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U.S. Department of State

Diplomacy in Action

2013 Investment Climate Statement - Bermuda


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
March 2013
Report
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Openness to, and Restrictions upon, Foreign Investment

Bermuda is a major industry center for the world insurance and reinsurance market. With a Bermudian population of approximately 50,000 and an expatriate presence of 10-14,000 living on a small group of islands approximately 21 square miles in size, Bermuda can literally and figuratively be somewhat insular. This manifests itself in all facets of life: social, political and business. Foreign investors should be aware that Bermudians generally feel strongly about ensuring that the assets of Bermuda benefit Bermudians, guaranteeing Bermudians have first preference with regard to employment, and retaining real property for the citizens of Bermuda. Most Bermudians are related, know one another, or know someone who knows another.

Despite its size, Bermuda’s business and financial industries operate in a sophisticated multinational environment. Its strength lies in its strong regulatory and legal systems. As an Overseas Territory of the United Kingdom, Bermuda’s systems adhere to current and high ethical standards and are grounded in UK law. Since 1684, the Crown has appointed a Governor who is responsible for external affairs, defense, and internal security. In other matters, he/she acts on the advice of the cabinet of the Government of Bermuda (GOB). Bermuda has its own written constitution, giving its elected government almost complete self-determination in conducting local affairs and enacting its own legislation.

The GOB welcomes foreign direct investment and continually seeks to develop innovative new financial services and products that manage risk and facilitate the efficient flow of capital. Incorporating a company in Bermuda is a relatively straightforward, well regulated, and efficient process, and the GOB has recently announced its intention to streamline the process even further.

Bermuda has a stable democratic government, low personal and corporate taxes, a relatively large pool of skilled professionals, close proximity to the United States, and extensive air and communication networks. Its currency, the Bermuda dollar, is pegged one-to-one to the U.S. dollar. Bermuda’s economy has been in recession since 2009, a trend that is likely to continue in 2013 and perhaps through 2014, despite efforts of the new government – elected in December 2012 – to encourage foreign investment and business growth. Its current government debt is US$1.45 billion. In anticipation of additional spending needs over the next three to five years, in February 2013 the GOB raised its debt ceiling to US$2.5 billion; the government is hopeful that the debt will not reach that level.

According to the Bermuda Department of Statistics, the top five investment sectors in Bermuda are international business, real estate and rental activities, financial intermediation, general business activities, education, and health and social work. At the end of 2011, 14,882 international companies and partnerships were registered on the island representing a 1.4 percent decrease from the 15,091 companies that were registered at the end of 2010. (Data from 2012 are not yet available.)

The Companies Act 1981 and its subsequent amendments are the principal statutes governing the formation and operation of Bermuda companies and regulate foreign investment through acquisitions, mergers, takeovers, greenfield investments, and the incorporation of companies.

Foreign investors interested in doing business in Bermuda should be aware of the 60/40 rule. To be classified as a “local” or “non-exempt” company, and able to conduct business within the local economy, a company normally must meet the following three requirements: (1) Bermudians must be beneficial owners of at least 60 percent of the shares in the company; (2) Bermudians must exercise at least 60 percent of the total voting rights in the company; and (3) Bermudians must make up at least 60 percent of the directors of the company.

Most insurance, reinsurance, and other financial services companies – commonly referred to collectively as “international business” - are exempt companies, i.e., companies that are domiciled in Bermuda but are exempt from the 60/40 rule. Exempt companies may be 100% owned by non-Bermudians. The term “exempt” has only to do with ownership, not taxation; the tax system for both local and exempt companies is the same. Nor does the term imply that the companies are subject to any less supervision, regulatory oversight, or fiscal rules than are local non-exempt companies. In general, exempt companies are precluded from doing business within the local economy and may not own real property in Bermuda (with a few exceptions created by individual acts of the legislature). However, exempt companies may deal with other Bermuda-based exempt companies without restriction. Exempt companies may also buy their locally-needed supplies or services from local companies, such as accounting, banking, legal, management and office supply services.

Companies with non-Bermudian ownership of more than 40 percent wishing to do business in the local economy generally must apply to the Ministry of Finance for a license pursuant to the exemption provisions of section 114B of the Companies Act. Many hotels and telecommunications companies fall into this category. In recent years, the Ministry of Finance waived the 60/40 ownership restrictions as they apply to three of the island’s four banks. A factor contributing to this decision may have been an interest in complying with Organization for Economic Cooperation and Development (OECD) guidelines that seek to eliminate separate regulatory regimes for local and international companies. In 2012, the ownership distinction between local/non-exempt and exempt companies began to narrow even further. In July 2012, Bermuda amended the Companies Act to allow companies listed on the Bermuda Stock Exchange to apply for a license to seek foreign investment over and above the 40 percent maximum foreign ownership. The GOB hopes that relaxation of the rule will attract foreign investment, increase liquidity in the local market, and boost the economy.

