The Incorporated Segregated Accounts Companies Act 2019 (the ISAC Act) was tabled in Bermuda’s House of Assembly on 27 September 2019 and allows for the creation by a company of segregated accounts, or cells, with separate legal status (an ISAC).
The ISAC Act operates under the provisions of the Segregated Accounts Companies Act 2000 (the SAC Act) to ring-fence the assets of each individual cell from the creditors of other cells and allow for the winding up of individual cells without affecting any of the other cells.
Under the ISAC Act, each incorporated segregated account is a separate legal entity under Bermuda law and in its own right. As such, each account or cell will have many of the attributes of a company, including the ability to hold assets, sue and be sued in its own name and be subject to winding up proceedings with no impact on other cells. Further and most importantly, each incorporated segregated account will enjoy legal segregation of the account or cell from the ISAC itself and other accounts or cells. Each cell will also have its own board of directors, separate from the board of directors of the ISAC, though the same directors can sit on both if so desired.
ISACs will be advantageous to a number of industry sectors, such as insurance, reinsurance, rent-a-captives, life insurance, ILS, fund structures and family office structures, as each cell will be able to function independently within the same ISAC, obtaining separate tax elections or credit ratings while minimising operating costs. The ability for each account to sue or be sued in its own right is also advantageous as it permits each cell to effectively operate autonomously from the others, further ring fencing operational costs and potential liabilities.
Except where otherwise provided in the ISAC Act, ISACs will be governed by the Companies Act 1981, as amended and will be subject to the applicable licensing and regulatory regime depending on the nature of its business.
Bermuda Introduces Two New Classes Of Insurer
The Insurance Act 1978 (the “Insurance Act”), was amended on the 5 August 2019 providing for the supervision and regulation of “insurance marketplace providers”, a new class of insurance intermediary, and sees the introduction of two new class of insurers, namely the “Collateralised Insurers” and “Class IIGB”.
The introduction of “Collateralised Insurers” is expected to benefit both insurance-linked securities (ILS) funds and their investors. Recognising the expansion of the ILS market to include collateralised reinsurance, the Bermuda Monetary Authority (BMA) has developed the new class of limited purpose insurer that extends beyond the traditional special purpose insurer. The new Collateralised Insurers are designed to be used for multi-use transactions for multiple cedants, including unrated non-affiliated cedants.
A Collateralised Insurer must have a paid-up share capital of US$120,000, must maintain its head office in Bermuda, appoint a principal representative, and direct and manage its insurance business in a proportional manner. Additionally, in compliance with the Insurance Act, the Collateralised Insurer must appoint an individual approved by the BMA who is a qualified loss reserve specialist and to submit an opinion annually with its statutory financial return.
The new classification of a non-sandbox innovative class, the Class IIGB insurers, is for general insurance business and is primarily designed for those models using digital assets. The new Class IIGB complements the existing insurance regulatory sandbox and insurance innovation hub introduced last year.
Class IIGB insurers will also be required to meet the head office requirements, annual filing of financial statements, and the Declaration of Compliance and minimum solvency requirements equal to the Class 3A requirement (US$1 million).
The new class of insurance intermediary, the Insurance Market Provider, is primarily for use by insurtech-related providers and is defined as “a platform of any type established for buying, selling or trading contacts of insurance”.
The aim of the foregoing amendments to the Insurance Act is to recognise and encourage those insurers and intermediaries focused on innovative and technology-based solutions, and to ensure that the Bermuda insurance market is amongst the leaders in providing an alternative regime under which such stakeholders may operate.
DABA Extended To Include Digital Assets Derivatives
The Digital Asset Business Amendment Act 2019 (the DABA Amendment) was enacted on 2 October 2019 and became operative on 8 October 2019. The DABA Amendment Act amends the existing provisions of the Digital Asset Business Act 2018 (the DABA) governing digital asset business in Bermuda.
Key amendments introduced for the purpose of expanding the oversight of digital service providers by the BMA include regulation of:
• persons who operate a 'digital asset derivative exchange' and provide the services of (a) creating, selling or otherwise entering into digital asset derivatives contracts; and (b) clearing and settlement of digital asset derivatives. 'Digital asset derivatives' include contract for differences, and options, swaps and futures contracts, based on a digital assets underlying interest;
• persons acting as 'digital asset benchmark administrators' being a person that has control over the provision of a 'digital asset benchmark', which includes any rate, index or figure made available to the public or published that is periodically or regularly determined by the application of a formula to, or on the basis of the value of, one or more underlying assets or prices, by reference to which the amount payable under a digital asset or the value of a digital asset is determined; and
• 'digital asset trust service providers' which are persons acting as fiduciary, agent or trustee on behalf of another person for the purpose of administration and management of a digital asset, subject to certain exceptions, including where a qualified custodian has been appointed in respect of the digital assets.
The DABA Amendment also expands the definition of market maker to now include:
(a) quoting buy and sell prices in furtherance of profit or gain on the bid offer spread;
(b) fulfilling orders initiated by clients or in response to clients’ requests to trade; or
(c) hedging positions.
With the DABA Amendment, Bermuda continues to position itself as a premier jurisdiction for digital asset business activities and illustrates the commitment to establish a well-regulated jurisdiction for digital assets and financial products for which the underlying interests are digital assets.
