U.s.a. - Bermuda Tax Convention Act 1986

"request" means an application made, pursuant to Article 5 and the Notes, for assistance;

"the U.K. Government" means the Government of the United Kingdom;

"the United States" has the meaning assigned by Article 1 ;

"the U.S. Government" means the Government of the United States.

(2) In this Act, a reference to the Minister, in relation to any function to be performed by the Minister under this Act, is a reference to the Minister of Finance or such person, being an of ficer or servant, or an agency, of the Government of Bermuda, as the Minister of Finance may designate to perform the function (with or without a duty to refer back to the Minister of Finance) in his stead as his delegate.

(3) A reference in this Act to the performance of a function in cludes reference to the performance of a duty or the exercise of a power or right.

Legal effect of this Act

3 (1) This Act has effect for the purpose of enforcing the giving of assistance by persons in Bermuda in connection with the performance of the obligations assumed by Bermuda under the Agreement.

(2) The Minister, in performing his functions under this Act, is not restricted by any law or any rule of law relating to confidentiality ex cept as expressly provided in the Agreement.

Procedure in respect of a request

4 (1) A request must be in writing.

(2) A request must be signed by a senior official designated by the U.S. Government.

(3) A request shall contain particulars indicating‑

(a) that by the request the U.S. Government seeks informa tion identified in the re quest; and

(b) that the information is in Bermuda and that a person in Bermuda has or may have the information in his pos session, custody or control; and

(d) that the information relates to the affairs of a person in respect of whom the re quest has been made under the Agreement ("the taxpayer"); and

(e) where the request has been made pursuant to the first sentence of Article 5, that the taxpayer has, or is be lieved to have, done some act, or made some omission, justifying the making of that request in respect of him; and

(f) whether or not the taxpayer is a resident of Bermuda or of the United States; and

(g) that the request relates to an examination of the tax payer in relation to a taxable period of the taxpayer, be ing a period specified in the request, but so that, where a request, in seeking information relating to a taxable period so specified, also seeks information relating to a time outside that period. the request must estab lish the connection between that period and that time.

(4) Subject to subsections (1), (2) and (3), a request shall be in such form as regulations may prescribe.

Power to require production of information

5 (1) Subject to this section, where the Minister has received a request in respect of which the requirements of section 4 are fulfilled, he shall by notice in writing under this section served upon the person re ferred to in paragraph (b) of subsection (3) of that section direct him to deliver to the Minister the information referred to in that para graph.

(2) For the purposes of subsections (3) and (4) of this section, a subsection (2) matter is a matter �

(a) with respect to which information is sought in a request; and

(b) which relates to a person who is not a resident either of Bermuda or of the United States, whether or not the re quirements of section 4 are fulfilled in rela tion to the re quest.

(3) Where the Minister receives a request which seeks informa tion with respect to a subsection (2) matter, he shall not issue a notice under this section to any person unless the Minister is satisfied that the information is necessary for the proper administration and enforce ment
of the fiscal laws of the united States.

(4) Where the Minister receives a request which seeks informa tion with respect to a matter which either �

(a) is a subsection (2) matter; or

(b) does not constitute a United States criminal or tax fraud investigation,

he shall not issue a notice under this section to any person unless the Minister receives certifica tion from a senior official designated by the Secretary of the Treasury of the United States that the information sought by the request is relevant to and necessary for the determination of the tax liability of a United States taxpayer, or the criminal tax liability of a person under the laws of the United States.

(5) A notice under this section must �

(a) contain the pertinent details of the request to which the notice relates; and

(b) specify the time within which the information sought by the request is to be de livered to the Minister.

(6) The time to be specified in such a notice is 28 days com mencing on the day on which the notice was served, or such greater or lesser number of days as the Minister may in any particular case think fit.

(7) Subject to subsections (8) and (9), a person who is directed by such a notice to de liver information to the Minister shall deliver it to the Minister in accordance with the notice if the information is in Bermuda and that person has it in his possession, custody or control.

(8) A person complies with a duty under this section to deliver information to the Min ister if he makes the information available to him.

(9) After a notice has been served, the Minister may in any case enlarge the time speci fied in the notice, either before or after that time has expired, if in his opinion the circumstances warrant.

(10) A direction given in a notice under this section to a person is an absolute defence to any claim brought against him in respect of any act of his that was done, or any omission of his that was made, in good faith in obedience to the direction.

Power to enter premises to obtain information

6 (1) An officer of the Ministry of Finance may make an applica tion to a judge under and in accordance with the provisions of this sec tion for the issue of a warrant authorizing entry upon premises.

(2) An officer of that Ministry who makes such an application must produce a minute signed by the Minister of Finance himself autho rizing the officer to make the application in that particular case.

