from Bermuda representing 70.4 percent (USD17.9bn of USD25.4bn).
Since 2010, Bermuda-based special purpose insurers have issued 145 ILS bonds while 165 special purpose insurers have been registered. A total of 80 ILS deals are listed on the Bermuda Stock Exchange with an aggregate nominal value of approximately USD18.6bn.
According to the most recent information, which is based on annual filings from 2015, overall, Bermuda's (re)insurers recorded USD108.5bn in net premiums, held USD200.8bn of capital and had total assets of USD631.7bn. While there was a decrease in premiums written and an increase in liabilities held, the (re)insurers' assets increased by nearly USD50 billion, which the BMA said demonstrated "confidence in the Bermuda market."
Commercial Classes reported net premiums of USD63.1bn, held capital of USD125.3bn and had total assets of USD436.7bn.
Craig Swan, the BMA's Managing Director, Supervision, said: "These statistics illustrate the continued strength of Bermuda's (re)insurance market and highlight the domicile's position of high repute in the world's risk transfer industry. Bermuda is one of seven countries having US Qualified Jurisdiction Status and one of two countries assessed as being fully equivalent under Solvency II,"
He continued: "Bermuda's positive reputation means that more (re)insurers are controlling and managing the primary operations of their group structure from Bermuda. In the Authority's 2017 Business Plan released this month, the Authority said it will continue to strive to improve its performance, relationships and operations in 2017. Bermuda's reputation as a financial center depends on the Authority's ability to continue executing and consistently delivering supervision to the high standard expected of it."
Bermuda And Solvency II
Bermuda's prudential framework for (re)insurance and group supervision has been recognized by the European Union as being fully equivalent to regulatory standards applied to European reinsurance companies and insurance groups under the Solvency II Directive.
The European Commission published a Delegated Act on November 26, 2015, approving of Bermuda's regime. The Delegated Act covers Bermudan insurance groups and reinsurers with Class 3A, 3B, 4, Class C, Class D, and Class E licenses and has applied since January 1, 2016.
Solvency II is an EU Directive that codifies and harmonizes EU insurance regulation. The Directive is primarily concerned with the amount of capital that EU insurance companies must hold to reduce the risk of insolvency.
"Equivalence" enables EU insurers to use local rules to report on their operations in third countries, while third country insurers are able to operate in the EU without complying with all of the EU rules. Both Bermuda and Switzerland have achieved full equivalence with the regulatory standards.
Besides insurance, Bermuda also has significant investment fund and trusts sectors, and a very well-developed advisory and financial infrastructure.
Fund management and administration is nevertheless a strong component of the finance industry, assisted by the existence of a stock exchange.
Aggregate assets under management as at December 31, 2015 was USD167.6bn, with an additional aggregate USD38.5bn in assets under administration. Of these assets 75 percent related to clients in the European Union with Bermuda-based clients a distant second at 19 percent.
An aggregate total of USD156.2bn in assets under administration was reported by Bermuda Fund Administrator licensees as at December 31, 2015. Total number of funds administered stands at 1,307 of which 489 are Bermuda funds. Bermuda, US and Canadian fund clients account for over 70 of the funds. Cayman Islands clients account for a further 22 percent, while BVI clients represent six percent of the total. EU clients account for just one percent of this business.
At the end of the third quarter of 2015 there was a total of 630 funds licensed in Bermuda, including 434 mutual funds, 39 umbrella funds, 70 segregated account companies, 50 unit trusts, and 37 umbrella trusts.
An important milestone for Bermuda's funds sector was reached in March 2014 when 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 of the MoU that: "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."
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."
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 2017). These include HSBC Bank Bermuda Limited, Bermuda Commercial Bank Limited, Clarien Bank Limited, and the Bank of N T Butterfield & Son Limited.
« Go Back to Articles