On 8 June 2009 the Organisation for Economic Cooperation and Development (OECD) announced that Bermuda had moved onto its ‘white list’ of countries ranked by tax transparency standards. Bermuda was the first jurisdiction to move up from the OECD’s ‘grey list’ putting it among those top tier countries that have ‘substantially implemented’ internationally agreed tax standards, as monitored by the OECD. The move came after Bermuda signed its 12th tax information exchange agreement (TIEA) with the Netherlands. The OECD requires countries to sign at least 12 TIEAs in appropriate form with OECD countries in order to reach the top tier.
In light of the global financial crisis and financial scandals that have affected countries around the world, the international focus on tax evasion and the implementation of the internationally agreed tax standards developed by the OECD has intensified since 2008. These issues were high on the agenda of the G20 London Summit in April of this year, with the OECD Secretariat issuing at its conclusion on 2 April 2009 a Progress Report constituting its assessment of the implementation of the legal and administrative framework for transparency and exchange of information for the 84 jurisdictions that participate in the OECD’s Global Forum on Transparency and Exchange of Information. The Progress Report includes a three-tier list commonly referred to as the ‘white’, ‘grey’ and ‘black’ lists. The white list identifies jurisdictions that have substantially implemented the internationally agreed tax standard, the grey list those jurisdictions that have committed to, but not yet implemented the standard and the black list jurisdictions that have not committed to the standard.
At the time of the G20 London Summit, Bermuda had TIEAs with the United States, Australia and the United Kingdom and subsequently signed further TIEAs with New Zealand, Denmark, the Faroe Islands, Finland, Greenland, Iceland, Norway, Sweden and finally the Netherlands on 8 June 2009 thereby satisfying the qualifying standard of 12 TIEAs to ascend to the white list. Bermuda has since signed its 13th TIEA with Germany and has concluded TIEA negotiations with Mexico, Canada and Japan. At the time of signing Bermuda’s TIEA with Germany, Bermuda’s Minister of Finance, Paula Cox, affirmed Bermuda’s commitment to supporting the OECD initiative to implement standards of information exchange and transparency and indicated Bermuda’s objective was to conclude TIEAs with all of the G7 countries and Bermuda’s other important international and trading partners ‘thereby exceeding by the widest of margins the minimum standard of 12 TIEAs’.
The principles of transparency and effective information exchange in tax matters have been articulated and refined through the work of the OECD’s Global Forum on Taxation. Currently the standards for exchange of information are set out in Article 26 of the OECD Model Convention and the 2002 Model Agreement on Exchange of Information. These standards have been endorsed by the G20 and UN Committee of Experts on International Cooperation on Tax Matters and now serve as a basis for most bilateral tax treaties as the internationally agreed standard for exchange of information. Exchange of information between the tax authorities of countries can be done bilaterally or multilaterally. The model agreement contains two versions, one being a model for bilateral agreements and the other a model for a multilateral instrument that provides a basis for an integrated bundle of bilateral agreements.
When done bilaterally, two main types of agreements are used – Double Taxation Agreements (DTAs) and TIEAs. TIEAs are typically intended for use with countries for which a DTA is not considered appropriate, mainly because they have no, or low taxes on income or profits. TIEAs tend to be narrower in scope that DTAs but are more detailed than DTAs on the subject of information exchange. They specify how such information exchange is to occur. Bermuda’s TIEAs require only the provision of information ‘upon request’ and include strict conditions about the form of such requests. They are designed to prevent so-called ‘fishing expeditions’. The agreements set out a number of requirements that the applicant territory must meet to show the relevance of the request to tax matters. The OECD model at article 5 section 5 sets out seven such criteria, while for example, the TIEA that the United Kingdom has signed with Bermuda sets out nine.
Most importantly, the agreements identify situations in which a party may decline a request to supply information. These may include instances where disclosure may reveal trade or professional secrets, confidential communications between a client and their legal representative for the purposes of seeking or providing legal advice or for use in existing or contemplated legal proceedings or where disclosure would be contrary to public policy.
