Multi-national shipping companies to benefit from Bermuda corporate income tax shipping exclusion

Fiona Bada

September 16, 2024

The Bermuda Corporate Income Tax Act 2023 (the “CIT Act”) which was enacted in response to the Organization for Economic Cooperation and Development’s global minimum tax initiative (known as “Pillar 2”) and the associated Global Anti-Base Erosion Model Rules (known as the “GloBE Rules”) contains provisions which apply to international shipping enterprises in line with the GloBE Rules. The relevant section of the CIT Act provides that international shipping income, together with up to fifty percent (50%) of certain ancillary income associated with international shipping, is excluded from the calculation of taxable income (the “International Shipping Income Exclusion” or “Exclusion”).

This Exclusion means shipping income excluded under the provisions of the CIT Act will 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.

The International Shipping Income Exclusion operates as a “book to tax” adjustment in the calculation of the Bermuda entity’s liability under the CIT Act. Income attributable to the Bermuda entity that is recorded in the 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 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 and includes net income from specific activities such as the transportation of passengers or cargo by ships in international waters, the leasing of ships (such as 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 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 fifty percent (50%) of a Bermuda entity’s net income 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 does not exceed three (3) years;

• 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;

• the provision of services to other shipping enterprises by engineers, maintenance staff, cargo handlers, catering staff, and customer service personnel; and

• investment income where the investment that generates the income is made as an integral part of the carrying on of the business of operating the ships in international traffic.

In order to qualify for the International Shipping Income Exclusion, a Bermuda entity must demonstrate that either (i) the strategic management or (ii) the commercial management of the relevant ships is effectively carried on from or within Bermuda. This is determined on the basis of all relevant facts and circumstances.

Strategic management means the oversight and control of an entity’s shipping business, the activities of which include making decisions on significant capital expenditure, asset disposal (such as the purchase and sale of vessels), the awarding of major contracts, and the direction of foreign establishments. Relevant factors in demonstrating management include the location of decision-makers such as directors, senior management and staff, the location of board and operational meetings, the residence of directors and key employees, whether there is a physical office in Bermuda, and whether vessels are flagged in Bermuda.

Commercial management includes the day-to-day activities or ordinary activities that are undertaken in the normal course of operations and include route planning, taking bookings for cargo or passengers, arranging insurance and/or financing, and personnel management, provision and training. Relevant factors in the demonstration of commercial management include the number of employees engaged in these activities in Bermuda, whether there is a physical presence in Bermuda, and the residence of key management staff and directors.

The Exclusion provided by the CIT Act has significant implications for businesses engaged in international maritime operations and a clear understanding of the Exclusion is crucial for businesses operating in the sector. For further details on this topic or personalized advice, please contact the author.

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Fiona Bada is counsel in the Corporate & Commercial department of Cox Hallett Wilkinson Limited