(3) If on information given on oath by such an officer a judge is satisfied that there is reasonable ground for suspecting that an offence against this Act has been, or is being, or is about to be, committed on any premises, being an offence by reason of which the delivery to the Minister of information sought by a request is endangered, then the judge may issue a warrant in writing authorizing an officer of the Min istry to enter the premises, if necessary by force, at any time within 14 days commencing on the day of the issue of the warrant, and search them.

(4) In issuing a warrant under this section, the judge may im pose such restrictions upon the execution of the warrant as he may deem proper in the circumstances.

(5) An officer entering premises by virtue of a warrant under this section may take such other persons and equipment with him as he thinks necessary; and, on leaving premises entered by virtue of a war rant under this section, shall, if they are unoccupied or the occupier is tem porarily absent, leave them as effectively secured against trespassers as he found them.

(6) On entering premises by virtue of a warrant under this sec tion, the officer may seize and remove any things whatsoever found there which he has reasonable cause to believe may contain information rele vant to a request, and shall deliver any things so seized and removed to the Minister.

(7) Where entry to premises has been made by virtue of a war rant under this section and the officer making the entry has seized any things under the authority of the warrant, he shall prepare a list of them and, if so requested by a person showing himself either �

(a) to be the occupier of the premises; or

(b) to have had possession or custody of those things im mediately before the seizure,

provide that person with a copy of that list.

(8) Where things are seized under the authority of a warrant and it is shown that access to those things is required for the continued conduct of the business or affairs of any person, the Minister shall

afford to that person reasonable access to those things.

Provision supplementary to ss.5 and 6

7 Where the Minister obtains material by virtue of section 5 or 6, he shall �

(a) in any event, for 20 days commencing on the day on which he obtained the ma terial, unless he returns it pursuant to paragraph (c), not disclose or reveal to any person the contents or import of the material, and, in particular, if the mate rial in his opinion contains infor mation sought by a request, not, as respects that mate rial, comply with the request;

(b) after the expiry of those 20 days, if the material in his opinion contains informa tion sought by a request, be entitled to make copies of it and keep them and also make them available to others in furtherance of the re quest;

(c) whether or not the material contains information sought by a request, return the material as soon as practicable to the person from whom he obtained it.

Service of documents

8 (1) A document to be served under this Act by one person ("the server") on another per son ("the subject") is to be treated as properly served on the subject if dealt with as provided for in this section.

(2) The document may be delivered or sent by post to the sub ject, or addressed to him by name and left at his proper address.

(3) For the purposes of subsection (2), a document sent by post to, or left at, the ad dress last known to the server as a person's address shall be treated as sent by post to, or left at, his proper address.

(4) References in this section to the serving of a document on a person include the giv ing of the document to him.

Offences

9 (1) A person who �

(a) contravenes subsection (7) of section 5; or

(b) wilfully obstructs an officer executing a warrant under section 6 or a person lawfully accompanying him pur suant to subsection (5) of that section, is guilty of an of fence.

(2) If any person, in or in connection with delivering informa tion pursuant to subsection (7) of section 5, wilfully tampers with it or alters it so that the information is false when received by the Minister, he is guilty of an offence.

(3) If any person without a reasonable excuse destroys or dam ages any information which he knows that the Minister by a notice under section 5 has directed should be delivered to the Minister, he is guilty of an offence.

(4) A person guilty of an offence may be proceeded against summarily, and is liable on conviction to imprisonment for a term not exceeding six months or to a fine not exceeding $5,000, or to both such imprisonment and such a fine.

Depositions, etc.

10 (1) Where a request so stipulates, the Minister shall obtain the infor mation sought by the re quest in the form of �

(a) depositions of witnesses; or

(b) original documents or copies of original documents,

being depositions so made, and documents or copies so certified or authenticated, as the laws and administrative practices of Bermuda permit.

(2) Regulations shall be made, conferring such functions on such persons as the regu lations may specify, so that full effect can be given to subsection (1).

Advisory Committee

11 (1) The Minister of Finance shall establish and maintain a committee, to be known as "the Tax Convention Advisory Committee", for the purpose of advising him on matters of policy connected with the performance of his functions under this Act.

(2) The Tax Convention Advisory Committee ("the Committee") shall consist of such per sons (not fewer than five in number), to be ap pointed by the Minister of Finance, as he thinks fit, but so that not fewer than three of the Committee's members shall be persons appearing to him to be knowledgeable about the matters dealt with in the Convention.

(3) The Minister of Finance shall appoint a person to be the

Committee's chairman.

(4) Subject to Article 6 dealing with confidentiality, the Minister of Finance may refer to the Committee any matter mentioned in subsec tion (1), and shall take into account any advice that the Committee may tender on that matter.

