Bermuda Continues To Demonstrate First-Rate Legal, Regulatory and Compliance Frameworks

IFC: In a critical judgment, the Court of Justice of the European Union recently ruled that public registers of beneficial ownership infringes upon fundamental rights of privacy and personal data. How important is it for Bermuda to offer data protection and privacy for its entities; and how crucial is this judgment in enabling Bermuda to continue doing so?

JG: Bermuda has implemented corporate transparency rules to further bolster its reputation as a compliant and reputable offshore jurisdiction. On 23 March 2018, Bermuda enacted legislation that required all companies, limited liability companies and partnerships to maintain a register of beneficial ownership. A copy of this register is maintained by the Bermuda Monetary Authority and is currently only accessible by the Registrar of Companies on request.

Furthermore, in July 2020, the Bermuda Government committed to work with international bodies (including the Financial Action Task Force (FATF), OECD, International Organization of Securities Commissions, International Association of Insurance Supervisors, and G20) and other jurisdictions in respect of standards relating to corporate transparency and information exchange mechanisms.  In addition, the Bermuda Government confirmed its intention to make the companies register of beneficial ownership information accessible to the public only once it became adopted as a global standard.

However, the EU’s Court of Justice ruling is a set-back for advocates of a publicly accessible beneficial ownership regime, as the global standard appears to be leaning toward protection of one’s right to privacy. At the very least, this judgment is likely to frustrate global efforts to advance international standards for the transparency of beneficial ownership information.

According to reports in the Bermuda press, “The Ministry of Finance has taken note of the ruling and will continue to monitor developments in this regard.”

Bermuda has also sought to show its commitment to enhancing how personal data is handled. The Bermudian government passed the Personal Information Protection Act 2016 (PIPA) to enhance its data protection and privacy legal framework. Once all sections of PIPA become fully operative, all organisations (including businesses and the government) will be required to implement policies and procedures that will protect and manage individual’s personal data. This is to ensure that the personal data collected is relevant for its use in the businesses’ purposes and that the personal information is being used or ascertained from a lawful basis.

IFC: Bermuda was recently whitelisted by the European Union due to its commitment to remedy deficiencies in monitoring compliance with economic substance legislation. What general economic substance requirements currently apply in Bermuda?

JG: The Bermuda economic substance legislation applies to relevant entities in Bermuda that carry on “Relevant Activities”. Relevant entities include both local and exempted companies, permit companies (companies overseas that have a permit allowing them to conduct business in Bermuda), exempted and local LLCs, partnerships that fall under the Partnership Act 1902’s remit, and exempted and limited overseas partnerships. An entity which is in scope would be carrying on a relevant activity if they carry on one or more businesses in the areas of banking, insurance, fund management, financing and leasing, headquarters, shipping, intellectual property, distribution and service centres or as a holding entity. An entity will comply with the economic substance requirements where:

• it is managed and directed in Bermuda;
• its core income-generating activities are undertaken in Bermuda with respect to its relevant activity;
• it maintains adequate physical presence in Bermuda;
• it has adequate full-time employees in Bermuda with suitable qualifications; and
• it incurs adequate operating expenditure in Bermuda in relation to its relevant activity.

An entity that is carrying on the relevant activity of holding entity, and which carries on no other relevant activity, is not subject to the economic substance requirements detailed above and must instead comply with the ‘minimum economic substance requirements.’ These minimum requirements are that it must:

• comply with the corporate governance requirements applicable to it pursuant to its governing legislation (e.g., the Companies Act 1981 in respect of companies);
• have adequate people in Bermuda for holding and managing its equity participations; and
• have adequate premises in Bermuda.

Each entity in scope who performs a Relevant Activity must file an economic substance declaration form with the Registrar of Companies annually. Depending on the relevant activity performed, the company will provide details of any profits made or indicate the level of activity that is being conducted within Bermuda.

The Bermuda Registrar of Companies is the authority responsible for the monitoring and enforcement of the economic substance requirements in Bermuda. The Registrar also has very broad powers to request additional information, and to conduct onsite inspections of entities’ books and records, to further support its monitoring and enforcement efforts. This includes the power to ‘police the perimeter’ by requesting information and inspecting records of entities that believe themselves not to be in scope of the economic substance requirements (e.g., because the entity believes that it is not carrying on a relevant activity).

IFC: How else is the jurisdiction committed to cooperating with the OECD and EU in implementing tax governance standards?

JG: Bermuda’s government made commitments to adhere to global corporate transparency and exchange of information standards with international regulatory bodies and jurisdictions. International reporting standards have increased and have resulted in more filings being made to regulatory authorities. This includes international initiatives such as the beneficial ownership register, economic substance requirements, Foreign Account Tax Compliance Act and Common Reporting Standard. Bermuda also has membership with the FATF which sets standards to prevent terrorist financing and money laundering globally.