Information exchanged for tax purposes must be treated as confidential. TIEAs contain rules to ensure that information is used only for authorised purposes and thereby protect taxpayer privacy rights. Typically unauthorised disclosure of tax related information received from another country is a criminal offence.
At the G20 London Summit in April the G20 declared a commitment to ‘take action against non-cooperative jurisdictions, including tax havens’, and stated: ‘We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over.’ Bermuda’s ascendancy to the white list and ongoing commitment to meet and exceed the OECD’s high standards of transparency and exchange of information for tax purposes cements its competitive edge as a top tier international business and trust jurisdiction.
Perpetual private trusts now allowed in Bermuda
In another significant move, on 29 May 2009 the Bermuda parliament passed the Perpetuities & Accumulations Act 2009 (the 2009 Act), which abolishes the rule against perpetuities for trusts established on or after 1 August 2009, except in relation to trusts holding land situated in Bermuda, which will continue to be subject to the perpetuity period but only in respect of such land. Bermuda private trusts established on or after 1 August 2009 may thus exist in perpetuity without any limit on the period during which income may be accumulated or for which capital may remain unexpended or inalienable.
Previously private trusts for beneficiaries established under Bermuda law were limited to a fixed trust period of up to a maximum of 100 years. Where a trust holds Bermuda land as well as other assets, the rule against perpetuities will apply only in respect of the Bermuda land and the other assets may validly remain in trust for perpetuity.
Bermuda charitable trusts have long been able to exist in perpetuity and Bermuda non-charitable purpose trusts have been so permitted following the amendment in 1998 of the Trusts (Special Provisions) Act 1989. The 2009 Act also confirms that for charitable or non-charitable purpose trusts, income may be accumulated for any duration including an unlimited duration.
The abolition for most trusts of the rule against perpetuities, a rule seen by many commentators as out-of-date and anachronistic, brings Bermuda into line with a growing number of both offshore and onshore jurisdictions.
For trusts already in existence on 1 August 2009 wishing to ‘opt-in’ to the new rules, it is anticipated that an application could be made to the Bermuda court under either section 47 or section 48 of the Trustee Act 1975 to extend the duration of an existing trust, or the time within which an interest must vest, or the time within which certain powers are exercisable. Approval by the court under section 47 will depend on whether the court deems such arrangement to be expedient and for the benefit of the trust as a whole. There are already precedents of Bermuda cases where the court has granted a new perpetuity period and such approval should now be even easier than before with respect to existing trusts. Section 48 provides for the variation of trusts by the Bermuda courts where the variation would be for the benefit of the beneficiary seeking it.
Whilst it is not expected that every settlor will want their trust(s) to be perpetual, the availability of such trusts offers additional flexibility for multi-generational wealth planning and, together with Bermuda’s position on the OECD white list mentioned above, enhances Bermuda as a leading jurisdiction for wealthy families looking to set up trusts for the long term preservation of their family wealth.
Private trust companies – changes to residency requirements
All Bermuda exempted companies, which includes private trust companies, are subject to certain residency requirements. These have now been amended by the Companies Amendment Act 2009 to provide greater flexibility.
A Bermuda private trust company will now only require:
- at least one director who is ordinarily resident in Bermuda, or
- a secretary that is:
- an individual who is ordinarily resident in Bermuda, or
- a company that is ordinarily resident in Bermuda, or
- a resident representative that is:
- an individual who is ordinarily resident in Bermuda, or
- a company that is ordinarily resident in Bermuda.
Until now, a Bermuda private trust company required at least two directors, or a secretary and a director, or a secretary and a resident representative who were individuals and ordinarily resident in Bermuda.
Although the new residency requirements are simpler and increase flexibility, it remains important that the location and number of directors and officers of a private trust company be carefully considered to avoid any unintended or undesirable consequences such as, for example, the underlying trusts being considered as resident for tax or other purposes somewhere outside Bermuda.
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