Overseas and resident investors may form partnerships under the Partnership Act 1902. Partnerships are either local or exempted and may be general or limited. A local partnership is composed of Bermudian partners only and is permitted to conduct business locally and abroad. If one or more of the partners in a partnership is not Bermudian, then the partnership is considered an exempted partnership and may only conduct business outside Bermuda from a principal place of business within Bermuda. An overseas partnership formed outside Bermuda may, through the Bermuda Monetary Authority (BMA), apply to the Minister of Finance for a permit to operate in Bermuda or outside Bermuda from a place of business in Bermuda. These partnerships must appoint and maintain a resident representative on the island.

Bermuda scrutinizes who it will permit to engage in business in its country, and the vetting process undertaken in incorporating a business is rigorous. The Bermuda Monetary Authority is the integrated regulator of the financial services sector in Bermuda and screens all potential foreign investments. The Corporate Services Providers Business Act 2012 eliminates the requirement for double vetting. Depending on the type of business being established, the Ministry of Finance, Registrar of Companies, and/or the Tax Commissioner’s Office may also become involved in the process.

Because Bermuda seeks to distance itself from offshore jurisdictions that are considered tax or money laundering havens, the BMA has a list of criteria that companies must meet. At a minimum, the BMA requires a copy of the company’s most recent financial statements, a detailed business plan, the Memorandum and Articles of Association, equivalent documentation for non-incorporated bodies, copies of client agreements used or intended to be used for the business, personal questionnaires completed by all proposed institutional and/or individual controllers of the entity, a description of the group structure, an up-to-date chart for licensed institutions forming part of wider groups, and a check for the application fee. By maintaining this standard, the BMA acts as the regulator for company incorporation. In October 2009, the BMA launched an automated e-filing and e-approval system for corporate registrations. The system enhances the existing process by improving the speed of processing applications, while maintaining the integrity of its application review procedures. Company incorporation may take as little as four weeks. As noted above, the GOB has recently that it intends to further streamline the incorporation process.

The BMA provides continuing supervision and regulation of all investment providers, which are required to regularly submit financial documentation and other information about their business. If this criterion has not been met, or if there has been a failure to comply with law or regulation, the BMA has the authority to restrict or revoke the company’s license. The BMA will notify the company, which then must initiate corrective action with the BMA within a period of 14 days. Under the Investment Business Act, the BMA may take several disciplinary actions: public censure, issuance of warning/ discontinuance notices, or winding up or dissolution of the company. An investment provider may appeal the BMA’s decision to a tribunal constituted in accordance with the Investment Business Act 2003, section 34.

Opportunities to invest in privatization programs are minimal. In Bermuda, industries such as airports, tourism and transport, which have been privatized in many other countries, are controlled by the GOB. As Bermuda’s economy continues to struggle, some see privatization as the means to effect government cost-savings, but to date, there have been few such opportunities. When privatization opportunities do arise, foreign investors are generally not treated differently from local investors. The Ministry of Public Works publishes public tenders in the Royal Gazette (official gazette) and places its contract tendering system on its homepage for potential bidders to view. With the exception of franchise hotels, non-local franchises are generally not permitted in Bermuda; therefore, the GOB must give investors special permission to establish a franchise on the island.

Many in the international business and financial sector viewed certain of the actions and policies of the previous government, e.g., raising the payroll tax without consultation, imposing limits on the amount of time a foreign citizen could work in Bermuda, etc., as anti-business. That, in combination with the global economic downturn, led many companies to move their non-Bermudian executive staff to locations outside Bermuda. (Estimates of the number of foreign staff who left Bermuda since 2008 range from several hundred to more than a thousand.) At the same time, those companies laid off no longer needed unneeded Bermudian support staff. Few new businesses – international or otherwise - established themselves in Bermuda during that period, and those that did maintain a small staff footprint. The effect of this downsizing on the local economy has been significant: recession, the closing of dozens of local retail and service businesses, a steep drop in the value of real property, a 40% office vacancy rate, and high unemployment (from 4% in 2009 to 8% in late 2012).

With the change in government after the December 2012 election, most in the international business sector see the outlook as improving. The new government campaigned on a business-friendly platform and has already taken steps to lure international business to Bermuda, as outlined elsewhere in this statement. Although there has been some concern and speculation about the impact of FATCA on Bermuda, the market remains open to potential investors.

