Published on and written by Cyril Jarnias
Setting Up an Offshore Company in Bermuda may seem, on paper, like the ultimate weapon for optimizing your taxes and gaining confidentiality. Zero corporate income tax, company law inspired by English common law, a regulator with a solid reputation, mature financial infrastructure… The archipelago has all the attributes of a respectable offshore “hub.” But behind this image lies a legal and regulatory environment far more constraining than many investors imagine.
Underestimating the legal, regulatory, and tax constraints can turn an assumed advantage into a time bomb: bank account freezes, regulator sanctions, the structure being challenged by onshore authorities, or personal liability for directors. A precise map of the pitfalls to avoid—based on the current framework and actual supervisory practices—is essential.
Romanticizing Bermuda as a “Tax Haven with No Rules”
The first mistake is treating Bermuda as a simple mail drop shielded from scrutiny. The territory has indeed built its reputation on the absence of income tax or corporate profits tax. But at the same time, it has implemented one of the most sophisticated compliance frameworks in the world for anti-money laundering (AML), counter-terrorism financing (ATF), and, more recently, economic substance requirements.
Bermuda’s anti-money laundering and counter-terrorist financing efforts rest on the Proceeds of Crime Act 1997, the Anti-Terrorism (Financial and Other Measures) Act 2004, and the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing) Regulations 2008. The Bermuda Monetary Authority (BMA) has broad powers to supervise and control financial institutions and regulated professions.
In other words, setting up an offshore company in Bermuda hoping to “fly under the radar” is an illusion. The country is assessed as largely compliant with FATF recommendations on many key points (risk analysis, customer due diligence, record-keeping, internal controls, targeted sanctions). It is precisely this compliance with international standards that keeps major banks and investors willing to accept Bermudian structures—but at the cost of a very high level of transparency and traceability.
Underestimating the Weight of the Anti-Money Laundering (AML/ATF) Framework
One of the major pitfalls is neglecting the depth of AML/ATF obligations that apply, directly or indirectly, to an offshore company in Bermuda.
A Broad Scope of Entities and Sectors Covered
Bermuda’s AML/ATF regime does not apply only to banks. The following are also covered:
– Digital Asset Business and Money Service Business activities
– the securities sector
– Corporate Service Provider (CSP) and Trust Business
– long-term life insurance
– legal professions and certain DNFBPs (designated non-financial businesses and professions)
Even if your company is limited to a holding or an investment structure, it will almost always depend on a Corporate Service Provider, a bank, or even an asset manager—all of which are themselves strictly regulated by this framework. Your company then becomes, in practice, part of the AML/ATF system.
Highly Intrusive Customer Due Diligence Obligations
The 2008 Regulations impose an extremely detailed regime of customer due diligence (“CDD”) and ongoing monitoring. Every regulated provider must:
Identify and verify beneficial owners, especially beyond the 25% ownership or control threshold. Analyze each client’s risk profile (politically exposed persons, high-net-worth clients, non-residents, complex structures). Maintain ongoing transaction monitoring and regularly update documentation and risk assessments. Report any suspicious activity to the Financial Intelligence Agency (FIA) via Suspicious Activity Reports (SARs).
For the offshore company itself, this means that effective anonymity is illusory: the identity of ultimate beneficial owners must be provided, documented (passport, proof of address, evidence of source of funds), and kept current. Refusing to cooperate or providing incomplete information exposes the company to refusal of account opening, termination of banking relationships, or even reporting to the authorities.
Penalties and Liability for Non-Compliance
Failing to meet these obligations—whether through internal deficiencies or insufficient cooperation with providers—exposes the company to financial penalties of up to $250,000 for certain regulatory breaches, not to mention the regulator’s ability to publicize such decisions. Regulated institutions are required to implement policies, procedures, annual training, and independent audits, and to maintain evidence of all these measures.
The Appleby case shows that repeated deficiencies in KYC and risk management are not merely theoretical: they led to public criticism, penalties, and severe reputational damage, also exposing the clients sheltered behind those structures.