Judicial review

12 For the avoidance of doubt, it is hereby declared that nothing in this Act excludes or re stricts the right of any person aggrieved by the performance by the Minister of Finance or any other person of any func tion under this Act to challenge the performance of that function, in so far as it affects him, either by seeking review of it by the Supreme Court and the grant, if thought fit by that Court, of an order under section 10 of the Administration of Justice (Prerogative writs) Act 1978 [title 8 item 12] or by taking any other action which is lawfully available.

Regulations

13 (1) The Minister of Finance may make regulations�

(a) prescribing anything that is required or permitted by this Act to be prescribed by regulation, or that is in the opinion of the Minister necessary or convenient to be prescribed for carrying out this Act or giving effect to it; and

(b) creating offences and prescribing penalties (including, if thought fit, imprison ment) for such offences but not ex ceeding the penalties fixed by section 9.

(2) Regulations are subject to the affirmative resolution proce dure.

Crown bound

14 This Act binds the Crown.

Commencement

15 [omitted]

[This Act was brought into operation on 2 December 1988 by BR 72/1988]

FIRST SCHEDULE (Section 2)

THE CONVENTION

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED KING DOM 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 IN SURANCE ENTERPRISES AND MUTUAL ASSISTANCE IN TAX MATTERS

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, desiring to con clude a convention with re spect to the taxation of insurance enterprises and mutual assistance in tax matters, have agreed as follows:

Article 1

General Definitions

1 In this Convention, unless the context otherwise requires:

(a) (i) the term "United States" means the United States of America, but does not include Puerto Rico, the Virgin Islands, Guam, or any other United States pos session or territory; and

(ii) the term "Bermuda" means the islands in the Atlantic Ocean known as Bermuda;

(b) the term "person" includes an individual, an estate, a trust, a company, a part nership, and any other body of persons;

(d) the term "enterprise of insurance" means an enterprise of which the predominant business activity during, the taxable year is the issuing of insurance or annuity con tracts or acting as the reinsurer of risks underwritten by insurance compa nies, together with the investing or reinvesting of assets held in respect of insur ance re-
serves, capital, and surplus incident to the carrying on of the insurance business;

(e) the terms "enterprise of a Covered Jurisdiction" and "enterprise of the other Cov ered Jurisdiction" mean re spectively an enterprise carried on by a resident of a Covered Jurisdiction and an enterprise carried on by a resident of the other Cov ered Jurisdiction;

(f) the term "competent authority" means:

(i) in the case of the United States, the Secretary of the Treasury or his del egate; and

(ii) in the case of Bermuda, the Minister of Finance or his delegate;

(g) the "insurance obligation" means any obligation which, in accordance with nor mal industry practice, an insurer undertakes under the terms of a contract of in surance, to make payments or incur expenses in connection with the insurance protection offered under the contract, in cluding any such obligation to pay claims to or for the benefit of the insured resulting from damages connected with the covered risk, to pay interest on such claims, and to pay the costs of defend ing an insured against such damages, but in no event including any obligation to pay premiums or other costs of reinsuring the covered risk; and

(h) the term "Covered Jurisdiction" means the United States or Bermuda, as the context requires.

2 As regards the application of the Convention by a Covered Juris diction, any term not de fined therein shall, unless the context otherwise requires or the competent authorities agree to a common meaning, have the meaning which it has under the laws of that Jurisdiction. For pur poses of the United States, the preceding sentence shall refer to laws concerning taxes. The com petent authorities may agree to a common meaning of a term for purposes of this Convention.

Article 2

Residence

For purposes of this Convention, the term "resident" of a Covered Juris diction means:

(a) in the case of the United States:

(i) any person, other than a company, resident in the United States for the purpose of United States tax; but in the case of a partnership, es tate or trust, only to the extent that the income derived by such partnership, estate or trust is subject to United States tax as the income of a resident, either in its hands or in the hands of its partners or beneficiaries; and

(ii) a company created under the laws of the united States or a political sub division thereof; and

(b) in the case of Bermuda:

(i) an individual who has the status of a legal resi dent of Bermuda; and

(ii) a company, partnership, trust, or association created under the laws of Bermuda.

Article 3

Permanent Establishment

1 For the purposes of Article 4, except as otherwise specified in this Article, the term "permanent establishment" means a regular place of business through which the business of an enterprise of insurance is wholly or partly carried on.

2 The term "Permanent establishment" shall include especially a place of management, a branch, an office and premises used a sales outlet.

3 The term "permanent establishment" shall also include the fur nishing of services, in cluding consultancy, management, technical and supervisory services, within a Covered Juris diction by an enterprise of insurance through employees or other persons but only if:

(a) activities of that nature continue within the Jurisdiction for a period or periods aggregating more than 90 days in a twelve-month period, provided that a perma nent es tablishment shall not exist in any taxable year in which such services are rendered in that Jurisdiction for a pe-
riod or periods aggregating less than 30 days in the tax able year; or

(b) the services are performed within the Jurisdiction for an associated enterprise.