Conversion and Transfer Policies

The U.S. dollar is used and accepted in Bermuda with the Bermuda dollar, which trades at par. Both currencies are freely interchangeable and transferable without restriction. The BMA administers the Exchange Control Act 1972 (and regulations made there under) that states that no capital or exchange controls apply to non-residents or to the various forms of offshore entities (exempt or permit companies or partnerships), which are free to import and export funds in all currencies with a US$50,000 transfer limit. The BMA reviews all transfers on a case-by-case basis. No taxes apply to such transfers, and there is no withholding tax on interest, dividend or royalty payments. In practice, government consent is not required for Bermudians to hold foreign currency and assets. The regulations ensure the maintenance of local ownership and make sure that people coming in from other countries have been vetted and found credible and not at variance with world standards governing financial flows. In 2010, Bermuda passed the Foreign Currency Purchase Tax Amendment Act, which applies to the purchase of all non-local currencies, including the U.S. dollar. The foreign currency purchase tax doubled from 0.5 percent to 1 percent per transaction. The Act also raised the tax on goods bought overseas and imported into Bermuda.

The BMA performs inspections prior to granting specific exchange control permission for the issue and transfer of registered securities in Bermudian companies to persons deemed non-resident for exchange control purposes. Additionally, the BMA must approve the issuance and transfer of securities of local and exempt companies unless listed on a stock exchange.

In 2009, Bermuda passed The Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing) Amendment Regulations 2009 authorizing the BMA to oversee all wire transfers. The legislation requires financial institutions to verify the accuracy and completeness of the information on the payer/originator before transferring funds, retain complete records on the payor/originator of the fund transfer for a period of five years, and maintain effective procedures to detect whether complete information on the payor/originator is received with the wire transfer. The legislation specifies how the receiving institution should treat transfers with missing or incomplete information.

Generally, there are no major delays for remitting investment returns unless the entity needs approval from the BMA. Such approvals usually take less than 60 days.

In 2009, Bermuda updated the Revenue Act 1898 to strengthen the requirements relating to cross border transportation of currency and monetary instruments. The threshold for reporting is US$10,000. Mandatory declaration forms are used for all incoming passengers (regardless of point of embarkation). For outgoing passengers to Canada and the UK there is a disclosure system in place.

Expropriation and Compensation

Expropriation is regulated by the Housing Loan Insurance (Mortgage) Regulations 1984 and the Municipalities Act 1923. Generally, there is no history of expropriation without just compensation in Bermuda, nor have there been any expropriatory acts towards U.S. investors in Bermuda.

Dispute Settlement

The BMA is the primary entity involved in handling investment disputes in Bermuda. Despite the large amount of investment business in Bermuda, dispute resolution is seldom required.

As an Overseas Territory of the United Kingdom, Bermuda’s legal system, which has been in force since 1612, is based on English common law and principles of equity as well as English statutory law. The system is effective at enforcing property and contractual rights. The rules of practice and procedure are very similar to those of England, and there is no government/authority interference in the court system. Three courts preside in Bermuda: the Magistrates Courts, the Supreme Court, and the Court of Appeal. The court of last resort in Bermuda’s legal system is the Privy Council in London. Bermuda also has arbitration legislation, which may be invoked in certain circumstances.

With respect to international disputes, Bermuda enacted the Bermuda International Conciliation and Arbitration Act in 1993 in which it adopted the UN Commission on International Trade Law (UNCITRAL) model law of arbitration. The United Kingdom extended the 1958 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("The New York Convention") to Bermuda in 1979, and Bermuda became a party in 1980. As a result, arbitration awards from other countries - including the United States - are readily enforceable in Bermuda, and vice versa. Bermuda has not entered any reservations regarding its ratification of the New York Convention. The United Kingdom has also ratified and extended to Bermuda the Washington Convention on the Settlement of Investment Disputes between States and Nationals of other States 1965 (“ICSID Convention”). Bermuda is not a party to any bilateral or multilateral investment treaties.

The current (unwritten) GOB policy is that arbitrators and foreign counsel travelling to Bermuda for the purposes of arbitration do not need work permits. However, the Department of Immigration requires advance notice of their presence in the jurisdiction for the purpose of the arbitration.

Commercial arbitration in Bermuda has been directly linked with the growth of international companies, in particular insurance and reinsurance companies. Arbitration clauses are found in many insurance and reinsurance contracts. Often, these contracts name Bermuda as the arbitral seat, although they sometimes provide for arbitration in other locations, including London under New York substantive law (the so-called “Bermuda form”). Providing for arbitration in Bermuda pursuant to Bermudian substantive and procedural law is becoming increasingly popular in lieu of “Bermuda form” arbitration clauses.

