Jewellery box

With a population of just over 280,000 people, Barbados has distinguished itself as an unique international jurisdiction with modern laws, solid regulations and a comprehensive tax system. Our expansive tax treaty network, ratified with 19 countries so far and nine more in the pipeline, means it is no surprise that Barbados has been removed from the OECD ‘tax haven’ list for quite some time.

Trusting times

Barbados began development of its international business and financial sector around 1977. Its legislation allows for domestic and international trusts, international business companies, segregated cell companies, international banks, exempt insurance and management companies, societies with restricted liability and ship registration.

There are three types of trusts available in Barbados: international trusts; offshore trusts; and domestic trusts. International trusts are governed by the International Trust Act Cap 245 (ITA). An international trust may only be created by instruments in writing. The written trust deed must specify that the ITA applies. An international trust has a maximum lifespan of 100 years. This does not apply to purpose trusts or a trust established for charitable purposes. Such trusts may continue in force without the time limit.

The rule of law known as the ‘rule against perpetuities’ does not apply to an international trust. An international trust is deemed to be non-domiciled in Barbados for tax purposes and therefore will be subject to tax only on its Barbados source income and on any overseas income remitted to Barbados. International trusts are generally considered appropriate where the beneficiaries have no requirement to take advantage of any of the double taxation treaties Barbados has globally, ?i.e. where the settlor and/or beneficiaries ?are ‘tax neutral’.

Offshore trusts are regulated by the International Financial Services Act, Cap 325, 2002. An offshore trust can be established by persons resident outside of Barbados (the settlor) in favour of persons resident outside of Barbados (the beneficiaries) by way of assets of foreign currency, foreign securities, foreign personal property and/or foreign immovable property. The perpetuity period can be up to 80 years. Offshore trusts are exempt from all Barbados taxes and duties and free of any exchange control requirements. They are generally not entitled to treaty benefits because they are not subject to tax in Barbados.

Domestic trusts are regulated by the Trustee Act, Cap 250, 1985. If the trustee is a Barbados resident and the trust deed does not specify that the trust is an international trust, then a domestic trust is created. Barbados tax is payable on income not paid to the beneficiary before the end of the calendar year in which it is earned. Capital gains earned by the trust are not subject to tax (there is no capital gains tax in Barbados). Exemptions from exchange control restrictions can be obtained where the trust has foreign assets, beneficiaries outside of Barbados and operates primarily in foreign currency. Domestic ?trusts are entitled to ?treaty benefits.

Corporate line

There are various types of company structures in Barbados. These include a Barbados International Business Company (IBC), which is created under the International Business Companies Act 1991 and provides the following features:

• exemption from Barbados exchange control;

• income is taxed on a reducing scale starting at 2.5 per cent to a minimum of one per cent;

• the IBC may buy back its own shares or reduce its stated capital;

• are subject to an annual audit if the assets or revenue exceed US$500,000 (this threshold will be raised for income years 2012 and onwards).?

An IBC is not permitted to carry on its business in Barbados, which would provide goods or services to the residents of Barbados.

Another type of company structure ?is a Barbados Regular Business Company (RBC), which is created under the Companies Act and provides the following features:

• may utilise various benefits provided for under the double taxation treaties including reduced withholding taxes;

• income tax rate of 25 per cent;

• may require an audit.

Both an IBC and an RBC may have:

• a single shareholder and director;

• corporate directors and secretaries;

• no minimum capital required;

• no taxes or duties on capital;

• no local tax on capital gains.

 

A Barbados Society with Restricted Liability (SRL) and a Barbados International Society of Restricted Liability (ISRL) are variations of the RBC and IBC respectively and are created under the Societies with Restricted Liability Act 1995.

For SRLs and ISRLs:

• two members are required;

• one manager is permitted;

• may be allowed to move into Barbados from another jurisdiction;

• maximisation of foreign tax credits.

Wide reach

A significant advantage to using Barbados in a trust or corporate planning structure is its expansive network of tax and bilateral investment treaties. These treaties provide tax and strategic advantages to investors using Barbados resident entities to conduct business in other jurisdictions. Its double taxation agreements include Caribbean Community members, for example, the Bahamas, British Virgin Islands and Trinidad and Tobago, and also many other countries across the world, including Austria, Switzerland, the United Kingdom and the United States. In addition to these, Barbados has bilateral investment treaties with Canada, China, Cuba, Germany, Switzerland, the United Kingdom and Venezuela, and has other ?tax treaties in the pipeline.

These treaties can create an advantage for domestic and international companies by allowing companies in the contracting states to strategically utilise subsidiary entities in Barbados to enter jurisdictions with which Barbados may have favourable tax or bilateral investment treaties. Many of the treaties between Barbados and the various contracting states impose preferential withholding tax rates on income paid to qualifying Barbadian resident entities, or lower or nil rates of tax on capital gains derived by qualifying entities, as well as provisions to protect the investor.

Some Barbados treaties have particularly interesting features (see box). Several treaties include, for example, ‘tax sparing’. A tax-sparing provision has the effect that if tax is ‘spared’, i.e. exempted in Barbados, then it is credited against an investor’s tax liability in his jurisdiction (the contracting state) as if it was paid in Barbados. There are tax-sparing provisions in the treaties established with Finland, Norway, Sweden and Canada.

The Canada treaty excludes IBCs or any other entity benefitting from a special tax regime. The Canada-Barbados treaty also contains the following clauses:

• withholding tax on dividends, interest and royalties from Canada are 15 per cent, ten per cent and ten per cent respectively;

• while IBCs and other similar companies under a special tax regime cannot benefit under the treaty, the Canadian domestic foreign affiliate rules permit these types of companies, i.e. the Barbados IBC can pay dividends from its active business income to its Canadian parent exempt from withholding tax.

Tool kit

A bilateral investment treaty (BIT) is another tool which can be used by companies to advance and protect their business interests. It is a useful remedy to protect direct foreign investment by one country into another, basically helping to defend foreign situs assets from expropriation or nationalisation. To assist in reducing the risk of investing in some nations, Barbados resident companies can enjoy certain protections provided under BITs. BITs provide dispute resolution through the Washington D. C. based International Centre for Settlement of Investment Disputes. Provisions of Barbados’s BITs include:

• investment promotion;

• provision for the compensation ?for losses;

• the granting of the most favoured nation and national treatment provisions;

• protection from unfair expropriation and nationalisation of investment;

• procedures for fair and equitable settlement of disputes arising;

• procedures for the timely repatriation of investment and returns;

• procedures for prompt transfer ?of funds;

• subrogation.?

Barbados presently has BITs with Canada, China, Cuba, Germany, Italy, Mauritius, Switzerland, the United Kingdom and Venezuela. If structured properly, this may reduce the risk of investment by foreign investors. A BIT was signed with Ghana in 2008 but it is not yet in effect.

 

Roland Jones is chair of STEP Barbados, a chartered accountant ?and professional banker