For purposes of this paragraph, two enterprises shall be "associated" if either participates directly or indirectly in the management, control, or capital of the other, or if the same persons partici pate directly or indi rectly in the management, control, or capital of both.

4 Notwithstanding the preceding provisions of this Article, the term "permanent establish ment" shall be deemed not to include any one or more of the following:

(a) the maintenance of a regular place of business solely for the purpose of pur chasing goods or merchandise, or of collecting information, for the enterprise of insurance; or

(b) the maintenance of a regular place of business solely for the purpose of adver tising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise.

5 Notwithstanding the provisions of paragraphs 1, 2, and 3, a per son (other than an agent of independent status to whom paragraph 6 applies) acting in a Covered Jurisdiction on behalf of an enterprise of in surance of the other Covered Jurisdiction shall be deemed to be a per manent establishment of that enterprise in the first-mentioned Jurisdic tion if he has and habitually exer cises in the first-mentioned Jurisdiction an authority to include contracts on behalf of the enter prise, unless his activities are limited to those mentioned in paragraph 4 which, if exer cised through a regular place of business, would not make that regular place of business a permanent establishment under the provisions of that paragraph.

6 An enterprise of insurance shall not be deemed to have a perma nent establishment in a Covered Jurisdiction merely because it carries on business in that Jurisdiction through a broker, general commission agent, or any other agent of an independent status, provided that such per sons are acting in the ordinary course of their business. However, when the activities of such person are devoted substantially on behalf of that enterprise, he shall not be considered an agent of independent sta tus within the meaning of this paragraph if the transactions between the agent and the enterprise were not made under arm's length conditions.

7 The fact that a company which is a resident of a Covered Juris diction controls or is con trolled by a company which is a resident of the other Covered Jurisdiction, or which carries on business in that other Jurisdiction (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

Article 4

Taxation of Insurance Enterprises

1 The business profits of an enterprise of insurance of a Covered Jurisdiction derived from carrying on the business of insurance (including insubstantial amounts of income incidental to such business) shall not be taxable in the other Covered Jurisdiction unless the enter prise car ries on or has carried on business in the other Jurisdiction through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the business profits of the enterprise may be taxed in the other Jurisdiction but only so much of them as is attributable to that permanent establishment. Nothing in this Convention shall prevent the United States from taxing its residents (as determined under Article 2(a) ) and its citizens as if this Convention had not entered into force.

2 Where an enterprise of insurance of one of the Covered Jurisdic tions carries on or has carried on business through a permanent estab lishment in the other Jurisdiction, there shall in each Covered Jurisdic tion be attributed to the permanent establishment business profits which would reasonably be expected to have been derived by it, if it were a dis tinct and independent enterprise engaged in the same or similar activi ties under the same or similar conditions. In de termining the business profits of a permanent establishment in a Covered Jurisdiction through which an enterprise of insurance of the other Jurisdiction carries on or has carried on business, there shall be allowed as deductions, for pur pose of tax imposed by the first-mentioned Jurisdic tion other than excise taxes on premiums paid to foreign insurers, expenses which are incurred for the purposes of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development
expense, interest, and other ex penses incurred for the enterprise of insurance as a whole (or the part thereof which includes the permanent establishment), whether incurred in the Jurisdiction in which the permanent estab lishment is situated or elsewhere. For the purposes of this paragraph, the business profits to be attributed to a permanent establishment shall be determined by the same method year by year un less there is good and sufficient reason to the contrary. Nothing in this Article shall affect tax ation by a Covered Jurisdiction of dividends, inter est, royalties, gains or compensation for ser vices beneficially owned by a resident of the other Covered Jurisdiction if such items of income are not attributable to a permanent establishment of the beneficial owner of such income in the first-mentioned Jurisdiction.

3 A person which is a resident of a Covered Jurisdiction and which derives income from sources within the other Covered Jurisdiction shall not be entitled, in the other Covered Juris diction, to relief from taxation under this Article if:

(a) 50 percent or less of the beneficial ownership of such person is owned, directly or indirectly, by any combina tion of one or more individual residents of a Covered Ju risdiction or citizens of the United States: or

(b) the income of such person is used in substantial part, directly or indirectly, to make distributions (where such distributions are made with respect to beneficial owner ship interests and are substantially disproportionate to such interests) to, or to meet liabilities (including liabili ties for interest, royalties, or other expenses, but not in cluding liabilities, whether or not for interest or other expenses, which constitute insurance obligations) to, persons who are neither residents of either of the Cov ered Jurisdictions nor citizens of the United States.

If one of the Covered Jurisdictions proposes to deny benefits to a resi dent of the other Covered Jurisdiction by reason of this paragraph, the competent authorities of the Covered Jurisdictions shall, upon request of the competent authority of the other Covered Jurisdiction, consult each other.

