11 June 2025 Bermuda releases first public consultation for CIT technical amendments
On 29 May 2025, the Government of Bermuda began a first public consultation (First Public Consultation) concerning a first set of proposed technical amendments to the Corporate Income Tax Act 2023 (CIT Act). The First Public Consultation primarily intends to clarify certain provisions, better align the CIT Act with the Global Anti-Base Erosion (GloBE) Rules as appropriate, and make come clerical and administrative corrections. The three-week consultation period runs from 29 May to 19 June 2025. The First Public Consultation is presented in three parts. An introduction is followed by a summary of the technical amendments to the CIT Act. The third part contains illustrative draft legislation for the Proposed Technical Amendments (Proposed Amendments). In December 2023, the Bermuda Parliament passed legislation enacting a 15% Corporate Income Tax (CIT) regime that became effective for tax years beginning on or after 1 January 2025. (See EY Global Tax Alert, Bermuda Parliament passes legislation to enact a 15% corporate income tax, dated 22 December 2023.) The CIT will apply to Bermuda Constituent Entities (BCEs) that are part of multinational enterprise (MNE) groups with annual revenue of €750m or more (In-Scope MNE Group). In July 2024, Parliament passed the Corporate Income Tax Agency Act 2024 (the Agency Act), which established a Corporate Income Tax Agency (the Agency) to administer the CIT regime. On 7 August 2024, a first public consultation (First Public Consultation — Administrative) related to CIT administrative provisions was released to provide stakeholders with a summary of the proposed tax compliance framework. (See EY Global Tax Alert, Bermuda releases public consultation for CIT administrative provisions, dated 15 August 2024.) On 31 January 2025, a second public consultation (Second Public Consultation — Enforcement) related to enforcement provisions outlined a wide range of proposed civil and criminal penalties (the Proposed Penalties Act) related to the CIT. (See EY Global Tax Alert, Bermuda releases public consultation for CIT enforcement provisions, dated 5 February 2025.) On 17 February 2025, a third public consultation related to administrative provisions (Proposed Administrative Regulations) outlined a wide range of provisions related to the orderly administration of the CIT. (See EY Global Tax Alert, Bermuda releases third public consultation for CIT administrative provisions, dated 25 February 2025.) The Proposed Administrative Regulations were made final (Final Administrative Regulations) effective 2 June 2025 (See EY Global Tax Alert, Bermuda releases final CIT administrative regulations, dated 22 May 2025.) Following is an overview of the proposed technical amendments to the CIT Act contained within the draft legislation. Issuers of matched insurance contracts, also known as unit-linked insurance contracts, pass investment returns to policyholders while retaining an investment management fee. In this context, amounts arising from the securities held by the insurance company lead to economically offsetting changes in the insurance reserves. Many of the underlying equities generate dividends that are excluded from tax under the CIT Act. However, the related increase in policyholder liabilities is still recognized in the issuer's financial statements, creating a mismatch for tax purposes. The Proposed Amendments would exclude from the computation of taxable income or loss any movements in the insurance reserves that are related to excluded dividends and/or excluded equity gains or losses from securities held in respect of a matched insurance contract. Short-term portfolio shareholdings are not eligible for excluded dividend treatment and are therefore included within taxable income or loss. However, stakeholders, particularly in the insurance sector, have expressed concerns that distinguishing between short-term and long-term holdings can be administratively burdensome. The Proposed Amendments introduce a new annual election under which the Filing BCE can classify all portfolio shareholdings as short-term. This means that all dividends received from these shareholdings during the fiscal year will be included in the calculation of the entity's taxable income or loss, rather than potentially being treated as excluded dividends. Under the CIT Act, BCEs are allowed to carry forward tax losses indefinitely. These entities can elect to deduct part or all of their tax loss carryforward from previous years to reduce their taxable income for the current fiscal year. Any unused portion of the deduction remains available for future years. The Proposed Amendments introduce an additional option allowing companies to elect to limit the use of current-year losses against gains of other BCEs in the BCE Group and convert those current-year losses into a carryforward. This proposed provision adds elective flexibility for business and tax planning practices. The proposed provision outlines the treatment of an entity that is considered a BCE for only part of a fiscal year. If an entity meets the requirements to be treated as a BCE or meets specific conditions for a portion of the fiscal year, certain rules will apply to determine its taxable income or loss for that year. To calculate taxable income or loss, the amount would be based on the net income or loss that would have been determined if the financial statements for the fiscal year were prepared only for the period when the entity was treated as a BCE. Adjustments related to foreign taxes and other specified sections of the CIT Act will be computed based on this net income or loss. The Filing BCE has the option to elect an alternative