The Application Of Bermuda Stamp Duty To Trust Structures

• Published date: 16 March 2022
• Subject Matter: Corporate/Commercial Law, Tax, Corporate and Company Law, Corporate Tax, Capital Gains Tax, Tax Authorities, Trusts
• Law Firm: Carey Olsen
• Author: Mr Ashley Fife

This article explores some important Bermuda stamp duty implications applicable to instruments that trustees of Bermuda law trusts often enter into. It also considers the consequences of not paying stamp duty within the required time when an instrument is chargeable with stamp duty. It applies in respect of the law in Bermuda in force as at 20 January 2022 and is not intended to be exhaustive or constitute legal advice.
Bermuda continues to be a popular jurisdiction to establish or re-domicile trusts and family offices. It has attractive laws that facilitate flexible, efficient trust structuring and restructuring. Bermuda law does not impose income tax, corporation tax, capital gains or wealth taxes. "Exempted undertakings" may apply to the Minister of Finance for a tax assurance certificate certifying that the exempted undertaking will not be subject to any such taxes if introduced in Bermuda before 31 March 2035.

However, while there are certainly considerable fiscal and other benefits to establishing and administering a trust structure in Bermuda, it is incorrect to say that Bermuda is "tax free". Bermuda, like many other international financial centres (whether considered "onshore" or "offshore") has developed a tax regime that has evolved to take into account the costs of its government's maintenance of infrastructure provision of health care and benefits, including social security and initiatives to combat COVID. Consequently, Bermuda law does impose certain taxes in certain circumstances. Such taxes include stamp duty (including on affidavits of value in respect of "Bermuda property" forming part of the value of a person's deceased estate), payroll tax, land tax and customs duty.

In many cases, instruments executed in relation to Bermuda law trusts are ordinarily only chargeable with nominal stamp duty (if chargeable at all) provided they do not affect a disposition of "Bermuda property" and provided a "local trustee" or an "international business" is properly a party to the instrument.

However, there are some discrete issues to be mindful of, particularly in connection with:

• instruments that effect a disposition of "Bermuda property";
• instruments that neither a "local trustee" nor an "international business" is properly a party to (irrespective of whether or not the instrument effects a disposition of Bermuda property); and
• promissory notes.

In some cases, the above instruments may be chargeable with a form of ad valorem stamp duty.

There is little jurisprudence regarding the application of many provisions of Bermuda's stamp duties legislation. Many Bermuda lawyers have adopted a practical and consistent approach to the construction of complex provisions of Bermuda's stamp duty legislation that are frequently encountered. However, practitioners' views may differ on some of the more complex questions of construction.

When the time comes for finalising drafts of instruments that may be chargeable with stamp duty in Bermuda, it is recommended to have a Bermuda qualified lawyer advise on the stamp duty implications. A Bermuda lawyer may be asked to prepare a brief stamp duty certification to include in the instrument (typically under the execution provisions). The stamp duty certification may state the amount of duty with which the Bermuda lawyer determines the instrument is chargeable (if any), the time within which the duty must be paid, any exemption relied upon (if applicable), and the relevant provision(s) in Bermuda's stamp duty legislation relied on for the certification. In some cases, it may be recommended or necessary to have an instrument assessed for duty by Bermuda's Tax Commissioner.

RULES APPLICABLE TO INTERPRETATION OF BERMUDA'S STAMP DUTY LEGISLATION

It is well-established, particularly following Barclays Mercantile Business Finance Ltd Mawson [2005] 1 AC 684, that a taxing statute is to be interpreted by reference to the ordinary principles of statutory construction by giving its provisions a purposive construction in order to identify its requirements. It is suggested that this approach would apply to the interpretation of Bermuda's stamp duty laws.

INSTRUMENTS CHARGEABLE WITH DUTY

Section 2 of Bermuda's Stamp Duties Act 1976 (the Act) provides that, subject to certain exemptions, stamp duty is chargeable in the amounts specified under the relevant head (Head) of the Act's schedule (Schedule), on:

"(a) every instrument specified in the Schedule as an instrument chargeable with stamp duty which, not having been previously executed by any person, is executed in Bermuda after 31 March 1976;

(b) every bill of exchange or promissory note drawn or made out of Bermuda after 31 March 1976, and accepted or paid, presented for acceptance or payment, or endorsed, transferred or otherwise negotiated in Bermuda; and

(c) every instrument (other than a bill of exchange or promissory note) specified in the Schedule as an instrument chargeable with stamp duty which is executed out of Bermuda after 31 March 1976 and is brought into Bermuda after 31 March 1976 and which requires stamping under section 3." (Emphasis)

Section 1 of the Act defines "instrument" to include "every written document". The definition does not exclude instruments that are governed by a law other than that of Bermuda. However, often, instruments that are not governed by Bermuda law will relate to transactions exclusively concerning a subject matter not connected with Bermuda and may consequently benefit from an exemption such as those provided by section 4 of the Act (set out below).

Payment of stamp duty is ordinarily evidenced by affixing revenue stamps of the required value on the instrument (and counterparts or duplicates) and cancelling such stamps by handwriting the initials of the person, party or firm affixing the stamps and the date of such cancellation.

TIME FOR PAYMENT OF DUTY

Each Head indicates the time within which the respectable instruments must be stamped (e.g., payment of duty/affixing and cancellation of stamps). The payment of stamp duty may be deferred in some instances (e.g., until released from escrow or until the instrument is brought into Bermuda in circumstances where the instrument is delivered outside Bermuda). The Act includes a process for adjudication by the Tax Commissioner upon application by a person who is uncertain whether and what amount of stamp duty is payable on an instrument. The Act provides the Tax Commissioner the power to grant special permission for the late stamping of an instrument provided certain conditions have been satisfied. A person dissatisfied with the Tax Commissioner's assessment has a right to appeal to the Supreme Court within 14 days after receiving the assessment.

Where an instrument chargeable with duty executed outside of Bermuda, while there may be different views, it is suggested that the time specified in the Schedule for its stamping commences on the day after the original instrument is brought into Bermuda.

CONSEQUENCES OF FAILURE TO PAY DUTY

The consequences of a failure to pay duty on a chargeable instrument can include:

• civil penalties being imposed on the parties liable for the duty;
• the instrument not being able to be relied upon by the parties so liable as evidence in civil court, arbitration or other proceedings; and
• the instrument not being accepted for filing or registration by any public officer or company in Bermuda.

It is an offence for a person to practice any fraudulent act, connivance or device to defraud the Bermuda Government of any stamp duty.

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