4 The provisions of paragraph 3 shall not apply if the person de riving the income is a com pany which is a resident of a Covered Juris diction in whose principal class of shares there is substantial and regu lar trading on a recognized stock exchange. For purposes of the preced ing sentence, the term "recognized stock exchange" means:

(a) the NASDAQ System owned by the National Association of Securities Dealers, Inc. and any other stock exchange registered with the Securities and Exchange Commission as a national securities exchange for purposes of the Se curities Ex change Act of 1934; and

(b) any other stock exchange agreed upon by the competent authorities of the Cov ered Jurisdictions.

5 Nothing in this Convention shall limit any provisions of the law of either Covered Juris diction which permit the distribution, apportion ment, or allocation of income, deductions, credits, or allowances between persons, whether or not residents of a Covered Jurisdiction, owned or controlled directly or indirectly by the same interests when necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such persons.

6 The existing taxes to which this Article shall apply in the United States are the Federal income taxes imposed by the Internal Revenue Code (but excluding the accumulated earnings tax and the personal holding company tax), and the excise taxes imposed on insurance pre miums paid to foreign insurers. This Article shall, however, apply to the excise taxes imposed on insur ance premiums paid to foreign insurers only to the extent that the risks covered by such premi ums are not rein sured with a person not entitled to the benefits of this or any other con vention which applies to these taxes. This Article shall also apply to any identical or substantially similar taxes which are imposed by the United States after the date of signature of the Convention in ad dition to, or in place of, the existing taxes, and shall also apply to any tax imposed by Bermuda after the date of signature of the Convention which is identical or substantially similar to the ex isting United States taxes to which this Article applies, to the same extent as it applies to those existing taxes. The competent authorities of the Covered Jurisdictions shall notify each other of any significant changes which have been made in their respec tive taxation laws and of any official published material concerning the application of the Convention, including explanations, regula tions, rul ings, or judicial decisions.

7 The taxation on a permanent establishment which an enterprise of insurance of a Cov ered Jurisdiction has in the other Covered Juris diction shall not be less favorably levied in that other Jurisdiction than the taxation levied on enterprises of insurance of that other Jurisdiction
carrying on the same activities. This provision shall not be construed as obliging a Covered Ju risdiction to grant to residents of the other Covered Jurisdiction any personal allowances, reliefs, and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents. The provisions of this paragraph shall not be construed to prevent the United States from imposing an additional tax on the income of a permanent establishment maintained by a resident of Bermuda in the United States. Except where the provisions of para graph 5 apply, interest, royalties. and other disbursements paid by a resident of a Covered Juris diction to an enterprise of insurance of the other Cov ered Jurisdiction shall, for purposes of de termining the taxable profit of such resident, be deductible under the same conditions as if they had been paid to an enterprise of insurance of the first-mentioned Jurisdic tion. For purposes of this paragraph, the term "taxation" means taxes which are the subject of this Convention.

Article 5

Mutual Assistance in Tax Matters

The competent authorities of the Covered Jurisdictions shall provide as sistance as appropriate in carrying out the laws of the respective Covered Jurisdictions relating to the prevention of tax fraud and the evasion of taxes. In addition, the competent authorities shall, through consulta tions, develop appropriate conditions, methods, and techniques for pro viding, and shall thereafter provide, assistance as appropriate in carrying out the fiscal laws of the respective Covered Juris dictions other than those relating to tax fraud and the evasion of taxes.

Article 6

Confidentiality

Any matters subject to assistance under Article 5 shall be treated as confidential in the same manner as such matters or items would be un der the domestic laws of the Covered Jurisdiction requesting the assis tance and, in any event, shall be disclosed only:

(a) in the case of the United States, to persons or authori ties (including courts and administrative bodies) involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the deter mination of appeals in relation to, taxes, and

(b) in the case of Bermuda, to the competent authority of Bermuda.

Such persons or authorities shall use such matters or items only for purposes of the assessment, collection, or administration of, the en forcement or prosecution in respect of, or the determina tion of appeals in relation to, taxes. Such matters or items may be disclosed in public court pro ceedings or public decisions, but shall not be disclosed to any coun try other than one of the Cov ered Jurisdictions for any purpose.

Article 7

Entry into Force and Termination

1 This Convention shall be subject to ratification in accordance with the applicable proce dures of each party and instruments of ratifica tion shall be exchanged as soon as possible.

