US companies that have relocated to Bermuda suffered another blow on Thursday when the US Senate passed a defence spending bill that banned defence contractors that incorporate outside the US from receiving military contracts.

The Wall Street Journal reported on Friday that the Senate approved $355.4 billion in military spending for fiscal 2003.

"But amid the swirl of corporate scandal and market turmoil that has left voters angry and eager for change, Democrats couldn't resist slapping defence contractors that have moved overseas to cut their US tax bills," The Wall Street Journal said. "The practice, known as corporate inversion, involves setting up shell headquarters in a tax haven such as Bermuda while continuing to operate in the US.

"Though such relocations are legal, Democrats have seized on them as further evidence of corporate irresponsibility. Last week, the House approved a similar provision to bar such companies from getting contracts with the yet-to-be-created Homeland Security Department. Democratic Sen. Paul Wellstone said he would seek to place similar restrictions in the Senate's homeland-security bill, and efforts are under way in both chambers to try to close the tax-haven loophole."

The defence restriction would bar publicly traded companies that relocate to tax havens in 2002 from receiving military contracts; it would remain in place for fiscal year 2003 beginning October 1. No major defence contractor is expected to be snared by it.