Bermuda Introduces Economic Substance Requirements
In June 2018, Bermuda committed to satisfying the EU’s Intergovernmental Code of Conduct (Business Taxation) Group (the Code of Conduct Group) imposing legislative requirements on certain jurisdictions with regards to the economic substance of entities incorporated/formed in such jurisdiction. Such legislation is intended to address concerns arising from perceived harmful tax practices that have become the focus of increased scrutiny across the European Union and have the aim of counteracting the effects of preferential tax regimes around the world. Bermuda was one of 40 countries identified by the Code of Conduct Group in 2017 and classified as a “Criterion 2.2 jurisdiction”.
Bermuda has enacted the Economic Substance Act 2018 (the ESA), which came into force on 21 December 2018 and became operational on 1 January 2019 and the Economic Substance Regulations 2018 (the ESA Regulations). The ESA will impact all companies to which the Companies Act 1981 applies, including permit companies and overseas companies, limited liability companies (LLCs) formed under Bermuda law, all partnerships registered under the Exempted Partnership Act 1992 and the Limited Partnership Act 1883 and the Overseas Partnership Act 1905, which have elected to have separate legal personality.
An entity registered in Bermuda that has elected to be a “non-resident entity” for tax purposes will not be subject to economic substance requirements. A non-resident entity is an entity resident for tax purposes in a jurisdiction outside on Bermuda that is not in Annex 1 to the EU list of non-cooperative jurisdictions for tax purposes.
Those entities carrying one or more of the designated “relevant activities” will be in scope and must comply with the economic substance requirements. Designated relevant activities are defined as:
Finance and leasing
Distribution and service centres
Local companies and LLCs carrying on relevant activities and pure equity holding entities are required to comply with the minimum economic substance requirements, including the compliance with applicable corporate governance requirements of the Companies Act 1981 or the Limited Liability Companies Act 2016.
All other entities will be required to comply with the full economic substance requirements, set out below:
• the entity is managed and directed in Bermuda;
• core income generating activities are undertaken in Bermuda with respect to the relevant activity;
• the entity maintains adequate physical presence in Bermuda;
• there are adequate full-time employees in Bermuda with suitable qualifications; and
• there is adequate operating expenditure incurred in Bermuda in relation to the relevant activity.
Every entity that is in scope of the ESA and the ESA Regulations will be required, on an annual basis, to file an economic substance declaration with the Registrar of Companies (the Registrar) confirming that it satisfies the economic substance requirements. The first filing deadline is expected to be June 2020. The Registrar will consider the following factors to determine whether or not an entity has complied with the economic substance requirements:
• the nature and extent of the relevant activity engaged in by the entity including, in particular, its core income generating activities undertaken with respect to such relevant activity;
• the nature and extent of the entity’s presence in Bermuda including physical offices or other premises occupied by the entity or its affiliate in Bermuda, and an adequate level of annual expenditure of the entity in Bermuda;
• whether the entity is managed and directed in Bermuda or from Bermuda, having regard to:
i) the location of strategic or risk management and operational decision-making, or where management of the entity meets to make decisions regarding business activities;
ii) the presence of an adequate number of senior executives, employees or other persons in Bermuda who are suitably qualified and responsible for oversight/execution of its core income generating activities; and
iii) the location and nature and frequency of board, manager or partnership meetings held in Bermuda in relation to the overall number of meetings; and
iv) the nature and extent of outsourcing arrangements (if any) to affiliates or service providers in Bermuda and whether and to what extent the persons carrying on the outsourced services are suitably qualified and have adequate capacity for the implementation and execution of those services; and whether the outsourced service provider complies with the economic substance requirements applicable to the outsourcing entity (noting that employees, premises and expenditure may not be counted multiple times by multiple entities with respect to such compliance).
Industry stakeholders are currently waiting for the final form of the guidance notes on the general principles of economic substance to be published by the Ministry of Finance, along with industry specific guidance notes for each of the designated relevant activities. Additional legislative changes to the ESA are underworks with the Ministry of Finance to ensure a level playing field with other offshore jurisdictions.
Senior Associate. Janice practices in all areas of corporate and commercial law, advising a wide range of international and local clients. Janice’s primary areas of expertise are with respect to asset financings, particularly aviation and shipping financing, shipping and aircraft registration in Bermuda, and banking and finance transactions. Janice also has extensive experience advising on mergers and acquisitions of both local and international companies, the migration of corporate entities and partnerships into and out of Bermuda, partnership structures, including global restructuring projects involving Bermuda entities, the incorporation and establishment of Bermuda special purpose vehicles and establishing private trust companies. Janice joined CHW in 2007 and was admitted to the Bermuda Bar in 2008. Janice is a member of the WISTA Bermuda Branch and the Society of Trust and Estate Practitioners, Bermuda Branch. Janice is ranked as a Rising Star by IFLR1000 and by The Legal 500 in both of the corporate & commercial and banking, finance & capital markets categories.
Kathleen practices in all areas of corporate and commercial law including IP migration, life sciences and bio-tech restructuring, securities and financings, as well as investment business and partnerships. Kathleen also has experience in a wide variety of international asset financing transactions, including debt and equity offerings, mergers and acquisitions and cross-border financings. Kathleen is proficient in Bermuda’s regulatory compliance regime, including data protection, anti-bribery and anti-money laundering. Prior to joining CHW in November 2018, Kathleen was a senior associate at a Tier 1 Bermuda law firm for 12 years. Kathleen joined CHW in 2018 and was admitted to the Bermuda Bar in 2007. Kathleen was ranked by the IFLR1000 as a Rising Star.