International Shipping Income Exclusion under the Corporate Income Tax Act 2023

International Shipping Income Exclusion under the Corporate Income Tax Act 2023

Following the OECD-led agreement by over 130 countries to impose a minimum tax rate of 15% on the corporate profits of large multinational enterprise groups (“In-scope MNE Groups”) to be applied in every jurisdiction in which they have a corporate footprint, commonly referred to as the Global Minimum Tax (the “GMT”), the Bermuda Government decided to introduce a corporate income tax regime.

The Corporate Income Tax Act 2023 (the “Act”) has been designed to be a covered tax under the OECD’s GMT eligibility rules; that is, one that is recognised within the OECD tax framework. The intention is to minimize top-up taxes levied on Bermuda multinational enterprises in other countries where they conduct business. 

The rate in the Act has been set at 15% and corporate income tax will be chargeable to any Bermuda constituent entities that are part of an In-scope MNE Group. 

For over 50 years, the shipping industry has played a key role in placing the Island on the international business map.  Bermuda’s strategic location in the North Atlantic Ocean, coupled with its well-established legal framework and political stability, has made it an attractive domicile.

Today, Bermuda is a thriving centre for international ship financing and registration. Over the years, many of the world’s leading ship owners, managers and related professionals and financiers have developed close relationships with Bermuda; this collaboration has resulted in the creation of financial structures that are tailored to the specific requirements of the shipping industry.

For In-scope MNEs in the shipping business, it is worth noting that the Act includes an exclusion for relevant shipping income earned by Bermuda constituent entities from the transportation of passengers or cargo in international traffic. This exclusion, derived from  the OECD’s Global Anti-Base Erosion Model Rules, functions as an adjustment to a Bermuda constituent entity’s financial accounting net income or loss.  The exclusion applies whether a ship is owned, leased or otherwise at the disposal of the Bermuda constituent entity and covers net income obtained in circumstances where a ship is either operated under slot-chartering arrangements, leased under either time or bareboat charter (the latter where the charterer is part of the same group) or participates in a pool or joint business or international operating agency.  Net income on the sale of a ship used for the transportation of passengers or cargo in international traffic is also within the exclusion, provided the ship has been held for a minimum of one year.

The exclusion also extends to qualified ancillary international shipping income which covers net income obtained from activities performed primarily in connection with the transportation of passengers or cargo in international traffic, as specified in the Act.

One important condition that must be met for the Bermuda constituent entity’s net income to qualify for this exclusion is that it must demonstrate that the strategic or commercial management (only one need be demonstrated) of all ships concerned is effectively carried on from or within Bermuda.  Strategic management is generally taken to mean oversight and control of the shipping business, while commercial management would typically consist of more day-to-day ordinary course activities such as route planning, taking bookings for cargo or passengers and personnel management.  Guidance on how this can be satisfied has been issued by the Minister of Finance.

The international shipping income exclusion in the Act aligns with Bermuda’s commitment to promoting a competitive and business-friendly environment for international companies.  By doing so, Bermuda will continue to attract top-tier players in the industry and strengthen its position as a key player in the international maritime sector.

Please contact one of MJM’s experienced shipping finance professionals if you require further information on how the international shipping income exclusion can benefit your group.