Bermuda shorts

Global minimum corporate tax

On 18 December 2023, the Bermuda legislature enacted the Corporate Income Tax Act 2023 (the Act) and issued guidance regarding its application. The substance of the Act will commence operation on 1 January 2025.

The Act generally imposes a 15 per cent corporate income tax (CIT) on certain Bermuda-resident ‘entities’ that are part of multinational enterprises with an annual group revenue of EUR750 million or more. ‘Qualified refundable tax credits’ are available, providing the possibility that entities liable to CIT may ultimately pay a lower effective tax rate than the 15 per cent tax rate.

Trust structures are not specifically targeted or mentioned in the Act. A Bermuda trust and underlying company may each be an entity (as defined in the Act) and thereby theoretically within its scope. It appears that trusts’ structures might be regarded as out of scope in most cases because, among other things, many trust structures will not meet the revenue threshold and applicable accounting standards do not require trusts (i.e., by their trustees) and their underlying passive investment-holding entities to prepare ‘consolidated financial statements’. However, an entity that is an ‘ultimate parent entity’ (potentially a trust and/or a trust’s underlying Bermuda company) of a multi-jurisdictional structure with an underlying business with group revenues at or exceeding EUR750 million will need to carefully consider the Act’s application.

Beneficial ownership registers

Following the European Court of Justice (ECJ) judgment in WM and Sovim SA v Luxembourg Beneficial Ownership Registers[1] and the European Commission’s response to it (as reflected in the Sixth Anti-Money Laundering Directive),[2] British Overseas Territories, including Bermuda, and Crown Dependencies have been reconsidering their commitments to the UK government to introduce central registers of public beneficial ownership of companies and certain other entities. Some have modified their commitment to only permit public access to those who can demonstrate a ‘legitimate interest’ in the information, in the manner contemplated by the ECJ judgment. Under this approach, journalists and civil society organisations engaged in the prevention of money laundering and terrorist financing may be able to access information from jurisdictions’ central beneficial ownership registers. Bermuda has not formally modified its commitment, but appears likely to. The precise criteria of such a legitimate interest test and how it might be administered have not been formulated. The UK parliament has indicated that it accepts implementation of a legitimate interest test as an ‘interim step’ for introduction later in 2024 or early 2025 but remains committed to the information becoming publicly available generally in future.[3]

Under Bermuda’s existing legislation, beneficial ownership information filed with its regulator is not publicly available. Where, for example, a trust forms part of a Bermuda company’s structure, generally little to no beneficial ownership information is filed by the company in respect of the trust and its settlor, protector or beneficiary, particularly in the case of a properly administered irrevocable discretionary trust and underlying company.

Two to tango?

In April 2023, the Supreme Court of Bermuda (the Court) published its decision in In the Matter of Trusts A and B.[4] The decision concerns:

• trusts with a governing law of Bermuda, England and Wales and Jersey having the same Bermuda-resident trustee; and
• numerous share sale transactions for fair value that the trustee had entered into with itself in capacities as trustee of different trusts in the structure.

The main question was: were the transactions void from the outset by application of the two-party rule?[5] If yes, numerous transactions (mostly Bermuda-law governed) over many years and the tax treatment of them may have required revisiting. The trustee continued to be the registered owner of the shares but understood (ultimately correctly) that the transactions had effected changes to the beneficial ownership of the shares.

The Court held that:

• Given the facts, the question was one of trust law specifically and not property law generally, so the governing law of the trust (as opposed to the situs of the assets) applied.
• The two-party rule did not operate to void any of the transactions under Bermuda, England and Wales or Jersey law.
• The transactions might have nevertheless been voidable under the rule against self-dealing,[6] but the Court affirmed the trustees could continue to administer the trusts on the basis that the transactions would not be so liable to be set aside.

Protectors’ powers

Do protector veto powers confer an independent decision-making discretion (the wide view) or merely a power to ensure the trustees’ substantive decision was a valid and rational one (the narrow view)? In In Re the X Trusts,[7] Bermuda’s Court of Appeal preferred the narrow view in the absence of clear, strong wording in the trust instrument providing for the wide view.

The Court of Appeal:

• Rejected that the narrow view would reduce the protector’s role to that of a rubber stamp.
• Considered English and Welsh and Jersey decisions (which held that the wide view reflected the settlor’s intentions in those cases and was the preferred starting assumption) were wrongly decided.[8]
• Considered that the wide view would provide the protector an absolute right of veto over a trustee decision. Consequently, the protector would be making a separate decision that trumped that of the trustees. That consequence was inconsistent with the ancillary, although important, watchdog function of protectors that the Court determined objectively that the settlor intended.
• Considered that the narrow view provided for the operation of two fiduciary roles in an efficient and complementary manner, in contrast to the wide view, which could produce duplication, delay and conflict in cases.

The question will likely be further considered by courts around the world in the future. In the meantime, settlors that prefer the wide view might ensure the trust instrument is clearly drafted to implement that preference.

In closing

All the developments outlined in this article may prompt careful structuring and restructuring of trust structures or variations of trust instruments to mitigate against unintended or undesirable outcomes that might otherwise arise.

On a separate note, Bermuda currently has a number of pending initiatives to further attract family offices and enhance its private wealth offering. These initiatives may well consider a clear statutory abolition of the two-party rule in contexts such as the above.