The Bermuda government is also considering the effect that a future global minimum tax introduced by the OECD may have on the island. Bermuda is in discussions with the International Tax Working Group regarding recommendations and insight of any global tax implementation that may take place. Bermuda seeks to comply with global minimum tax provisions, while also ensuring the island’s economy still remains competitive.

IFC: In 2022, Bermuda's aviation regulator suspended certification of all Russian-operated airplanes registered in the territory due to international sanctions over the war in Ukraine. How has this affected aviation financing and registration in the jurisdiction?

JG: Following the international sanctions imposed on Russia due to the war in Ukraine, the aviation industry has seen a dip in registration within Bermuda. The Bermuda Civil Aviation Authority withdrew aircraft related airworthiness activities which were conducted with the Russian Federation or associated with Russian persons. This includes any technical support for maintenance and continuing airworthiness management approvals.  Russian aircraft registration constituted a major part of the aircrafts that were registered in Bermuda due to the Bermuda Civil Aviation Authority having an agreement in place with Russia since 1999, which permitted Russian-operated aircraft to be registered in Bermuda. Conforming with relevant compliance mandates regarding the sanctions has resulted in businesses taking a strict approach when assessing potential new clients, whilst also ceasing to act for any Russian individuals which are subject to the sanctions imposed. 

IFC: Bermuda's Aircraft Registry has earned a solid reputation internationally for being safe and well-regulated; while over 300 vessels are currently registered with the Bermuda Ship Registry. What key advantages make Bermuda a popular choice for vessel and aircraft registration?

JG: Bermuda’s international reputation and popularity for aircraft aviation is largely due to the Bermuda Register being classified as a Category 1 register under the United States Federal Aviation Assessment Programme. This is an exemplary status and attracts owners who require high standards of airworthiness and an inspection control. The Bermuda Civil Aviation Authority also accepts internationally recognised airworthiness and operational standards of other jurisdictions which allows a flexible combination of the necessary standards required in Bermuda.

The Bermuda Ship Registry was established in 1789 and the Bermuda Registry has enjoyed international success and popularity since the 1980s.  The Bermuda Ship Registry is a Category 1 member of the Red Ensign Group and Bermuda ranks at the top of the Paris MOU “White List” of flag states and also scores highly on the “Round Table” list of flag states. 

There are several reasons why Bermuda is a leading centre and a jurisdiction of choice for the shipping industry, including:

• sophisticated and stable infrastructure;
• a strong legal system based on English maritime law and has comprehensive maritime legislation;

• the BSMA’s in-house expertise across time zones enables it to give timely response to technical queries 24/7, with their focus on assisting the efficient, economic and compliant operation of ships, aware of the commercial and operational requirements of the ship owner; and
• the BSMA’s expert surveyors are available 24/7 to assist with port state control matters to avoid delays.

IFC: Bermuda remains a popular jurisdiction in which to establish PTCs, trusts and corporate entities. What are the main benefits to establishing a PTC in the jurisdiction; and how does Bermuda regulate this structure?

JG: Bermuda’s high quality legal system which is based under English common law (but independent of it), provides a well-respected and trusted legal system to ensure one’s rights are protected. Due to Bermuda being a British Overseas Territory, Bermuda’s legal system has an appellate mechanism in place where the Privy Council in London will act as the final court of appeal of Bermuda.

Private Trust Companies are most commonly set up as companies limited by shares but can also be companies limited by guarantee. Since a PTC is incorporated as a company, they will be subject to the provisions of the Bermuda Companies Act 1981. PTCs are also exempt from trustee licence requirements under The Trusts (Regulation of Trust Business) Exemption Order 2002. This means that PTCs have less regulatory obligations than licensed trustees who provide trustee services as a business. If a PTC does not engage the services of a Bermuda licensed trustee, or engage the services of a Bermuda licensed corporate service provider, then they are required under Bermuda’s proceeds of crime legislation to register with the BMA as a non-licensed AML/ATF regulated financial institution.

The main benefits of establishing a PTC in Bermuda include:

• Control - the ability to retain greater control over the trustee decision making processes;
• Family involvement at with board or committee level, which can facilitate family members working together in a structured environment and facilitate the development of younger family members’ decision-making capabilities and knowledge; and
• Flexibility and Privacy.

IFC: The Segregated Accounts Companies Amendment Act 2021 was recently introduced to allow for the segregation of assets and liabilities and protection from creditors within Bermuda limited liability companies. How do these amendments offer further asset protection to clients using these structures?

JG: A Segregated Account (SAC) is a separate account from a larger group of assets or general account for a particular group, assets or individuals. The SAC is distinct and legally separated from the general account, which means any assets and liabilities are treated independently and cannot be relied on or used by the general account of the company or other SACs. The amendment has expanded the application of the SAC Act to include the limited liability company. This now combines the benefit of allowing a company with limited liability to create segregated accounts, offering greater flexibility with businesses under the LLC model.  The LLC models and takes inspiration from the Delaware LLC regime, which allows for familiarity with several clients who are familiar with operating an LLC model in the United States.