2 The Convention shall enter into force upon the exchange of in struments of ratification and its provisions shall have effect:

(a) in respect of excise taxes on insurance premiums paid to foreign insurers, for premiums paid or credited on or after January 1, 1986;

(b) in respect of income taxes imposed on the business profits derived by an enter prise of insurance, for such profits derived in taxable years beginning on or after the first day of the calendar year in which this Convention enters into force;

(c) in respect of mutual assistance covered by the first sen tence of Article 5, for tax able years not barred by the statute of limitations of the Covered Jurisdiction re questing such assistance; provided, however, that nei ther Covered Jurisdiction shall be required by Article 5 to provide such assistance with respect to taxable years beginning prior to January 1, 1977; and

(d) in respect of mutual assistance covered by the second sentence (and not also de scribed in the first sentence) of Article 5, for taxable years not barred by the statute of limitations of the Covered Jurisdiction requesting such assistance; provided, however, that neither Covered Ju-
risdiction shall be required by Article 5 to provide such assistance with respect to:

(i) taxable years beginning prior to January 1, 1977; or

(ii) taxable years beginning prior to the entry into force of the Convention if the provisions of such assistance would cause or result in the breach of an obligation to maintain confidentiality of information under the laws of such Jurisdiction in effect on the date of signature of the Conven tion.

2 The Convention shall continue in force indefinitely, but either party may give notice of termination to the other party on or after June 30 of the year following the calendar year in which this Convention en ters into force and in such event the Convention shall terminate on the first day of the seventh full calendar month following that in which the notice is given.

Done at Washington, in duplicate, this Eleventh day of July, 1986.

SECOND SCHEDULE (Section 2)

THE TEXT OF THE NOTES

(1) The United States Government noted that in order to im plement the relief from ex cise taxes pursuant to paragraph 1 of Article 4 of the Convention it would be necessary to estab lish procedures which would, inter alia, ensure that companies claiming the benefits of that paragraph are entitled to such benefits and, in the case of refunds, that the amount and recipient of such refunds are properly determined. Rep resentatives of Bermuda assured the representa tives of the United States Government of Bermuda's willingness to establish such procedures as may be mutually agreed to ensure that relief from the excise tax is ob tained by appropriate per sons.

(2) The United States Government noted that paragraph 3 of Article 4 of the Convention limits the availability of the exemption granted to insurance enterprises by either Covered Juris diction under the Convention to persons resident in the other Covered Jurisdiction which (i) are more than 50 percent owned, directly or indirectly, by indi vidual residents of the Covered Juris diction or U.S. citizens; and (ii) do not use their income in substantial part, directly or indirectly, to make certain payments to persons who are neither residents of a Covered Ju risdiction nor U.S. citizens. The United States Government indicated that, for purposes of the ownership test in that provision, it would not treat any individual as owning "indirectly" through an intermediary entity any beneficial interest in an entity resident in one of the Covered Juris dictions if the evidence of and rights to the ownership of any interest in such intermediary entity are in bearer form. For purposes of the second test, the term "Liabilities" refers to payments which reduce gross premi ums or are deductible against gross income, and includes interest, roy alties, and premiums paid in connection with reinsuring risks. Also, if the sum of (i) the ratio which reinsurance premium payments bears to gross premiums less return premiums and (ii) the ratio which payments of other liabilities bears to (a) gross premiums less return premiums and less reinsurance premium payments plus (b) gross income from all other activities, is no more than 50 percent, such pay ments will not generally be considered "substantial," provided that in appropriate circumstances a lower aggregate percentage will be considered "substantial".

(3) The United States Government expressed its concern that the obligations of a Cov ered Jurisdiction not be construed to establish an obligation to provide assistance with respect to matters other than those relating to the domestic laws of a Covered Jurisdiction respecting taxes. The representatives of the United States and Bermuda agreed
that the intended scope of Article 5 of the Convention is limited to assistance re lating to the domestic laws of the Covered Jurisdictions concerning taxes.

(4) Representatives of Bermuda expressed concerns as to the policies of the United States Government regarding assistance that might relate to persons not resident in one of the two Covered Jurisdictions and matters that do not constitute a criminal investigation. The repre sentatives of the United States Government discussed with the repre sentatives of Bermuda the United States' policies relating to information exchange. The representatives of the United States and Bermuda agreed that, where the United States requests assistance with respect to a mat ter which (i) relates to a person not resident in one of the two Covered Jurisdictions or (ii) does not constitute a United States criminal or tax fraud investigation, a senior official designated by the Secretary of the Treasury shall certify such request as being relevant to and necessary for the determination of the tax liability of a United States taxpayer, or the criminal tax liability of a per son under the laws of the United States. The representatives of the United States and Bermuda further agreed that, in connection with any assistance relating to persons not resident in one of the two Covered Jurisdictions, it shall be established to the satisfaction of the competent author ity of the requested Jurisdiction that such as sistance is necessary for the proper administration and enforcement of the fiscal laws of the requesting Jurisdiction. Where such necessity has been duly established, the competent authorities shall consult as to the appropriate form of such as sistance.