The Bankruptcy Act 1989 as well as the Companies Act 1981 and the Companies (Winding Up) Rules 1982 govern the winding-up of companies. The Supreme Court (the first instance court of general jurisdiction) administers the bankruptcy process. Foreign money judgments can be enforced under Bermudian law under statute or common law, depending upon the country in which the original judgment was obtained. Under the Judgments Reciprocal Enforcement Act 1958 (JRE), Bermudian courts will recognize and enforce foreign money judgments as if they had been originally obtained in Bermuda. The JRE follows the same procedure as the Foreign Judgments (Reciprocal Enforcement) Act 1933 of the United Kingdom. A foreign creditor may apply for the bankruptcy of an individual or for the winding-up of a company provided the creditor follows the procedures set out in the aforementioned Bankruptcy Act 1989 and the Companies Act 1981.

Performance Requirements/Incentives

Except with regard to tourism and certain energy efficient goods and technologies, there are no grants or incentives available to foreign or domestic investors interested in investing in Bermuda. The Hotel Concession Act 1991 may provide full or partial relief from, or deferral of, customs duty for materials used in hotel renovations, and/or tax on land, occupancy, and payroll and/or lease requirements. The GOB is discussing offering additional incentives to spur investment in hospitality on the island. Special development orders (SDO) may be granted on a case-by-case basis. The expanded version of the Temporary Customs Duty Relief Bill 2002 extends similar relief for restaurant renovations. In 2010, the GOB removed the import duty on many energy efficient goods and goods for use in harnessing power from renewable energy resources.

Bermuda’s low taxation incentives are applicable to Bermudian and non-Bermudian businesses alike. There is no income tax, profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty/inheritance tax, or VAT or sales tax in Bermuda, although there is a duty on almost all goods imported into Bermuda. Customs duty is normally calculated on an ad valorem basis, generally on the transaction value of imported goods and on whether it is for commercial or personal use. The most common rate is 22.25%, although luxury items such as boats and cars carry a higher rate, while most food items have a lower rate. Relief is available for materials used in local manufacturing. The most common rate for accompanied personal goods of persons arriving in Bermuda by air or sea is 35% of the transaction value.

Annual government fees are imposed on businesses, and there is a 14% payroll tax - two-thirds paid by the employer and one-third by the employee.

The 2012 Incentives for Job Makers Act, designed to encourage international business executives to relocate and reside in Bermuda, recognizes and rewards companies that have demonstrated a commitment to Bermuda by exempting up to five of their senior executives from work permits for as long as the executive continues to be employed with the company and the company continues to invest in Bermuda. It also provides that senior executives will be eligible to apply for permanent residence status after ten years. The families of those exempt will also be entitled to reside in Bermuda. To be eligible for the exemption, companies must have at least 25 Bermudians on staff, employ Bermudians at all levels, provide entry-level positions for Bermudians, have programs in place for developing and promoting Bermudian employees, and engage in fair labor practices.

The BMA usually imposes minimum capital and regulatory requirements for exempt companies. These requirements are found in the Statement of Principles section of the agreement between the BMA and the investor. The Statement of Principles provides guidance on which assets the BMA accepts as liquid. The standard requirement is for liquid assets to be at least equivalent to the total of three months’ expenditure. This does not apply in the case of licensees who act as neither principal nor agent, in which case only one month’s expenditure must be maintained in the form of liquid assets.

The GOB does not force foreign investors to establish and maintain data storage within Bermuda. With the restructuring and re-domiciling of businesses after the 2008 economic slump, some organizations have shifted their IT departments to less costly jurisdictions, including Canada and the United States.

The Bermuda Customs Department has no discriminatory or preferential import or export policies affecting foreign investors, although the Bermuda Customs Tariff contains a number of preferential duty reliefs for certain local commercial activities (e.g., for the poultry and dairy industry). Investors are not required to purchase goods from local suppliers or export a certain percentage of output.

Because of Bermuda’s small size, the GOB does not normally solicit investment in infrastructure, although, as mentioned above, it has on occasion entered into public-private partnerships for large projects.

For information about labor requirements and work permits, see the section entitled “Labor” below at para. 18.

Right to Private Ownership and Establishment

Under the amended Companies Act pursuant to Section 114(b), local companies are permitted to own property. General speaking, however, exempt companies cannot own real property, although they may lease commercial land for up to 50 years and residential property for their employees for up to 21 years. The scheme for hotels is different; according to the Hotel Concession Act section 4 (h), “notwithstanding the provisions of section 78 of the Bermuda Immigration Act 1956 and paragraph 12 of the First Schedule to the Companies Act 1981, a company may lease a hotel or residential unit for a period not exceeding 131 years with an option to renew for a similar period.”