IFC: Which business structures are currently most popular with your clients; have demands changed over recent years and how do you see them developing over the next few years?

JG: The most popular vehicle used within Bermuda is a company limited by shares. This model limits shareholder’s liability to the amount of shares paid into the company. The company will have separate legal personality and the ability to carry on business and enter contracts under its own name. This is largely modelled after the United Kingdom’s limited company regime. To appeal to corporate structures that one would be familiar with in the United States, Bermuda enacted the Limited Liability Company Act 2016 which introduced the limited liability company. This is similar to a company limited by shares where the company will have separate legal personality, but has features that make an LLC a hybrid of a company limited by shares and a partnership. For example, an LLC is operated by an LLC agreement, which is a contractual agreement that sets out how the relationship with members in the LLC are to be conducted.   However, a company limited by shares still remains the more popular business vehicle in Bermuda due to its familiarity.

IFC: Bermuda introduced the Digital Asset Business Act 2018 (DABA) to regulate entities carrying on digital asset business in or from within Bermuda. Following on from that, the Digital Asset Issuance Act (DAIA) was enacted in 2020 to cover the initial offerings of digital assets. What has been the DABA and DAIA’s progress to date in enhancing the jurisdiction as a reputable and innovation hub for digital business?

JG: The legislation is regulated and monitored by the Bermuda Monetary Authority (BMA). This allows for a singular regulatory authority to liaise with entities dealing with digital assets. The BMA’s reputation has given entities certainty and comfort to ensure that the regulations will be enforced to a high standard. Bermuda’s innovative enactment of the digital asset regulatory regime has produced several entities being established and registered in Bermuda. Bermuda was one of the first countries globally to introduce a regulatory framework for digital assets, which garnered interest internationally for those seeking a high-quality regulatory system in an already reputable jurisdiction. Since the introduction of the digital asset legislation, Bermuda has granted a full banking licence and digital assets business licence to Jewel Bank, one of the world’s first digital asset banks in the world and Bermuda’s first new bank in over 20 years. The Bermuda government’s commitment to developing a FinTech industry is emboldened by the licensing of a digital asset bank. Licensed FinTech companies in Bermuda previously sourced funding from overseas banks. Following the enactment of the legislative regime and the creation of the digital asset bank, businesses will now have access to banking services tailored to digital assets, which will be attractive for entities seeking funding or handling their assets.

IFC: Bermuda is working to establish itself as a leading market for insurtech, by combining the jurisdiction’s flourishing insurance industry with its developing FinTech offering. What frameworks are currently in place to encourage the formation and licensing of insurtech operations in the jurisdiction?

JG: The Bermuda Insurance Act 1978 was amended by the Insurance Amendment Act 2018 to allowed for two licensing tracks for hopeful insurtechs, namely the Sandbox Innovative Insurer Licence and the Innovation Hub. Applications to the BMA for a Sandbox Licence allow a collaborative, hands on application process with the BMA. The Sandbox Licence is designed to promote innovation and experimentation for insurers seeking to conduct new business in an emerging market. This allows companies looking to test new business models or technologies to be fast tracked for a limited period of time, provided that they fall under licensable activities defined in the Insurance Act 1978.

The Innovation Hub is an alternative track which allows companies to test new technologies or business concepts but provides a wider scope of companies who may apply. This applies to companies that are still in the early stages of not being ready for the Sandbox testing and companies which are not currently caught under the Insurance Act 1978, or any other financial acts. These various tracks are appealing as they allow companies to test insurtech solutions before investing heavy capital in operational deployment. As Bermuda’s application and regulatory process is more streamlined, it becomes an attractive destination for investors who may be unsure of the complexities of onshore jurisdictions such as the UK and USA.

Janice Gutteridge
Senior Associate. Janice practices in all areas of corporate and commercial law, advising a wide range of international and local clients. Janice’s primary areas of expertise are with respect to asset financings, particularly aviation and shipping financing, shipping and aircraft registration in Bermuda, and banking and finance transactions. Janice also has extensive experience advising on mergers and acquisitions of both local and international companies, the migration of corporate entities and partnerships into and out of Bermuda, partnership structures, including global restructuring projects involving Bermuda entities, the incorporation and establishment of Bermuda special purpose vehicles and establishing private trust companies. Janice joined CHW in 2007 and was admitted to the Bermuda Bar in 2008. Janice is a member of the WISTA Bermuda Branch and the Society of Trust and Estate Practitioners, Bermuda Branch. Janice is ranked as a Rising Star by IFLR1000 and by The Legal 500 in both of the corporate & commercial and banking, finance & capital markets categories.