Bermuda

Tax-deferred employer plans

The National Pension Scheme (Occupational Pensions) Act 1998 requires employers in Bermuda to provide occupational pension coverage for employees. Both employer and employee contribute to a registered pension plan, with minimum contribution rates set by regulation. Plans must be registered with the Pension Commission and meet fiduciary and investment standards. The exemption is available only to an ‘eligible individual’ under §5.02: someone who is compliant (or comes into compliance) with U.S. income-tax filing and has reported the plan’s contributions, earnings, and distributions as income to the extent U.S. law requires; a participant who never reported plan earnings cannot rely on it until they do.

Bermuda occupational pension plans typically hold assets in trust. Under Treas. Reg. §301.7701-7, these are foreign trusts: they are administered in Bermuda with no U.S. court exercising primary supervision. The Contributory Pension Fund (the government social insurance program under the Contributory Pensions Act 1970) is a separate pay-as-you-go system that provides a basic pension; as a government-run pay-as-you-go program, it is generally not a trust under §301.7701-7.

Rev. Proc. 2020-17 does not require a treaty, so the absence of a U.S.–Bermuda income tax treaty does not by itself disqualify a mandatory occupational pension plan. Whether it qualifies instead depends on whether it independently satisfies the revenue procedure's conditions (including local tax treatment, contribution limits, withdrawal restrictions tied to retirement age, disability, or death, and, for employer-maintained plans, nondiscrimination), which requires plan-specific analysis.

Absent a qualifying exemption, U.S. participants in Bermuda occupational pension trusts file as the note at the end of this section explains for a plan an employer contributes to.

For a plan an employer contributes to, a trust holding it is generally a nonexempt employees’ trust described in §402(b). §6048(a)(3)(B)(ii) excepts transfers to §402(b), §404(a)(4), and §404A trusts from Part I, the participant’s own contributions included, and §679 does not make the participant the owner (see the Reporting Guide’s employer-plan section). Payouts the participant reports as compensation income are excepted from Part III. If the participant’s own contributions ever exceed the employer’s, the participant is treated as the owner of the part those contributions fund (Treas. Reg. §1.402(b)-1(b)(6)), reports it on Part II and Form 3520-A each year it is owned, and is taxed on its income each year. In that count, what the participant chose to put in, salary sacrifice included, is the participant’s, and anything the plan’s rules required taken from pay is the employer’s, as the IRS chief counsel read a national retirement fund in 1997. The rest is taxed when it vests and, after that, when paid out (§402(b)(1), (2)).

Trust law framework

Bermuda trust law is rooted in English common law and has been supplemented by the Trusts (Special Provisions) Act 1989 (as amended), which introduced reserved powers trusts and purpose trusts. Bermuda has no income tax or capital gains tax; it has no estate tax as such, but stamp duty is charged on a deceased person’s net Bermuda estate (first $100,000 exempt, then 5% to 20%, with the primary family homestead excluded), and there is no U.S.–Bermuda income tax treaty.

For U.S. tax purposes, Bermuda trusts are foreign trusts under Treas. Reg. §301.7701-7. The Bermuda trust sector is long-established, and many trusts have been in existence for decades, sometimes predating the current reporting requirements. This can create compliance gaps when a U.S. person inherits or becomes a beneficiary of a long-standing Bermuda trust without understanding the reporting obligations.

Reserved powers trusts and purpose trusts

The Trusts (Special Provisions) Act 1989 expressly permits settlors to reserve certain powers (such as the power to revoke the trust, to add or remove beneficiaries, to appoint and remove trustees, or to direct investments) without invalidating the trust or causing it to be treated as a sham under Bermuda law.

For U.S. tax purposes, reserved powers are highly relevant. A settlor who retains the power to revoke the trust is the owner under IRC §676. A settlor who retains control over beneficial enjoyment (e.g., the power to add or remove beneficiaries) is the owner under IRC §674. These retained powers routinely cause Bermuda reserved powers trusts to be grantor trusts for U.S. income tax purposes, triggering Forms 3520-A and 3520 Part II.

For a U.S. settlor these powers are academic: §679(a)(1) already makes the settlor the owner if the trust has a U.S. beneficiary. For a non-U.S. settlor, §672(f) limits grantor treatment to a trust the settlor can revoke or one whose lifetime distributions go only to the settlor or the settlor’s spouse; a U.S. beneficiary of any other long-standing Bermuda trust reports distributions on Part III and does not file Form 3520-A.

Bermuda purpose trusts (non-charitable) are used for holding structures and corporate governance purposes. The classification analysis parallels that of Cayman STAR trusts: the absence of individual beneficiaries can complicate the §679 analysis.

Insurance-linked trusts

Bermuda is a global hub for insurance and reinsurance. Captive insurance companies, insurance-linked securities (ILS), and special purpose insurers frequently use trust structures to hold collateral or segregate assets.

A U.S. company that establishes a captive insurance subsidiary in Bermuda may use a trust to hold reserves or collateral. Even if the arrangement is a trust, §6048 applies only where a U.S. person gratuitously transfers property to it, is treated as its owner, or receives a distribution; collateral posted by a Bermuda captive (a foreign corporation) for consideration is outside §6048(a) under the fair-market-value exception of §6048(a)(3)(B)(i). The IRS has scrutinized captive insurance arrangements closely, and the trust classification question adds a further layer of complexity.

ILS structures (catastrophe bonds, sidecars, and collateralized reinsurance) frequently use Bermuda trusts to hold collateral. The U.S. tax treatment of the trust depends on the specific structure, including whether the trust has a U.S. owner or U.S. beneficiaries. Practitioners working with ILS structures should confirm the trust reporting position as part of the overall tax analysis.

Penalties and practical notes

The standard §6048 framework applies: Part I for transfers, Part II and Form 3520-A for U.S. owners, Part III for distributions. The same obligations apply to U.S. participants in Bermuda mandatory occupational pension trusts. Penalties under §6677(a) are the greater of $10,000 or 35% of the gross reportable amount for Parts I and III. Under §6677(b), the penalty for Part II and Form 3520-A is the greater of $10,000 or 5% of the gross reportable amount.

Because Bermuda has no income tax, no foreign tax credits are available. For grantor trusts, the U.S. grantor reports all trust income on their personal return at full U.S. rates.