(5) The representatives of the United States and Bermuda agreed that, subject to the limitations described in and agreement to procedures referred to in paragraph (4) above, it is in tended that the mutual assistance to be provided under Article 5 of the Convention come into ef fect under the limitations of Article 7 as follows:

(i) Subject to paragraph (iv), Bermuda's obligation under the Convention to provide assistance with respect to civil and criminal tax matters relating to taxable years of a taxpayer beginning after the entry into force of the Convention will not be limited by any confidentiality restrictions of Bermudian law, other than those relating to so licitor-client privilege.

(ii) With respect to matters relating to taxable years of a taxpayer beginning before the entry into force of the Convention (but beginning on or af ter January 1, 1977 and not barred by the statute of limitations), paragraph 2(d)(ii) of Arti cle 7 limits Bermuda's obligation to provide as sistance with respect to civil tax matters (other than civil fraud) if the provision of such assis tance would entail breach of an obligation to maintain confidential ity of information under the laws of Bermuda in effect on the date of sig nature of the Convention. Under this standard, confidential information would only include in formation protected by Bermudian statutory and common law. It is understood that under Bermudian common law confi dential informa tion would include information protected by the common law solicitor-client privilege and banker-client privilege, It was agreed that if a taxpayer claims that other categories of infor mation are pro tected under Bermudian common law, and if the United States so re quests, the Government of Bermuda will have such a claim determined in the courts of Bermuda.

(iii) Bermuda's obligation under subparagraph 2(c) of Article 7 to provide as sistance with respect to criminal tax matters (and tax matters involving civil fraud) relating to taxable years of a taxpayer beginning before the entry into force of the Con vention (but on or after January 1, 1977 and not barred by the statute of limitations) would only be limited by the confidentiality obligations of the solicitor-client privilege.

(iv) Bermuda's obligation under the Convention to provide assistance with respect to civil tax mat ters (other than civil fraud) relating to a tax payer's taxable years beginning after the entry into force of the Convention will not require it to cause any person to breach a legal obligation to main tain confidentiality of documents or infor mation, properly asserted by such person under the laws of Bermuda as in effect on the date of sig nature of the Convention, where such docu-
ments or information were created in or derived from periods prior to the date of entry into force of the Convention. However, the limitation on Bermuda's obligation de scribed in the preceding sentence will not apply to documents or infor mation created in or derived from a date pre ceding the entry into force of the Convention that are relevant to a request relating to taxable years after the entry into force of the Convention and are of a kind that have a continuing opera tional effect. For example, if assistance is re quested with respect to a taxpayer's bank trans actions occurring after the entry into force of the Convention and the signature card for the ac count in question was executed prior to the en try into force of the Convention, Bermuda's obli gation to provide assistance with respect to such a sig nature card would not be affected by confi dentiality restrictions. Simi larly, if a taxpayer's depreciation deduction for a year after entry into force of the Convention is under examination, Bermuda's obligation to provide assistance with respect to information about the purchase price of the property in question, if such property was acquired before the en try into force of the Con vention, would not be affected by any confiden tiality restrictions of Bermudian law.

(6) The representatives of the United States Government ex pressed concerns regarding whether assistance would be provided in a form which would permit its use in judicial or admin istrative proceed ings. The representatives of the United States and Bermuda agreed that under Article 5 of the Convention, it was intended that, if specifically re quested by a competent author ity of a Covered Jurisdiction, the compe tent authority of the other Covered Jurisdiction shall pro vide information in the form of depositions of witnesses and authenticated copies of origi nal doc uments (including books, papers, statements, records, accounts and writings) to the same extent such depositions and documents can be obtained under the laws and administrative practices of that other Ju risdiction.

(7) Representatives of Bermuda also expressed concerns as to the scope for use of uni lateral compulsory measures by one Covered Ju risdiction to obtain documents, records, or other materials located in the territory of the other Covered Jurisdiction, and within the scope of as sistance under the Convention after entry into force of the Convention. In this context the repre sentatives of the United States Government con firmed that, with respect to documents, records, or other materials in the custody of a resident of a Covered Jurisdiction and located in the terri tory of that Jurisdiction, it shall be the policy of the United States, where practicable, to request assistance pursuant to the provisions of the Con vention before using unilateral measures.

(8) The representatives of the United States Government in quired whether shares of a company organized under the laws of Bermuda could be issued in bearer form. The representa tives of Bermuda informed the United States representatives that the laws of Bermuda did not permit the issuance of company shares to an unnamed person.

(9) The United States representatives sought clarification that matters that were the subject of assistance under the Convention but that are made public in accordance with Article 6 of the Convention would not be further subject to Article 6. The representatives of the United States and Bermuda agreed that matters that are the subject of assistance under the Convention but that are made public in accordance with the Convention would not be further subject to Arti cle 6.