Except for trash collection and ferry services, the GOB has few monopolies. The postal service is in competition with private mail services. Public education competes with private education. Public bus service competes with taxis, local mini-bus services, and multiple-passenger airport buses. There is significant competition within the telecommunications industry. Bermuda currently has four categories of telecommunication companies: Class A providers, which are international service providers; Class B providers, which are fixed and wireless domestic service providers; Class C providers, which are internet service providers (ISP) providing DSL (broadband) and dial-up services; and Cable TV providers, which are Bermuda-based cable television companies authorized to provide limited telecommunication services. In April 2013, a new telecommunications regulatory scheme - the Regulatory Authority Act and the Electronic Communications Act - will come into effect. Among other things, the new scheme will increase competition – and hopefully result in better products and lower prices to consumers – by allowing providers to “bundle” wireless, internet, and television services.

Protection of Property Rights

Bermuda law recognizes and enforces secured interests in property, both movable and real. Bermuda protects property rights under the Mortgage Registration Act 1786, the Acquisition of Land Act 1970, the Development and Planning Act 1974, and the Registry General, all of which protect and facilitate the acquisition and disposition of property rights, such as land, buildings, and mortgages. Bermuda also has a land tax office and land valuations office. In November 2011, the Senate approved the Land Title Registration Act 2011, moving Bermuda from deeds-based property transactions to a parcel-based land registration system. Until the new registration system is implemented in April 2013, land owners must retain a Bermudian lawyer to research the history of the property and ensure that a third party does not have a claim. Each time a piece of real estate in Bermuda changes hands it is recorded in a deed of conveyance or a mortgage.

There is adequate protection for intellectual property, patents, copyrights, trademarks, and trade secrets. As an Overseas Territory of the United Kingdom, the island cannot enter into treaties separate and apart unless the UK expressly authorizes it to do so. Therefore, Bermuda is subject to the same treaties to which the UK is a party, including those concerning intellectual property rights. One such agreement is the Berne Convention for the Protection of Literary and Artistic Works (Berne Convention), which requires its signatories to recognize the copyright of works of authors from other signatory countries (known as members of the Berne Union) in the same way it recognizes the copyright of its own nationals. Bermuda has also passed its own laws for protecting intellectual property, patents, copyrights, and trademarks. These include the Patents and Designs Act 1930, the Trade Marks Act 1974 (as amended), and the Copyright and Designs Act 2004. While the GOB has taken steps to implement the WTO Trade Related Intellectual Property Rights (TRIPS) Agreement, it has yet to sign the World Intellectual Property Organization (WIPO) internet treaties.

Transparency of the Regulatory System

Bermuda’s legal, regulatory and accounting systems adhere to high ethical and current transparency standards. As noted previously, the legal and regulatory systems are grounded in UK law, while the accounting systems and auditing standards typically follow Canadian Generally Accepted Accounting Principles (GAAP). A Bermudian company may choose to follow the GAAP of any other jurisdiction, subject to full disclosure of its accounts. Bermuda is also a member of regulatory standard-setting bodies for banking (BASEL), insurance (International Association Insurance Supervisors or IAIS) and investment business (Financial Services Authority or FSA). Technically speaking, Bermuda is not considered an offshore financial centre because there is no distinction between how it regulates businesses operating in the local economy and the exempt companies operating internationally from within Bermuda. The BMA continually strives to improve transparency within the regulatory system. Neither unlicensed nor unregistered entities are permitted to operate in the financial services sector. The BMA is the sole regulatory body for financial services and is responsible for the licensing, supervision, and regulation of financial institutions, including those conducting deposit-taking, insurance, investment, and trust business in Bermuda. There are separate regulatory acts that apply to each of these sectors. The GOB posts new laws and regulations in the Royal Gazette (the official gazette) for public comment.

The amended Investment Business Act 2003 enhances the regulatory powers of the BMA, granting the BMA stronger intervention powers and clarifying provisions, such as the BMA’s ability to cooperate with foreign bodies. The amended Investment Business Act 2012, the Trust (Regulation of Trust Business) Amendment Act 2012, and the Banks and Deposit Companies Amendment Act 2012 further regulate investment businesses, trusts, and banks in the areas of civil penalties, public censure, prohibitions against providing certain services, and publications of decisions. Other provisions include measures to strengthen criminal and regulatory penalties. The Investment Business Act 2012 also brought the Bermuda Stock Exchange (BSX) under the regulation of the BMA.

In 2008, Bermuda passed the Proceeds of Crime Regulations (Supervision and Enforcement) Act (amended 2010), which designated the BMA as the supervisory body for securing compliance with regulations by regulated entities. The Act was amended in 2010 as part of Bermuda’s ongoing effort to strengthen its anti-money laundering and anti-terrorism financing (AML/ATF) framework to ensure a high level of compliance with international standards.

