From Blueprint to Benefit: A Guide to the Tax Credits Act 2025

From Blueprint to Benefit: A Guide to the Tax Credits Act 2025

The recent enactment of the Tax Credits Act 2025 (the “Act”) moves Bermuda from principle to practice, operationalising a key proposal in the Bermuda Tax Reform Commission’s Final Report. The Commission’s vision for a modern, investment-friendly business environment — one that incentivises tangible, on-Island economic activity — is now codified in a structured framework of incentives. For the international business community and local stakeholders alike, this represents a significant shift, offering a clear, rules-based system to reward the very substance the Island seeks to solidify and to anchor.

The Act is not a standalone initiative.  The incentives contained therein are a direct legislative response to the recommendations of the Bermuda Tax Reform Commission as part of its comprehensive review of Bermuda’s tax system following the implementation of the corporate income tax, effective 1 January 2025.  The Act creates a mechanism to recognise and reward corporate contributions that align with national priorities: high-quality employment, local expenditure, community support, and critical infrastructure investment.

At the heart of the Act are qualified refundable tax credits (each a “QRTC”) and a non-refundable tax credit (also known as an originator tax credit or “OTC”), each targeting a specific area of economic contribution.

The “qualified” nature of a QRTC signifies such tax credits are subject to specific eligibility criteria and calculation rules, while “refundable” is a crucial feature: if the credit amount exceeds a group’s Bermuda corporate income tax liability for the year, the excess is not merely carried forward as a non-refundable credit might be; instead, it can result in a cash payment from the tax refund reserve fund or the consolidated fund, subject to the Act’s phased distribution factors, within four years from satisfaction of the conditions for receiving the credit. This refundability transforms the credits into a powerful, direct financial incentive.  A non-refundable tax credit is a credit that can reduce a tax liability (the amount of tax owed) to zero, but any excess credit amount is lost and will not be paid out as a cash refund. 

1. The Substance-Based Tax Credit: This is seen as the centrepiece QRTC because it will be most beneficial for groups with significant operational ‘substance’ in Bermuda, particularly insurance groups (requiring at least one Bermuda Monetary Authority-registered insurer and a majority of revenue from insurance activities).   It calculates benefits through a dual-component model.  It rewards both employment (through a job-based component linked to eligible payroll expenses and factors such as increased Bermuda-based headcount — with enhanced rates for Bermudians — that reward employment growth) and local investment (through an expense-basedcomponent for premises, services, tangible assets and training). The detailed mechanics underscore the policy aim: measurable, substantive physical and human capital presence.
   
   
2. The Community Development Tax Credit: This QRTC, open to any qualifying Bermuda corporate group, functions as a rebate to taxpayers against payroll tax and incentivises sustained corporate philanthropy, offering a 25% credit on donations to eligible Bermuda charities. By setting a rolling three-year contribution threshold of $300,000, it encourages long-term partnerships between the private sector and Bermuda’s Third Sector while broadening the Act’s relevance across industries.
   
   
3. The Utilities Infrastructure Tax Credit: Targeting critical infrastructure providers in the electricity, electronic communications and fuel sectors, this credit supports groups that are licensed or permitted utilities.  The benefit, calculated from eligible payroll and the carrying value of Bermuda-based tangible assets, is specifically structured to underpin the modern infrastructure that all businesses rely upon.

The above credits are calculated based on an organisation’s fiscal year, starting with the first fiscal year commencing on or after 1 January 2025 in alignment with the effective date of implementation of the corporate income tax.  

The Act’s operation is grounded in financial statement data, with qualifying expenses derived from consolidated accounts and adjusted for specific items. This accounting foundation is crucial because it directly feeds into the determination of qualifying expenses and, ultimately, the credit amounts. For the substance credit in particular, success will hinge on meticulous data management.

The Act establishes a formal administrative process. Credits must be claimed in a prescribed manner and timeline, with penalties of up to 20% applicable for negligent or careless overstatements.  Importantly, it provides safeguards, including mitigations for those who act (i) with reasonable cause, (ii) in good faith and (iii) on substantial authority (which includes authority from the Act or any regulations made thereunder, decisions of the Supreme Court, determinations by the Corporate Income Tax Agency and any official guidance issued).  The Act also provides persons aggrieved with any decision made under the Act with a right of appeal to the Supreme Court.

The introduction of these tax credits represents a new chapter in Bermuda’s value proposition. For businesses, the message is operational as much as it is financial: those who thoughtfully deepen their local footprint and meticulously manage their data will be best positioned to secure the intended benefits.

As with any complex tax regime, early engagement and careful planning are paramount.  MJM’s Corporate Team is available to provide more information or help in navigating the new incentives.