Ignoring Economic Substance Requirements
Another classic pitfall: setting up an offshore company in Bermuda as if a registered address and a nominal board of directors were enough to be compliant. The economic substance regime requires exactly the opposite.
Substance: Just an Administrative “Formality”? No
The Economic Substance Act 2018 and its regulations require an entity carrying on a “relevant activity” (banking, insurance, fund management, financing and leasing, headquarters, shipping, distribution and service centers, intellectual property, holding entities) to demonstrate a real economic presence on the island. Concretely, it must:
– be managed and directed from Bermuda, which means key strategic decisions are made locally
– carry out the “Core Income Generating Activities” (CIGA) in Bermuda
– maintain an adequate physical presence (premises, offices)
– employ a sufficient number of full-time, qualified employees based locally
– incur operating expenditures proportionate to the activity in the territory
Substance criteria are not merely declaratory: the entity must file a detailed return through the official portals (headcount, expenditures, premises, activities, resident officers), and the authorities may require evidence and conduct inspections.
Typical Substance Mistakes
Concrete pitfalls observed in practice include:
Incomplete or inaccurate annual filings—even with minor errors—can constitute a compliance failure if they are significant. Underreporting activities considered “ancillary” risks pushing the entity fully into the scope of substance requirements. A lax interpretation of physical presence (a virtual office with no human resources) and de facto management exercised abroad without local evidence (minutes, meetings in Bermuda) are also major risk factors.
These failures expose the entity to escalating sanctions: first financial penalties, then the possibility for authorities to apply to the court for striking off the entity in the event of persistent non-compliance. In a post-BEPS and Pillar Two environment, ignoring substance is no longer an option.
A Structural Cost Often Underestimated
Putting credible substance in place in a high-cost jurisdiction like Bermuda is not neutral. Recruiting qualified local staff, leasing premises, holding regular physical board meetings, and using Bermudian professionals for accounting and compliance: all of this weighs on the business model, especially for smaller or low-activity structures.
Failing to build these costs into the business plan leads back to another pitfall: discovering after the company is formed that the structure is no longer profitable if it genuinely meets its substance obligations.
Overlooking the Real Cost of a Bermudian Structure
Marketing about Bermuda rightly emphasizes the absence of corporate income tax. But it often hides the very real recurring fixed charges that an offshore company in the archipelago entails.
Government and Regulatory Fees
Annual fees paid to the government are indexed to the company’s authorized capital. The more heavily capitalized the structure is—to inspire confidence among investors or lenders—the higher the annual bill climbs, reaching tens of thousands of dollars for large vehicles. On top of that, for regulated entities (insurance, financial services), BMA license fees and contributions can far exceed $100,000 per year for certain categories.
Annual costs apply even with no revenue or activity, making a holding company or dormant SPV a permanent cost center.
Any company governed by the Companies Act 1981 must maintain a registered office in Bermuda at all times. This means using a local Corporate Service Provider, with an annual subscription for the address, maintenance of statutory registers, filings with the Registrar of Companies, and often additional services (company secretarial support, assistance with filings, updating the beneficial ownership register).
The base cost of an offshore company remains due even without activity. An inactive company still incurs compliance maintenance costs, sometimes significant ones.
Comparing Objectives, Costs, and Alternatives
At this point, it is useful to translate these elements into a comparative table—not to compare jurisdictions, but to visualize the main internal cost items of a Bermudian structure:
| Cost Item | Nature | Key Variables |
|---|---|---|
| Corporate profits tax | None | — |
| Annual government fees | Unavoidable | Authorized capital, type of company |
| BMA license (regulated entities) | Unavoidable | License class, activity volume |
| Registered office / local agent | Unavoidable | Service level, provider |
| Substance compliance (premises, staff) | Variable but real | Nature of relevant activities, size |
| Legal and compliance services | Unavoidable | Group complexity, number of filings |
Creating a company in Bermuda without having costed out these line items over several years, including in reduced-activity scenarios, is a dangerous gamble.