In March 2009, the BMA issued Guidance Notes for AML/ATF Regulated Financial Institutions on Anti-money Laundering and Anti-terrorist Financing, outlining and interpreting the legal and regulatory framework, indicating good industry practices, and assisting institutions to design and implement systems and controls to limit AML/ATF risks to institutions. This was followed up by an AML/ATF market survey, which was designed to ensure that licensed entities were in compliance with the Proceeds of Crime Regulations.

The BMA regulates collective investment schemes (CIS). The 1997 Proceeds of Crime Act (POCA) and the 2006 Investment Funds Act (IFA) regulate the fund administrators. Collective investment schemes are also subject to IFA, which clarifies and codifies the current regulation of funds in order to strengthen Bermuda’s position in the international funds market.

Bermuda’s Financial Intelligence Agency (FIA) is a member of the Egmont Group of Financial Intelligence Units. The FIA shares information with other agencies, as appropriate, within and outside Bermuda. In addition, the BMA Amendment (No. 3) Act 2004 clarifies the power of the BMA to cooperate with other overseas authorities. Other laws that authorize the sharing of information with overseas regulators include the Banks and Deposit Companies Act 1999, the Trusts (Regulation of Trust Business) Act 2001 and the Investment Act 2003.

Efficient Capital Markets and Portfolio Investment

The GOB’s policies facilitate the free flow of financial resources in the product and factor markets. As the third largest insurance market in the world, Bermuda seeks to stay ahead of insurance product innovations. Bermuda has a commercially sensible regulatory regime, an international stock exchange, an established financial and legal services sector, and a geographical position between the U.S. and European markets that make it a prime location for the convergence of the insurance world and capital markets. Commercial credit lines are normally arranged through U.S. or UK institutions. The Banks and Deposit Companies Act 1999 implemented the Basel Committee’s Core Principles for Effective Banking Supervision. Bermuda banks are currently compliant with the Basel II Accord. In 2011, the BMA published a discussion paper on enhancing Bermuda’s current regulatory framework for banks in line with Basel III. As noted previously, Bermuda’s currency, the Bermuda dollar, is fixed or pegged to the U.S. dollar at a 1:1 rate. The BMA, which has limited central bank powers, oversees Bermuda’s currency. The BMA also facilitates portfolio investment but does not determine interest rates, which are set by the market and usually follow the Federal Reserve System (Fed) rates. Liquidity and solvency are important concerns for Bermuda’s four banks as there is no monetary policy, no lender of last resort, and no implied guaranty. In July 2011, the GOB passed the Deposit Insurance Act, which lays out proposals for implementing a Deposit Insurance Scheme (DIS) for the Bermuda market. To be implemented in 2013, the DIS will provide insurance coverage to small depositors in banks and credit unions.

Because Bermuda’s economy is so intertwined with the U.S., local capital restriction policies tend toward an open flow of capital. Bermuda does not have developed capital markets, as it relies on the U.S. and other overseas markets. Credit is allocated on market terms, and foreign investors are able to get credit on the local and international market. The private sector has access to a variety of credit instruments through the local banks. Many companies, particularly the larger ones, maintain external banking relationships. Since Bermuda does not have a central bank and does not conduct a controlling monetary policy, it has no need to intervene in the markets.

Bermuda’s banks are highly capitalized and hold significantly high quantities of liquid U.S. dollar assets on their balance sheets. Approximately two-thirds of their aggregate balance sheet consists of inter-bank placements or holdings of high quality marketable securities. The amount of total assets within the banking sector decreased 2.8 percent or US$672 million from Q2 2011 to Q2 2012, largely driven by lower interbank deposit levels (down by 18.0% or 1.1 billion during the quarter) amid stable lending both in BD$ and foreign currency. The BMA’s Regulatory Update from November 2012 reports the total assets for the banking sector for Q2 2012 were US$23.6 billion. Cash and deposits fell by 8.1 percent or 650.5 million while loans and advances increased 5.9 percent or 517.1 million during Q1. Banks are required to meet a minimum capital ratio of 10 percent at the consolidated level, but the aggregate ratio exceeded 20 percent in 2012. In other matters, the banks follow the Bank of England model. They are required to maintain separately capitalized subsidiaries in order to conduct their trust business. Bermuda’s banking system is sound, although there has been a steady increase in the ratio of non-performing loans to capital. As of September 2012, that ratio stood at 37.4%.

