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The corporate taxation impact on Bermuda's ILS sector

The corporate taxation impact on Bermuda's ILS sector

04 October, 2023
Hamilton Capital Markets Insurance Linked Securities

The Government of Bermuda recently announced the possible introduction of corporate income tax in Bermuda once it has conducted a series of consultations.

In this article, Sherman Taylor, Head of Capital Markets in Bermuda, sheds light on the recent corporate tax developments and its potential consequences for the insurance linked securities (ILS) sector if adopted.

What is the recent development regarding corporate tax in Bermuda?

In August 2023, Bermuda's Government opened up a public consultation paper, initiating a month-long public feedback period to consider the potential implementation of corporate taxation. Should this proposal become law, corporate tax would apply to Bermuda entities within an MNE Group.

What steps has Bermuda taken to reform to international tax rules?

Back in October 2021, Bermuda joined 141 other jurisdictions in reaching an agreement to reform international tax rules. The aim was to ensure that large multinational enterprises, those with global annual revenue exceeding €750M, pay a minimum level of income tax. The Global Anti-Base Erosion Rules (GloBE Rules), formulated by the Organisation for Economic Co-operation and Development (OECD), designed to ensure that global income earned by these enterprises is subject to an effective tax rate of at least 15%.

How will corporate tax impact the ILS industry in Bermuda?

If this proposal becomes law, the corporate tax will be applied to Bermuda entities that are part of an MNE Group, and as such, the impact on Bermuda’s ILS industry would be limited to those Bermuda ILS vehicles that are part of an MNE Group.

What does Bermuda's corporate tax proposal entail?

While Bermuda has existing taxes like payroll tax and import duties, these are unlikely to be considered "covered taxes" under the GloBE Rules. Bermuda's proposal contemplates a corporate taxation of between 9% and 15% on revenue earned starting January 1, 2025.

What challenges do ILS structures in Bermuda face under this proposal?

The typical structures used for ILS business in Bermuda are 'stand-alone' entities, created solely for ILS transactions. These are unlikely to meet the criteria for an MNE or MNE group, despite the substantial size of ILS deals.

Will the introduction of corporate tax deter ILS growth in Bermuda?

No, it's unlikely to dampen the demand for and growth of ILS as an asset class. In fact, ongoing challenges with pricing and capital availability in the traditional reinsurance market is attracting new players into the ILS space. It will, however, emphasise other factors in choosing a domicile for ILS transactions.

What advantages does Bermuda offer for ILS beyond taxation?

ILS structures in Bermuda are not solely driven by tax benefits. Bermuda boasts a strong track record, cost efficiency, speed to market, a stellar reputation, and a seamless setup for ILS vehicles.

What sets Bermuda apart in the ILS landscape?

Bermuda distinguishes itself with its robust regulatory environment, underpinned by established regulations that have endured the test of time. Moreover, Bermuda's regulators are well-versed, accessible, and cooperative. The presence of major players in the insurance industry, including brokers, reinsurers, claim handlers, actuaries, and insurance managers, further enhances Bermuda's allure, solidifying its position as a formidable hub for insurance talent.

The combination of these factors makes Bermuda an attractive choice, transcending any potential tax considerations, and positions it to maintain its global leadership in the ILS realm, even in the event of corporate tax implementation.

How can Ocorian help?

Ocorian’s ILS team work with insurance managers, brokers and intermediaries to provide a complete ILS solution. We support the securitisation of insurance by facilitating the creation of ILS structures such as sidecars, special purpose insurance (SPI) and transformers, issuing catastrophe bonds and other risk-linked securities. 

Contact a member of the ILS team to find out more.