Confusing “Offshore” with “Opacity”: The Case of the Beneficial Ownership Register
Another misconception that leads to unpleasant surprises: believing that the ownership of a Bermudian company will remain completely invisible. In reality, the legal framework requires detailed registration of beneficial owners, with an internal register and a central register managed by the BMA.
A Mandatory and Live Beneficial Ownership Register
Any non-exempt entity must maintain a beneficial ownership register (BO register) listing the natural persons who, directly or indirectly, exercise control or hold a significant interest. The minimum information to record and report to the authority includes:
– full name, residential address, date of birth
– nature and extent of the interest or control held
– date on which a person becomes or ceases to be a beneficial owner
The register must be kept at the registered office or another declared location in Bermuda, and must never be empty: in the absence of formal identification, it must at minimum reflect the status of ongoing investigations.
The company is required to update this information when changes occur and to notify the BMA within strict deadlines. Compulsory notice mechanisms exist to force reluctant beneficial owners to provide the information, with response deadlines (30 days) and an obligation to record in the register any non-response or insufficient response.
Nominees: Apparent Confidentiality, Very Real Risk
Bermuda allows the use of nominee shareholders, through Corporate Service Providers, but the law is explicit: if shares are held by a nominee on behalf of a person, that person is the actual economic beneficiary and must be listed in the beneficial ownership register. The CSP providing a nominee must retain a written document identifying the true owner.
Believing that a nominee shareholder or director protects the identity of the beneficial owner is a major mistake. Confidentiality is relative (automatic exchanges, CRS, mutual assistance, political pressure), and using nominees to circumvent reporting obligations increases criminal and regulatory risk, with no real legal protection.
Underestimating the Difficulty of Opening and Keeping a Bank Account
The most beautiful offshore vehicle is worthless without access to the banking system. This is a pitfall many discover too late: incorporation is relatively quick and smooth, but opening a bank account—local or international—for a Bermudian company can be slow, intrusive, and sometimes impossible.
A High-Risk Perception Among Correspondent Banks
Many correspondent banks, particularly in the United States and the European Union, classify entities registered in zero-tax jurisdictions as high-risk under FATF and European standards. This does not mean they systematically refuse Bermudian companies, but it does trigger “enhanced due diligence”:
Implementation of in-depth control measures to ensure compliance and risk management.
Detailed analysis of the ownership chain through to the ultimate beneficial owners, to identify the actual control structure.
Careful examination of the source of funds and the nature of expected financial flows to ensure their legitimacy.
Verification of consistency between the entity’s actual substance and its declared activity, to detect any anomalies.
Cross-checks against sanctions lists and consultation of negative news databases to prevent reputational and compliance risks.
For an offshore company recently formed, with no operating history, fairly general activities, and a complex ownership structure, the odds of facing a refusal or multiple follow-up requests are high.
The Trap of the Mismatch Between Legal Structure and Banking Strategy
Many entrepreneurs set up the company first and only then think about opening an account. This is the most costly reversal of logic. Several factors increase the risk:
– excessively complex structures, or ones using nominees without clear business justification
– lack of credible local substance while the company declares risky or sensitive activities
– vague or overly broad constitutional documents (“any lawful business”) that worry bankers
– mixing incompatible business purposes (holding + financial services + digital assets) within a single vehicle
An offshore company deemed compliant by the Registrar can still be rejected by a bank because of the bank’s AML/ATF obligations and pressure from correspondents. The cost of a banking refusal, followed by emergency restructuring (changing jurisdiction, redomiciliation, or creating a new vehicle), is considerable.
Strategy: Align Structure and Banking Requirements from the Outset
To avoid this pitfall, company formation should be considered in parallel with banking strategy:
– precisely define the nature, source, and destination of financial flows
– segment, if necessary, activities across several entities with distinct risk profiles
– document the substance and economic rationale for being present in Bermuda
– anticipate the documentation banks require (KYC, business plan, key contracts, detailed organizational chart)
Above all, one must accept that an offshore company in Bermuda is not a generic product: the structure must be calibrated to convince, after the fact, a highly conservative bank compliance committee.