Solvency for the banking sector remains high as capitalization improved slightly during the second quarter of 2012. The aggregate risk asset ratio (RAR) rose to 22.1% in Q2 2012, as net capital rose by 0.6% (or 14.8 million), while risk-weighted assets (RWAs) declined by 0.7% (or 77.4 million).

The U.S. Securities and Exchange Commission (SEC) recognized the Bermuda Stock Exchange (BSX) as a “Designated Offshore Securities Market” in October 1996. In 1999, the BSX became a full member of the International Federation of Stock Exchanges. In 2005, the UK Financial Services Authority granted the BSX Designated Investment Exchange status. The BMA provides oversight of the BSX and its trading activity. The BSX employs the Bermuda Securities Depository (BSD) - an electronic clearing, settlement and registration system – under BMA oversight. The BSD was designed to facilitate more efficient trade settlement for BSX-listed securities by allowing book entry settlement rather than paper-based settlement. Companies listed on the BSX include: ACE Limited, Argus Group Holdings Limited, Bermuda Commercial Bank, Bank of Butterfield, HSBC Corporate Money Funds, Lines Overseas Management and Orbis.

Competition from State-Owned Enterprises (SOEs)

Bermudian state-owned enterprises (SOEs) are active in public transportation (buses and ferries), healthcare, and postal services. The rest of the economy is in the hands of private enterprise. In Bermuda, public enterprise generally has easier access to market, credit, licensing, and other critical business operations than do private enterprises. SOE employees are members of the Bermuda Industrial Union.

Governance of SOEs is hierarchical in structure and led by a politically-appointed Cabinet Minister. SOEs are required to provide financial information as necessary to the Minister who submits the information annually to the Auditor General. Generally, no boards of directors are affiliated with Bermuda SOEs, with the exception of the Hospital Board; some SOEs may have advisory boards.

Corporate Social Responsibility (CSR)

There is a general awareness of corporate social responsibility (CSR) among both producers and consumers, and many local and international companies domiciled in Bermuda practice it regularly. Many firms are involved in philanthropic endeavors such as donating, volunteering, and fundraising for local and international causes, including college scholarships for talented Bermudian students. Many companies also have environmental programs in place to reduce carbon dioxide emissions and create “green” office spaces and buildings.

Businesses may apply to the Ministry of Economic Development for designation as a “Good Corporate Citizen.” This program identifies companies of good standing in Bermuda that support (via training, scholarships, etc.) and employ a fair number of Bermudians. If a company meets the criteria, the Ministry may, for example, grant pending work permit applications permission-in-principle and fast-track them through the work permit process.

Political Violence

There have been no recent incidents of political violence in Bermuda.

Corruption

Bermuda has laws, regulations and penalties to combat corruption and effectively enforces them impartially. The Bermuda Criminal Code 1907 and the Proceeds of Crime Act 1997 make provisions for punishing corrupt practices in the area of investments, particularly for the offences of misleading statements and practices, market manipulation, and insider trading. The Parliamentary Election Act 1978 addresses giving bribes to (or accepting bribes from) a government official; the penalty under this act is US$1,000 or up to two years imprisonment or both. The Parliament Act of 1957 provides for a five-year imprisonment and/or up to US$84,000 in fines for the bribery of a member of the House of Legislature.

In 2010, the GOB published several reports from former auditors general that referred to evidence of massive mismanagement of government funds in 2007-08 and recommended that police investigate four cases of overspending and/or lack of oversight and poor internal controls. The investigation is ongoing. In 2012, the GOB enacted the Good Governance Act 2012 to improve the transparency and accountability of Government contracts. The Act provides protection for whistleblowers, stronger internal audits, and establishes an Office of Project Management and Procurement in order to strengthen oversight and control of government projects.

Keen to rise above any perceived impropriety associated with offshore banking centers, Bermuda continues to update its regulatory framework to meet international standards, including those of the International Monetary Fund (IMF), the Financial Action Task Force (FATF) and the Organization for Economic Cooperation and Development (OECD).

Bilateral Investment Agreements

There is no bilateral investment treaty between Bermuda and the United States.

Bermuda has two bilateral taxation-related treaties with the U.S., the “Convention between the Government of the United Kingdom of Great Britain and Northern Ireland (on Behalf of the Government of Bermuda) and the Government of the United States of America Relating to the Taxation of Insurance Enterprises and Mutual Assistance in Tax Matters” (Convention) (1986) and the “Tax Information Exchange Agreement” (TIEA) (1988). Under the Convention Act, the United States agrees to waive for eligible Bermudian insurance companies any income and excise taxes on insurance premium income derived from the United States. An “eligible” company is defined as one whose “predominant business activity is the issuing of insurance, reinsurance, or annuity contracts and the investing of insurance reserves and other capital incident to the carrying on of the insurance business” that does not operate as a permanent establishment in the U.S.

