Bermuda Tax Shelters for Hedgies

Bermuda Tax Dodge Aiding Billionaires, Reuters reports. Lovely views, no income tax. Where better than Bermuda to defer federal income tax by cycling hedge fund fees and profits through reinsurance companies?

This year's stiffer top tax rates should boost the appeal of tax deferment.

By setting up reinsurance companies [in Bermuda], money managers can take advantage of a loophole in IRS rules. Ordinarily, when hedge fund managers invest in their funds, they pay either the 39.6 percent rate for ordinary income or the 20 percent long- term capital gains rate, depending on how frequently securities are traded, plus an extra 3.8 percent health-law surcharge. If they were to move the hedge funds to tax havens, they would incur IRS penalties on earnings from what the agency calls “passive foreign investment companies.” 

Here’s the catch: The IRS doesn’t penalize earnings from insurance companies, which it considers to be “active” businesses. As a result, by routing money through a Bermuda reinsurer, which in turn puts its assets back into their own hedge funds, fund managers can defer any taxes until selling the stake. They then pay only the lower capital gains tax rate.

Having a business excuse to visit Bermuda sounds good to me, especially with more snow predicted for this weekend.

Bermuda - looking east from Gibbs Hill.