Captives are an important part of the wider Bermuda re/insurance market, with over $24 billion in gross premiums written in 2020, according to Bermuda Monetary Authority’s (BMA) “Captive Report 2021”. Much of this risk was assumed from North America. However, a growing number of Bermuda captives are writing international risks from outside this region, including from the Caribbean, Asia-Pacific and Latin America.
New captives opt to incorporate and license in Bermuda over other jurisdictions, and there were 18 new registrants in 2022. In addition to a steady flow of new registrants, Bermuda has also seen an increase of activity in existing captive structures which are leveraging existing captives for a number of expanded uses. Whether this is predominantly due to market-hardening on the commercial re/insurance market or not, Bermuda captives have proved over many decades that they provide numerous risk management benefits to parent companies and groups.
Our captive clients often raise the questions below either prior to, or as part of, the on-boarding process to establish and license a new captive.
Q: Does economic substance (ES) legislation impact Bermuda captives? Does a captive require a physical presence in Bermuda?
A: Bermuda enacted ES legislation in 2018 in response to the EU’s Code of Conduct Group on Business Taxation with the objective of counteracting the effects of zero tax and preferential tax regimes around the world. Bermuda was listed specifically under the EU’s fair taxation criteria 2.2 which relates to tax regimes which facilitate offshore structures that attract profits which do not reflect real economic activity in the jurisdiction.
The ES legislation and related guidance notes require that captives (and other in-scope entities conducting a “relevant activity”):
- Are managed and directed from Bermuda;
- Have core income-generating activities undertaken in Bermuda;
- Maintain an adequate physical presence in Bermuda;
- Have adequate full-time employees in Bermuda with suitable qualifications; and
- Have adequate operating expenditure incurred in Bermuda in relation to the relevant activity of insurance.
Bermuda captives have been able to strike the right balance in terms of keeping running costs low while also ensuring that they satisfy the ES criteria. This is typically accomplished by having one or more Bermuda-based directors and or officers, Bermuda service providers and regular visits to the Island for key decision-makers who are not based in Bermuda.
Q: Can my captive get a rating?
A: Yes, Bermuda has more rated captives than any other captive insurance domicile, many of which are highly-rated by reputable rating bodies, such as AM Best. Bermuda’s renowned commercial reinsurance market means that rating agencies are very familiar with Bermuda re/insurers, many of which have operations in Bermuda.
Q: What are the key regulatory aspects of Bermuda’s captive regime?
A: The Bermuda insurance regulatory regime, overseen by the BMA, bifurcates the regulatory regime between captives from commercial insurers, with the former having less onerous regulatory and reporting requirements. For example, a requirement to establish a Bermuda head office exists for the commercial classes of insurers, but not for captives.
The Bermuda regulatory regime is based on the proportionality principle, meaning the more complex and risky the actions of the licensed captive, the greater need for oversight and management. As such, an assessment of the proposed captive’s operations will be an important part of the formative steps in setting one up.
Bermuda insurance legislation categorises captives into general business and long-term business, and then into classes based on the amount of related versus unrelated business they plan to write. The vast majority of Bermuda captives are class 1 or class 2 captives, which are writing 100 percent related risks, or 80 percent related risks, respectively. Commercial class 3A insurers are often used for segregated account structures (ring-fending assets and liabilities of a given segregated account from others under Bermuda law) to house and operate numerous captives.
Q: Is there an industry body representing the interests of captive owners?
A: The newly formed Bermuda Captive Network (BCN) is a representative body that exists to serve the interests of its members. These include, but are not limited to, Bermuda captive owners, other stakeholders and service providers. The BCN is the amalgam of three pre-existing bodies: the Bermuda Insurance Managers Association, Bermuda Captive Owners Association and the Bermuda Captive Conference.
The main aims of the BCN are growing its international presence, delivering an expansion of resources, adding value to members and other stakeholders through events, forums, consultation, data and analytics, and promoting the development of a more diversified membership.
The BCN will offer enhanced advocacy, leading and evaluating changes in Bermuda’s legislative and policy landscape with one voice, to ensure the interests of Bermuda and its stakeholders are represented.
Q: What is the tax status of Bermuda and my captive once it’s formed?
A: According to the Organization for Economic Co-operation and Development (OECD), Bermuda is a jurisdiction that has substantially implemented the internationally-agreed tax standard and as such is appears on the OECD “white list”. Bermuda has entered into Tax Information Exchange Agreements with 32 other nations, an agreement to provide exchanges of information between governments.
Under current Bermuda law, there is no income, corporate or profits tax or withholding tax, capital gains tax or capital transfer tax payable by captives. Bermuda captives (and other Bermuda exempted companies) can easily apply for and obtain an assurance from the Minister of Finance under the Exempted Undertaking Tax Protection Act 1966, as amended, an assurance that, in the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of an estate duty or inheritance, then the imposition of any such tax shall not be applicable to the captive or to any of its operations or its shares, debentures or other obligations, until March 31, 2035.
Bermuda captives are free to make onshore tax elections where desired. For example, numerous Bermuda captives have made 953(d) elections (under section 953[d] of the US Internal Revenue Code) which means they are taxed as if they are domestic companies.
Q: What if I want to have an employee or employees in Bermuda?
A: There is a deep pool of talented professionals on the Island and advertising and agencies are good ways to attract them. For non-Bermudian staff, work permits can be obtained on a full-time or temporary basis by way of an application process. Work permits are not required for directors conducting carrying out normal board functions on-Island.
Q: Can my captive write emerging risks?
A: Yes, captives write any number of emerging risks. Cyber, crypto and risks relating to legalised cannabis are some of the newer/emerging risks being written from captives.
First Published In Captive International, February 2023