Bermuda corporate income tax consultation: impact on reinsurance agreements

Bermuda has announced that it is considering the implementation of a new corporate income tax regime to be effective on or after January 1, 2025, in response to the OECD’s BEPS Pillar II global minimum tax rules.

The intention is that the new Bermuda corporate income tax would qualify as a “Covered Tax” for the purposes of the Pillar II rules and so reduce the amount of top-up tax payable to other jurisdictions in relation to profits earned in Bermuda. Consistent with the Pillar II rules, the Bermuda corporate income tax will only apply to multinational groups with revenues of at least EUR750m. The new tax would apply to Bermuda resident entities and Bermuda permanent establishments. Entities will be treated as resident in Bermuda for the purposes of the new tax if they are created or organised in Bermuda, unless the entity provides sufficient evidence that it is tax resident in another jurisdiction based on the location of its central management and control. The rate of the new tax is subject to further analysis, but expected to be between 9% and 15%. Tax credits for tax paid in other jurisdictions have been included in the proposal.

As part of considering the potential impact of this new tax regime, in-scope reinsurers (and insurers with in-scope counterparties) should review their reinsurance agreements to confirm whether the introduction could constitute a “Tax Event”, which may allow a termination / recapture right for the affected party. This will depend on how broadly “Tax Event” is defined; it may be limited to VAT and withholding taxes but is often broad enough to cover additional tax payable in relation to the reinsurance agreement more generally. That could include tax payable as a result of the introduction of a new Bermudan corporate income tax regime.

A “Tax Event” requires an actual change of law, so the announcement on its own will not have an impact on reinsurance agreements, but a review of these contracts should be included as part of any impact assessment and preparation for the new regime, alongside any restructuring options.