In this year’s overview, Trevor Carmichael assesses the use of the Society with Restricted Liability (SRL) as a wealth planning vehicle before reviewing Barbados’s network of tax treaties.
Development is grounded in education, and the Education Act of 1858 set a benchmark in Barbados that was virtually revolutionary in nineteenth-century colonial societies. It formally established a pupil-teacher system with rigid criteria. The aspiring teachers were not to be under 14 years; they were to be selected after passing an examination; their number could not exceed 30 at any one time; and the master supervising the pupil teacher was earmarked to receive an extra payment. The pupil teacher also had to produce a certificate of good character from the Minister of his church. The early Barbadian educational grounding has been at the core of the jurisdiction’s ongoing development.
An Expanding Economy
The Barbadian economy has now recorded seven consecutive years of economic expansion with an average annual growth rate of four per cent. In the non-traded sector, the growth has been broad ranging, with annual rates reaching as high as five per cent as compared to the average annual rate of 0.5 per cent in the more stagnant traded sector. Sugar, as part of the traded sector, continues to decline and the recent experience of manufacturing continues to be modest in its development. However, there is a steady and encouraging increase in the performance of tourism and financial services as well as a commensurate development of appropriate enabling policies.
In recent years unemployment has averaged between eight and nine per cent, together with an average inflation rate between six per cent and 7 per cent. Indeed, there is still a strong reliance on foreign unskilled and partially-skilled labour in the construction industry, which continues to flourish. Inflation continues to rise slowly as a result of the higher oil prices in the international market.
The economy continues to manifest a growth of deposits within commercial banks. In mid-2008, such deposits, including foreign currency deposits, had reached around US$9,500 million, representing an annual growth of over five per cent. In keeping with the natural saving propensity of the Barbadian, savings deposits reached around US$1.7 million towards mid-2008, with savings of private individuals representing approximately 92 per cent of all savings deposits. On the other hand, credit has also shown a steady increase with commercial bank credit averaging about US$2,700 million, with at least 15 per cent of that credit being granted to the personal sector. With increased personal savings and moderate borrowings, it is therefore not surprising that Barbadian membership in credit unions (less formal lending, saving and borrowing institutions) has shown an ongoing increase. The 37 active credit unions extended loans to their members of around US$433 million compared to US$344 million the previous year, representing an increase of around 9.8 per cent.
International Business Trends
Barbados continues to record steady increases in the number of entities that are established under its incentive legislation for international business companies (IBCs), international banks, captive insurance companies, societies with restricted liability, mutual funds and ship registrations. Its three-tiered trust legislation also continues to be an attractive option for discerning international estate planners.
IBCs are increasingly incorporated within a regulatory framework that requires a rigorous but fair licence application procedure. This relevant legislation was introduced in 1965 and since then the scope and purpose of the user has changed according to tax and regulatory enactments, particularly in Canada, the US and the UK, where many users are based. The legislation’s use has also been influenced by the nature and type of double taxation agreements that Barbados continues to negotiate and the core treaties, which it inherited when it gained independence from Britain in 1966. There are currently treaties with Canada, the US, the UK, Switzerland, Norway, Sweden, Denmark, Malta, China, Cuba, Botswana, Venezuela, Brazil, Austria, the Netherlands, and Mexico.
The Society with Restricted Liability (SRL) has experienced significant growth in recent years. The flexibility of this vehicle, together with Barbados’ excellent treaty relationships with China, the US and Canada, account for multiple uses in joint venture investments within China, as well as for Chinese entrepreneurs who are pursuing global business deals. It provides a mechanism for structuring investments in civil law jurisdictions in Europe and Latin America. Also, under Barbados law, the SRL is a body corporate and therefore taxable. However, for US tax purposes, it has similar elements to its cousin, the United States Limited Liability Company. Accordingly, the members or quota holders of the SRL may elect, pursuant to US tax rules, to treat the SRL as a partnership or branch for all US tax purposes. By filing a prescribed form with the United States Internal Revenue Service within the stipulated time period, the entity may therefore qualify as a partnership or branch rather than be otherwise deemed as a corporation.