Bermuda is on the category “A” list of signatories to the IOSCO MMOU (International Organization of Securities Commissions Multi-lateral Memorandum of Understanding), which provides for mutual co-operation and the exchange of information among securities regulators. In June 2009, the BMA was approved as a signatory to the Multi-lateral Memorandum of Understanding (MMoU) established by the International Association of Insurance Supervisors (IAIS). The IAIS developed the MMoU to establish a formal basis for cooperation and information exchange between signatory regulators who supervise insurers with international, or cross border operations.

OPIC and Other Investment Insurance Programs

Bermuda is an Overseas Territory of the UK and is not a member of the Overseas Private Investor Corporation (OPIC) or any other investment insurance programs.

Investors in Bermuda do not enjoy the same kinds of protections as provided by other jurisdictions such as the U.S. and should exercise their own “due diligence.” There is no deposit protection for owners of mutual funds or trusts, nor is there any central fund to reimburse investors. The BMA, however, maintains as public information a register of all licensed investment service providers. Moreover, investment managers must be licensed pursuant to the Investment Business Act of 1998. Prior to licensing, the investment service must provide proof of adequate professional indemnity insurance. In 2006, the GOB passed the Investment Funds Act, which clearly outlines how public funds are regulated, defines the framework for non-public, institutionalized funds, and includes requirements for fund administrators.

Labor

According to GOB figures released in December 2012, unemployment stands at 8%, compared to only 4% in 2009. Unemployment among young people age 25 or under is estimated to be more than 30%. Historically, a large part of the international business, hotel and hospitality, and construction workforce came from overseas because of the lack of skilled or qualified labor within the island’s small population. That has become a political issue within Bermuda.

The GOB requires investors to employ Bermudian workers where at all possible. The GOB’s overall objective has been to encourage the training and eventual hiring of locals to fill senior management positions at local and exempt companies. To support this objective, the Bermuda Department of Immigration has established specific guidelines. Companies must hire an equally qualified Bermudian or qualified spouse of a Bermudian before hiring a qualified foreign national.

On January 30, 2013, the GOB eliminated the controversial “term limits” policy, under which foreign workers were allowed to work in Bermuda for no more than six years unless their employers could demonstrate that they were “key employees,” whereupon they were permitted to work up to ten years. The “term limits” policy had been adopted to ensure that foreign nationals did not remain on the island for extended periods of time with the possibility of becoming permanent residents. The GOB believes abolition of the policy will encourage foreign businesses to maintain and/or establish themselves on the island and keep productive foreign citizens in Bermuda. It has pledged to look for additional ways to streamline the immigration process.

As noted above, the 2012 Incentives for Job Makers Act was designed to encourage certain international business executives to relocate and reside in Bermuda and to reward them and their family members by exempting them from work permits and putting them on a fast track to permanent residence. In February 2013, the GOB introduced special category work permits, including global work permits and new business work permits. A global work permit facilitates a global company’s ability to transfer employees throughout their organization, including Bermuda. New business work permits allow exempt companies that are new to Bermuda to expedite up to five work permits for overseas recruits for senior executive positions. A recruitment declaration form will be incorporated into the work permit process to ensure that Bermudians are treated fairly in the recruitment process, with hefty penalties for violators.

In 2011, the GOB imposed a work permit moratorium on cleaning, landscaping, and gardening jobs. In February 2013, it added technicians, grocery packers, cashiers, and couriers to the moratorium list and placed carpenters, administrative assistants, room attendants, kitchen porters, landscape gardeners, and masons in a restricted category. English competency will be officially incorporated into the new work permit policies. The GOB does not force foreign investors to establish and maintain data storage within Bermuda. With the restructuring and re-domiciling of businesses after the 2008 economic slump, some organizations have shifted their IT departments to less costly jurisdictions such as Canada or the United States.

Although Bermuda continues to have labor disputes (under the purview of the 1992 Labour Disputes Act), the number of disputes has decreased in recent years due in part to the passage of fair labor laws favored by most Bermudians. The government labor force is highly unionized and when there are disputes, they can be particularly adversarial and contentious.

Foreign Trade Zones/Free Ports

Bermuda has no free port or duty-free import zones.

Foreign Direct Investment Statistics

There are few statistics available regarding foreign direct investment in Bermuda. In general, ownership in the Bermuda insurance sector is geographically diverse, but U.S. companies own approximately 60% of the active commercial insurers. Bermudian-owned and European-owned insurers represent approximately 20% and 15% of the market, respectively. Approximately one in three commercial insurers is a publicly-listed company, of which two-thirds are listed on U.S. exchanges.



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