In a landmark move on 27 December 2023 the Bermuda Government took a significant step by adopting the Corporate Income Tax Act 2023 (the “CIT Act”), a pivotal piece of legislation that promises to reshape the island’s financial landscape. The new legislation applies to Bermuda tax resident entities and Bermuda permanent establishments that are part of Multinational Enterprise Groups (“MNEs”). These groups are defined as those operating in multiple jurisdictions with consolidated revenues of at least €750 million in two out of the previous four fiscal years.

The CIT Act is in response to the Organisation for Economic Co-operation and Development’s (OECD) global minimum tax initiative, also known as “Pillar 2” and the associated “GloBE Rules” that contain detailed provisions concerning the implementation of Pillar 2. The CIT Act, in line with the GloBE Rules, contain provisions which may be of interest to international shipping enterprises. In particular, the CIT Act provides that “international shipping income” together with up to 50% of certain ancillary income associated with international shipping is excluded from the calculation of taxable income. These exclusions are designed to mirror equivalent exclusions under the GloBE Rules, meaning that shipping income excluded under the CIT Act should also qualify for exclusion under the corporate tax regimes of other jurisdictions that would otherwise seek to levy top-up taxes under the Pillar 2/GloBE Rules framework.

As with the GloBE Rules, in order to qualify for the International Shipping Income Exclusion a Bermuda entity must demonstrate that the strategic or commercial management of relevant ships is effectively carried on from or within Bermuda.

What is the International Shipping Income Exclusion?

The International Shipping Income Exclusion operates as a “book to tax” adjustment in the calculation of a Bermuda entity’s liability under the CIT Act. Income attributable to the Bermuda entity that is recorded in that entity’s financial statements and is identifiable as either international shipping income or qualified ancillary shipping income is excluded (or removed) when calculating the Bermuda entity’s tax liability. This means such income that is subject to the exclusion is not taxed under Bermuda law. However, any non-shipping income that the Bermuda entity has may be subject to tax under the CIT Act).

International Shipping Income is defined under the CIT Act to include net income from specific activities such as:

• Transportation of passengers or cargo by ships in international waters;
• leasing of ships (e.g., time, bare boat or voyage charters) which are used in the international transportation of passengers or cargo;
• participation in a pool, a joint business or an international operating agency for the international transportation of passengers or cargo; and
• the sale of a ship used for the international transportation of passengers or cargo.

Up to 50% of a Bermuda entity’s net income that is obtained from activities performed primarily in connection with the international transportation of passengers or cargo may also benefit from the exclusion, provided these ancillary activities consist of one or more of:

• Leasing a ship on a bare-boat charter to another shipping enterprise where the charter is not for international traffic;
• sale of tickets issued by other shipping enterprises for the domestic leg of an international voyage; leasing and short-term storage of containers or detention charges for the late return of containers;
• provision of services to other shipping enterprises by engineers, maintenance staff, cargo handlers, catering staff, and customer services personnel; and
• investment income where the investment that generates the income is made as an integral part of the carrying on the business of operating the ships in international traffic.

How does an Entity Qualify for the International Shipping Income Exclusion?

In order for an entity to qualify for the International Shipping Income Exclusion it must demonstrate that either the “strategic” or “commercial” management of the ships deployed in earning international shipping income is effectively carried on from or within the Bermuda. In March 2024 the Bermuda Government issued guidance on the relevant consideration of the International Shipping Income Exclusion (the “Shipping Guidance”). The Shipping Guidance provides that whether the strategic or commercial management is effectively carried on from within Bermuda will be determined on the basis of all relevant facts and circumstances.

How is Strategic Management Demonstrated?

Per the Shipping Guidance, strategic management generally means the oversight and control of an entity’s shipping business and includes the following activities:

• making decisions on significant capital expenditure;
• asset disposal (i.e. the purchase and sale of vessels);
• awarding major contracts, agreements on strategic alliances and vessel pooling; and
• the direction of foreign establishments.

The relevant factors to demonstrating strategic management include:

• location of decision-makers, including directors and senior management staff;
• location of board meeting and other operational meetings;
• the residence of directors and key employees; and
• a physical office presence in Bermuda; and
• whether or not vessels are flagged in Bermuda.

How is Commercial Management Demonstrated?

In the Shipping Guidance commercial management is described as day-to-day activities, or ordinary activities undertaken in the normal course of operations such as:

• route planning;
• taking bookings for cargo or passengers;
• arranging insurance and/or financing; and
• personnel management, provision, and training.

The relevant factors to demonstrating commercial management include:

• the number of employees engaged in these activities within Bermuda;
• physical presence in Bermuda; and
• residence of key management staff and directors.

[View source.]