POST SEPTEMBER 11 with the enactment in the US of the Patriot Act and the simultaneous challenges to Caribbean financial centres by the OECD with issues of harmful tax practices and lack of transparency, Barbados continues its development as a global financial centre of repute. The centre is underpinned by its long tradition of political stability, enhanced regulatory environment, sophisticated financial infrastructure and skilled labour force.
Barbados is an international financial centre in the Caribbean with a difference. It is a centre with tax treaties which effect the way dividends, interest and royalties are taxed to the benefi t of the foreign investor. Barbados currently has a network of tax treaties with the Caribbean Common Market (CARICOM) the United States, Canada, United Kingdom, Sweden, Norway and Finland, Malta, Switzerland, Cuba,Venezuela, China Mauritius and Botswana. Treaties with Austria and the Netherlands are expected to be signed shortly.
The Barbados-Canada tax treaty is well known and allows Canadian businesses to invest using Barbados’ tax advantaged vehicles (eg, the IBC, limited liability company, called the SRL, captive insurance company and offshore bank).
Under the treaty dividends received by a Canadian corporation from a foreign affiliate whose earnings from an active business (as defined in Canadian domestic legislation, being distinct from passive investments), are received in Canada taxfree and are categorised as ‘exempt surplus’ if the affiliate is resident in a country that has a tax treaty with Canada. Barbados therefore continues to be attractive to Canadian investors since it has a tax treaty with Canada and offers tax incentives to companies engaged in international business and financial services.
Barbados signed a second Protocol to its tax treaty with the US on 14 July 2004. The treaty replaces the Limitation on Benefi ts (LOB) article and under its new provisions the following categories of persons will be eligible for treaty benefits:
The LOB also specifically denies the benefits under the Investment Income articles of the treaty to entities which are entitled to a special tax regime as specified in the article.
What then are the effects of the provisions of the Second Protocol? An IBC can still qualify for benefits under the treaty if it can establish that it is engaged in the active conduct of a trade or business and the income derived from the other contracting state is derived in connection with, or is incidental to, that trade or business and that IBC satisfies other conditions for obtaining such benefits.
In addition benefits may also be derived under Clause 3 of the new Article 22 as inserted by the protocol which states that a person that is not entitled to the benefits of the treaty may nevertheless, be granted the benefi ts of the treaty if the competent authority of the state in which its income in question arises so determines.
The object of the protocol was to curtail the availability of treaty benefits to inverted groups and, although as a result, the opportunities to benefit have been limitedby more restrictive provisions, the overall benefits to Barbados are that the protocol encourages the setting up of companies which will carry on substantial trade or business.
The Barbados-Venezuela tax treaty came into force on 17 January 2001. The main advantage to Barbados is that it opens up significant opportunities for foreign investment from South America and for Barbados resident companies to invest in Venezuela. The treaty provides reduced rates of withholding taxes under the investment income articles of the treaty (dividends, interest and royalties).
Article 22: Relief from Double Taxation provides that where a resident of Venezuela receives income which according to the convention may be taxed in Barbados, that income shall be exempted from any further tax in Venezuela. This offers significant benefits to investors using Barbados’ tax advantaged vehicles.
The Barbados-China treaty was signed in 2000 as part of Barbados’ strategy to
expand opportunities for international and pan-Caribbean business. It allows for investments to flow out of Barbados into China and encourages Chinese corporations to use Barbados in their global business operations.
Bilateral Investment Treaties
The distinctive features of BITs is that they allow for an alternative dispute resolution mechanism whereby an investor who claims that his rights under the BIT has been violated has recourse to international arbitration under the International Centre for the Resolutions of International Disputes (ICSID) rather than in the courts of the host State.
Barbados has entered BITs which provide a level of comfort for investors from those countries.
Bilateral Investment Treaties (BITs) seek to establish the terms and conditions for private investment by nationals and companies of one contracting state in another state and play an important role in global trade and investment protection. BITs make a number of guarantees with respect to the investment by a business of one contracting state in the other. The main provisions cover the scope and definition of foreign investment, national and most favoured nation status compensation, guarantee for expropriation of property, war and civil unrest, and guarantee that funds will be able to be transferred in foreign currencies and without delay.
Barbados has introduced segregated cell company and account legislation with amendments to its Companies Act.
In respect of insurance the Act provides that a company, whose articles allow, may establish one or more separate accounts in respect of contract liability. Its articles must specify the designation, restrictions, conditions and rights that are attached to any separate account created.
The assets of the company are segregated into separate accounts that are kept separate from the general assets of the company.
The assets of a separate account include the specific assets owned by a company and allocated and credited to the separate account in accordance with the terms of the contract that relates to the establishment of the separate account.
The legislation applies to companies carrying on financial services which include insurance, banking and mutual fund activity, but non-financial services may also be included as approved by the relevant Minister.
The Segregated Cell Company (SCC) must include in its name the words ‘segregated cell company’ or ‘SCC’ and its cell must have a distinct designation or denomination which must be set out in an agreement.
A cell is a structure created by the SCC for the purpose of protecting cellular assets. However, the company is treated as the single legal entity and not the cell. Where liability of a cell company arises the liability is attached to the cellular assets attributable to a particular cell. Where cellular assets are insufficient to discharge the liability the complainant may have recourse to non-cellular assets of the company. No recourse can be had to the assets of other cells.
This legislation allows flexibility for insurance and other qualified entrepreneurs to undertake business which may involve considerably higher risk than that traditionally undertaken. It allows these companies to offer infrastructures to other companies which are not willing to set up separate infrastructures. For example, instead of setting up captives in each field of business, one captive may be created with a group of cells, each cell with separate liability, separate accounts, its premiums paid independently and capitalised independently and having different shareholders.
What does the future hold?
A newly formed promotion corporation will continue the mandate of seeking to improve the provision of services to both government and the private sector and a sub-committee will look at developing niche markets for newly created products.
Yolande Bannister QC and Sean Lewis LLb LLM,