There are many benefits in using an SRL, including the maximisation by US individual taxpayers of foreign tax credits. It may allow US residents to obtain a deduction for tax depreciation, and will also allow the use of foreign tax credits from lower-tier entities by US corporations. The SRL may also facilitate avoidance of US sub-part F classification in relation to certain deductions, as in the case of those from one lower-tier non-US resident entity to another affiliated non-resident US entity.
As a very flexible entity, the SRL may be formed as an Exempt or Non-Exempt Society, and may be owned beneficially by residents of Barbados. The former is designed primarily for use in international transactions and is therefore prevented from doing business with residents of the Caribbean Community. However, the latter, with its more local focus, is able to do business with residents of Barbados and the Caribbean Community, as well as to participate in Barbadian real estate opportunities, which are not available to the Exempt or International SRL.
The international insurance sector was introduced in 1983, and the SRL regime in 1995. The insurance industry has undergone significant changes in the past two decades as the traditional captive is no longer the sole type of structure in use. Indeed, today the insurance industry and securities industry have become so closely intertwined that the traditional definition of a captive insurance product is no longer always accurate. Many of the new special purpose vehicles, which are being used to insure and reinsure catastrophic risks, are embedded within structures that are sometimes more akin to the securities industry than its insurance counterpart. Barbados, like Bermuda and the Cayman Islands, has been host to many of these new structures. It was the regulated flexibility of these jurisdictions that facilitated the speedy setting up of new reinsurance entities immediately after the catastrophe of 11 September 2001.
Development in the insurance industry continues to be of a steady and sustainable character; and in a fashion that allows for continuity. During 2007, 10 new applications for exempt insurance and insurance management companies were received, compared with seven in 2006. There are currently over 450 registered exempt insurance companies, of which approximately 200 are very active, with around 20 active management entities. Total assets in the insurance industry are estimated at US$30 billion.
On a more general level, Barbados’ tax treaties offer benefits that provide tax-planning opportunities to investors who are seeking to minimise their global tax exposure. Most of Barbados’ treaties allow for reduced withholding tax rates on dividends, interest and royalties. A case in point is Canadian domestic tax legislation, which provides that dividends paid by a Canadian resident company to a non-resident company are subject to Canadian withholding tax at a rate of 25 per cent. However, under the Barbados-Canada tax treaty, this rate is reduced to 15 per cent.
The treaties generally also contain tax-sparing provisions. These allow for foreign companies with subsidiaries that conduct business in Barbados under the Fiscal Incentives Act or the Tourism Development Act, and consequently pay no corporation tax, to be given credit for the Barbados taxes that would have been paid had the Barbados subsidiary not operated under the above-mentioned incentive legislation. The Barbados-UK double tax agreement contains such tax-sparing provisions. In addition, the interaction of the Permanent Establishment and Business Profits Articles of Barbados’ treaties offer protection to Barbadian resident companies from exposure to taxes on business profits earned in another treaty country. The treatment of capital gains is often important to international investors since, in some of Barbados’ treaties, the right to tax certain gains lies with the state where the seller is resident. Hence, in cases where the seller is resident in Barbados, and since Barbados does not impose tax on capital gains, no tax is payable in either Barbados or in the other treaty country.
With the exception of the Caribbean Community and Common Market (CARICOM) Treaty, which is a source-based treaty, all of Barbados’ tax treaties provide a credit for underlying taxes in respect of dividend payments. An underlying tax credit is the associated corporation tax paid by the investor in its home country, the after-tax profits of which are used to pay dividends. Consequently, on receiving dividends from a subsidiary, the country in which the parent company is resident grants a credit, not only for the withholding tax on dividends, but also for the tax paid by the subsidiary on its profits out of which the dividends are paid.
A limitation on benefits provision is also present in a number of Barbados’ tax treaties. Such a provision prohibits treaty benefits from being applied to offshore companies that benefit from a special tax regime or prevent non-residents of a treaty country from enjoying benefits of a treaty. Barbados’ treaties with Canada, Norway, Sweden, Finland and the UK contain restrictive clauses denying the benefits of the treaty to special incentive companies, such as IBCs. Although the provisions of the Barbados-Canada treaty do not apply to companies that are entitled to special tax benefits in Barbados, the Canadian domestic foreign affiliate rules permit these companies, once resident for tax purposes in Barbados, to utilise special tax benefits under Canada’s domestic tax legislation. As a result, such income, when repatriated to Canada, is not subject to tax there. The revised Limitation on Benefits Article of the recently renegotiated Barbados-US tax treaty excludes special incentive companies from benefiting from the treaty provisions applicable to dividends, interest and royalties. However, this treaty still has advantages for these companies, principally under the Business Profits Article. There are also benefits for individuals.