method for calculating book income or loss for the short period, which involves determining the net income or loss for the fiscal year and applying a proportional factor based on the days the entity was treated as a BCE. Additionally, certain adjustments described in sections relating to the economic transition adjustment, prior period errors and changes in accounting principles, and adjustments due to International Financial Reporting Standards 17, Insurance Contracts (IFRS 17) and Long Duration Targeted Improvements, will be limited based on whether the entity was treated as a BCE from the start of the fiscal year. These adjustments will be nil if the portion of the fiscal year when the entity was treated as a BCE does not include the first day of the fiscal year. However, if the entity was a BCE on the first day of the fiscal year but the entity was only treated as such for part of the year, the adjustments will be calculated proportionally based on the number of days it was treated as a BCE. Proposed revisions to fiscal transparency classifications aim to provide further clarity on several key aspects. There will be a clear delineation of responsibility for making the fiscal transparency election in cases involving non-Bermuda Tax Resident Entities. Additionally, the guidance confirms that in applying fiscal transparency to segregated account companies, those established under a private act should be included. The guidance also specifies that the fiscal transparency election for segregated account companies should be made by the segregated account cell company. This approach ensures consistent treatment, particularly when a segregated account company has multiple Filing BCEs. A BCE group may elect that its chargeable tax liability be deemed to be zero if the group has average revenue of less than €10m and average net taxable income of less than €1m. The CIT Act currently defines average revenue and average net taxable income or loss based on the aggregate figures from all BCEs within an In-Scope MNE Group for the current and two preceding fiscal years, with exclusions for years without revenue or taxable income/loss. The draft legislation updates and enhances the calculation rules of the de minimis exemption to more closely align with the GloBE Rules. Average revenue and average net taxable income/loss will now be calculated using amounts from the current fiscal year and the two preceding fiscal years, with specific exclusions:
A new subsection 7(4) defines "revenue" as the amount included in financial accounting net income/loss, subject to specific adjustments, such as: the CFC exclusion election; adjustments due to IFRS 17 and Long Duration Targeted Improvements; economic transition adjustments; the matching adjustment; and certain prior-period errors and changes in accounting principles. Subsection 23(2) of the CIT Act has been entirely revised to align with the GloBE Rules under Articles 3.5.3 and 3.5.4. The public consultation explains that the existing wording of Section 23(2)(b) is considered overly broad and could be interpreted erroneously as applying to any ultimate parent entity (UPE) owner, regardless of whether that UPE is a flow-through entity. The proposed revision seeks to limit the application of Section 23(2)(b) specifically to UPEs that are also classified as flow-through entities. The new provision states that a BCE's financial accounting net income or loss shall be allocated to the BCE's owners in accordance with their ownership interests. However this does not apply: (1) if the BCE is the UPE of an In-Scope MNE Group; (2) to ownership interests in the BCE that are held, either directly or through a tax-transparent structure, by a UPE that is a flow-through entity; or (3) to the BCE's constituent-entity owners. Further, the provision only applies to owners that hold their BCE ownership interests directly or through a tax-transparent structure. The provisions regarding the conversion of foreign currency have been amended to improve clarity and transparency. Section 47 of the CIT Act, which governs the conversion of amounts denominated in currencies other than Bermuda or United States dollars, now specifies that the Minister shall "publish an official exchange rate for any currency (and any methodology for making any calculation pursuant thereto) by notice in the Official Gazette." This replaces the previous wording of "publish an official exchange rate." The amendment maintains flexibility to use various methods for determining the exchange rate, including the average foreign exchange rate for the year, the rate on 31 December of a given year, or the rate applicable on the due date of a payment under the Act. Stakeholders should be aware of this change, as it may affect how exchange rates are applied in tax calculations and compliance moving forward. To promote alignment within a BCE Group and reduce administrative burdens, the proposed guidance clarifies that the Filing BCE will be responsible for making elections. Necessary amendments to formalize this responsibility are proposed under specific sections. The Bermuda Government invites public comments and requests for further clarification on the proposed technical amendments to the CIT Act presented in the First Public Consultation. Comments received after 19 June 2025 may not be considered. The First Public Consultation reflects the Bermuda Government's commitment to stakeholder feedback and provides clarification and amendments that reflect the intent of the CIT Act. Multinational groups with Bermuda operations should carefully review the First Public Consultation and consider submitting comments as well as recommendations for additional guidance to the Bermuda Government.
Document ID: 2025-1236 | ||||||