(10) The representatives of the Government of the United States observed that, under the legal system applicable in Bermuda, the Con vention is not self-executing and that legislation would be required in or der to implement the provisions of the Convention. The representatives of Bermuda understood that instruments of ratification would not be ex changed until such legisla tion as may be required to implement the pro visions of the Convention has been enacted. It was further understood that the Convention would be ratified and other necessary steps, such as the adoption of implementing legislation necessary to meet the obliga tions of the Convention, would be taken so as to permit the exchange of instruments of ratification at the earliest possible date.

(11) The representatives of Bermuda inquired whether, following the entry into force of the Convention, the Secretary of the Treasury of the United States would be prepared to certify that assistance under the Convention, and subject to the understandings of this Note, would be satisfactory for purposes of section 927(e)(3) of the Internal Revenue Code of 1954, as amended (the "Code"), relating to countries qualifying as a Jurisdiction in which a Foreign Sales Corpora tion (FSC) may be or ganized. The representatives of Bermuda also inquired whether the assis tance provided for in the Convention, subject

to the understandings of this Note, would be satis factory for purposes of eligibility for conven tion tax benefits under section 274(h)(6) of the Code.

The representatives of the United States stated that upon entry into force of the Convention, and subject to the understandings contained in this Note, the Secretary of the Treasury, or his dele gate, will be prepared to certify Bermuda for purposes of section 927(e)(3) of the Code such that a company organized under the laws of Bermuda may qualify as a FSC. Such certification would be published in the Federal Register and may be terminated effective six months after the date of publication of a notice of termination in the Federal Register. The United States Government also stated that, upon entry into force of the Convention, the Secretary of the Treasury, or his dele gate, will be prepared to execute on behalf of the United States Government an executive agree ment satisfying the re quirements of section 274(h)(6) of the Code, which would incorporate by cross-reference the provisions of Articles 5 and 6 of the Convention and this Note, and would al low persons incurring expenses for attending business conventions in Bermuda to claim deduc tions for such expenses as though Bermuda were included as part of the "North American area."

(12) The representatives of Bermuda emphasized the necessity of including in the Con vention additional provisions intended to prevent changes in U.S. income tax treaty policy from adversely affecting the economic position of Bermuda's insurance and tourism industries rela tive to those of U.S. treaty partners in similar circumstances under cur rent U.S. tax treaty policy. The United States representatives were not able to accept such provisions. However, the United States Government recognizes that insurance and tourism currently play a vital role in the Bermudian economy. If, in the future, the income tax treaty policies of the United States change in a manner which would have a material, ad verse effect on such Bermudian business activities, compared with ex isting circumstances, the United States Government would be prepared to reopen the dis cussions in order to take account of such change in policies.

THIRD SCHEDULE (Section 2)

THE PROTOCOL OF EXCHANGE OF INSTRUMENTS OF RATIFICATION

The undersigned, John Swan, Premier of Bermuda, and George P. Shultz, Secretary of State of the United States of America, being duly authorized for the purpose by their respective Govern ments, have met for the purpose of exchanging instruments of ratification of the Convention be tween the Government of the United Kingdom of Great Britain and Northern Ireland (on behalf of the Government of Bermuda) and the Gov ernment of the United States of America relating to the Taxation of In surance Enterprises and Mutual Assistance in Tax Matters, with a re lated Ex change of Notes, signed at Washington on July 11, 1986. The United States ratification is subject to the following reservations:

(1) Effective January 1, 1990, said Convention shall not oper ate to prevent the imposi tion by the United States of any excise taxes on insurance premiums paid to foreign insurers, whether or not such pre miums constitute income of an enterprise of insurance of a Covered Ju risdiction; and

(2) Said Convention shall in no event operate to prevent the imposition by the United States of any excise taxes on insurance premi ums paid to foreign insurers except with respect to insurance premiums that either:

(a) constitute income of an enterprise of insurance of a Cov ered Jurisdiction carried on by a company in a taxable year in which the company is a controlled foreign corpo ration within the meaning of section 957(a) or (b) of title 26 of the United States Code as in effect for such taxable year; or

(b) constitute income of an enterprise of insurance of a Cov ered Jurisdiction carried on by a company in a taxable year in which:

(i) the company is subject to the rules of section 953(c) of the Internal Rev enue Code of 1986, and

(ii) the company is a controlled foreign corporation within the meaning of section 957(a) of the In ternal Revenue Code of 1986 as modified by sec tion 953(c)(1) of said Code, and

the premiums constitute related person insurance income within the meaning of section 953(c) of the Internal Revenue Code of 1986.

The respective instruments of ratification having been compared and found to be in due form, the exchange took place this day.

IN WITNESS WHEREOF, the respective Plenipotentiaries have signed the present Protocol of Ex change of Instruments of Ratification.

Bermuda Consolidated Legislation

U.s.a. - Bermuda Tax Convention Act 1986