Rushing the Incorporation and Governance Phase
The flexibility of Bermudian company law masks another pitfall: the temptation to settle for the legal minimum during incorporation, without thinking through governance, directors’ powers, or shareholder dispute resolution mechanisms.
Incorporation Formalities: More Than a Simple Form
Creating an offshore company in Bermuda involves several structured steps:
– reserving the company name with the Registrar of Companies, using the suffix “Limited,” “Ltd.,” “Corporation,” “Inc.,” or equivalent
– obtaining Bermuda Monetary Authority approval of the proposed ownership structure, with submission of personal declarations from beneficial owners, except for certain listed groups
– filing the Memorandum of Association, the bye-laws (articles), the registration application form, and—for exempted companies—a declaration of compliance signed by a Bermudian lawyer with the Registrar
All documents must be drafted in English and include the mandatory elements: corporate object, authorized capital, limited liability of members, any duration, and the capacity to acquire land. They must also be consistent with the intended activity. Once issued, the certificate of incorporation attests to the company’s legal existence.
Reducing these steps to a simple “standard pack” without adapting them to the group’s reality is risky: poorly defining the corporate object, omitting certain specific authorizations, or ignoring sectoral requirements (for example in insurance or financial services) can block later operations, complicate obtaining licenses, or even make certain contracts vulnerable in the event of a dispute.
Governance Mistakes: Figurehead Directors and Ghost Boards
The Companies Act 1981 does not formally require independent directors or a set number of local residents for all companies. But in practice:
Exempted companies must have at least one director who is a natural person. Entities subject to sectoral or substance regimes are well advised to have resident directors who can demonstrate effective management from Bermuda. Corporate Service Providers supplying professional directors are subject to conflict-of-interest management and compliance obligations.
The pitfall here is twofold. First, the use of “straw directors”—poorly informed, not truly involved, or even kept in the dark about real decisions—runs head-on into the common law of fiduciary duties. Under Bermudian law, as in most common law jurisdictions, a director must act in the company’s interest, avoid conflicts, and exercise independent judgment. A director can be held personally liable for breach, even if in practice he or she was “following orders.” Several document leaks and regulatory inspections reveal examples of structures where these duties were not taken seriously, resulting in challenges by regulators.
Second, from an international tax perspective, a board that never meets locally and systematically approves decisions prepared and made elsewhere weakens the claim that the company is resident in Bermuda rather than in the jurisdiction where the real center of decision-making is located. Several tax authorities now use the concept of “place of effective management” to recharacterize such structures.
International tax advisor
Documentation: The Blind Spot That Costs Dearly
Another discreet pitfall is documentary negligence. Terse minutes, lack of documentation of major strategic decisions, and inconsistency between corporate resolutions and actual financial flows: these are all weaknesses that auditors, regulators, and tax authorities know how to exploit.
For a Bermudian offshore company, it is essential to carefully record:
– investment and financing decisions, including an analysis of the economic rationale
– approvals of material contracts, guarantees, security interests, and intragroup restructurings
– internal policies (risk management, compliance, substance, relationships with key providers)
Failing to do so leaves the door open to unfavorable interpretations in the event of an audit or litigation.
Skipping the Regulatory Risk Mapping
Bermuda has an extensive regulatory arsenal, varying by sector (banks, insurance, securities, CSPs, etc.), backed by significant enforcement powers of the BMA. One pitfall is focusing only on company law and tax while forgetting this layer of sectoral and cross-cutting regulation.
A Powerful and Active Supervisor
The BMA supervises market entry (licensing), ongoing supervision, on-site inspections, enforcement of sanctions, and regulatory communication. It can:
The authorities may apply measures to control or restrict the activities of the entities and persons concerned.
The ability to refuse or withdraw licenses required to carry on activities.
Imposition of penalties that can reach several hundred thousand dollars, depending on the regime.
Issuance of prohibitions on holding certain positions, such as director or key officer.
Publication of penalty decisions, resulting in significant reputational impact.
For an offshore company looking to operate in financial services, digital assets, capital management, or insurance, ignoring this reality would be suicidal. The licensing process, for example, includes a very thorough assessment of the “fitness and properness” of directors and officers, the business plan, governance, AML/ATF/CPF systems, and the source of funds.
Contamination Effect: When a Provider’s Failures Catch Up With You
Even if your offshore company is not itself licensed, it depends on providers that are: bank, CSP, asset manager, lawyer. The Appleby case—sanctioned for “serious deficiencies” in AML/ATF compliance in several jurisdictions—illustrates a frequently overlooked risk: being caught up in the turmoil caused by a non-compliant partner.
The regulator examines the quality of KYC procedures, risk monitoring, internal escalations, and portfolio reviews. A negligent provider or one that underinvests in compliance becomes a risk for every structure it manages. For an investor, choosing a reputable, well-regulated service provider is strategic, even if its fees are higher.
Believing You Can “Patch Together” Compliance After the Fact
Many offshore structures were created in a bygone world: before CRS standards, before the intensification of FATF evaluations, before the explosion of substance requirements. The trap today would be carrying over reflexes from a bygone era to new incorporations.
Bermuda has aligned itself with international standards and developed a framework in which:
Beneficial ownership data must be centralized and kept up to date, with detailed filings retained for several years. Regulated institutions must train their staff, conduct independent audits, and review their policies upon each regulatory development or national risk assessment. Penalties for non-compliance can range up to the striking off of the company or personal liability for directors.
Attempting to hastily “regularize” a structure that was put together carelessly, for example to respond to an information request from a foreign authority or a deep review by a bank, is generally more costly—financially and in terms of risk—than having built compliance in from the start.
Failing to Align Objectives, Business Model, and Bermudian Reality
Running through all these pitfalls is a simple question: why, exactly, choose Bermuda for your offshore company?
If the answer is limited to “zero tax”, without analyzing:
– the exact nature of the intended activities
– the revenue and financing flows
– the substance requirements and the ability to fund them
– the strategy for accessing the banking system
– the shareholders’ jurisdiction and interactions with their domestic tax law
The project is heading for disillusionment.
Project warning
Bermuda offers a solid legal framework, recognized by markets and international authorities, political stability, and a depth of high-level professional services. In exchange, the price to pay is growing transparency, heavy compliance discipline, and significant fixed costs. Using this jurisdiction as a mere fiscal “black hole”—the famous image of the “Bermuda black hole” associated with BEPS structures—is no longer compatible with today’s regulatory and political reality.
Conclusion: Think “Architecture” Rather Than “Mailbox”
Setting up an offshore company in Bermuda can still make sense: to structure an international group, house a sophisticated insurance or reinsurance operation, organize cross-border financing, or host a holding company in a reputable common law jurisdiction. But it only makes sense if the project is approached as a complete architecture, not as a simple mailbox.
Avoiding the main pitfalls means:
For effective structuring, you must give up total opacity in favor of controlled transparency, integrate economic substance and its cost from the design stage, anticipate the banking strategy by calibrating the structure to correspondent bank requirements, invest in real and documented governance rather than figurehead directors, choose supervised and sustainable providers, and rigorously align the legal structure with legitimate economic and tax objectives, taking into account shareholders’ domestic law.
In Bermuda more than anywhere else, offshore is no longer an instrument of concealment but a highly regulated environment where legal sophistication must go hand in hand with compliance discipline. Those who accept this can still benefit from the jurisdiction’s strengths. Those who refuse would be better off abstaining: the probability of finding yourself trapped by your own structure is today higher than ever.
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Cyril Jarnias is an independent expert in international wealth management with over 20 years of experience. As an expatriate himself, he is dedicated to helping individuals and business leaders build, protect, and pass on their wealth with complete peace of mind.
On his website, cyriljarnias.com, he shares his expertise on international real estate, offshore company formation, and expatriation.
Thanks to his expertise, he offers sound advice to optimize his clients' wealth management. Cyril Jarnias is also recognized for his appearances in many prestigious media outlets such as BFM Business, les Français de l’étranger, Le Figaro, Les Echos, and Mieux vivre votre argent, where he shares his knowledge and know-how in wealth management.