The more recently concluded treaties, including those with China and Cuba, do not prohibit the use of special incentive entities from obtaining treaty benefits. These treaties provide significant tax-planning opportunities to investors wishing to minimise their costs when repatriating income from their investment. Indeed, the treaties with China and Cuba contain favourable provisions that make Barbados an attractive jurisdiction through which investments into China and Cuba can be channelled. China is one of the fastest growing economies in the world, and foreign investment remains a strong factor in its economic growth. China’s presence in the World Trade Organisation also helps to strengthen its ability to maintain strong growth rates. As a result of its historical, political, cultural and economic evolution, Chinese laws are unique and sometimes differ significantly from their foreign counterparts. For instance, tax laws in China are drafted in a much less precise manner, and thus the literal interpretation of those laws becomes difficult. According to Chinese law, provisions of a treaty to which China is a party prevail over the domestic law in case of inconsistency or discrepancy. Hence, tax treaties allow foreign investors and their advisers who are interested in investments in China, to transact their business with a degree of certainty.
Within the Barbados-China treaty, there is a very useful capital gains article. Currently, under China’s tax legislation, the disposition of property in China is ordinarily subject to a withholding tax at a rate of 10 per cent. Under the Barbados-China treaty, capital gains arising from the sale of property, other than immovable property situated in China (which would include shares), are taxable only in the contracting state in which the taxpayer is resident. Therefore, an IBC could own shares of a Chinese company, and if it sold them, the right to tax the capital gains would rest with Barbados. Since Barbados does not tax capital gains, no tax is payable in Barbados on the receipt of capital gains. This provision therefore makes Barbados a very competitive holding company jurisdiction for international investors with Chinese operations.
Barbados’ international business sector continues to be vibrant and diversified. With a renewed Joint Policy Working Group on International Business and Investment Promotion, it is set to ensure high levels of competitiveness and competence.
Local policy is firmly directed towards a sustainable economy, through initiatives such as promoting the use of renewable energy. The major source of biofuel has been bagasse, generating enough electricity for approximately three per cent of the national energy budget. Presently, there is also a plan to produce a high fibre ‘fuel cane’ as a result of a US$100,000 feasibility study. Many issues were considered in the study, including the correct type of fuel cane to be used which, in turn, could provide the level and type of energy suited to the island’s climate conditions.
The jurisdiction remains committed to achieving Goal 4 of its National Strategic Plan which involves: Building a Green Economy; Strengthening the Physical Infrastructure; and Preserving the Environment. In this regard, during 2006 and 2007, environmental programmes accounted for a government budgetary allowance of around US$30 million. There are a variety of agencies involved in using these budgeted sums in the interest of guided and careful environmental stewardship: the Environment Unit, the Coastal Zone Management Unit, the Environmental Protection Department, the National Heritage Department, the National Botanic Garden and the National Conservation Commission.
Special efforts are being made in the area of marine research to restore and protect the integrity of near-shore coral reefs and seagrass beds. The Coastal Zone Management Unit has implemented policies that will lessen the negative impact on those ecosystems. A policy of ‘no anchoring’ for dive boats has been implemented and a permanent mooring buoy system for popular dive sites is now in use. In further recognition of its obligations to International Maritime Organisation protocols, Barbadian policymakers have acted by designating certain reef sites as ‘no anchoring’ areas. Furthermore, seagrass beds in designated areas are being monitored and their nearby water quality is being improved.
Within Barbados there are also incipient trends towards more environmentally-friendly housing, led, to a great degree, by the Government’s Ministry of Energy and the Environment, private individuals, and agencies such as the innovative Environment People and Information. The Solar House, constructed as a show house for the Government of Barbados, is now complete and contains different types of insulation in the roof, which act as a thermal barrier. The walls also contain insulation, which reduces the extreme exposure to sunlight. Windows are designed with reflective tint to deflect sunlight and allow for more cooling. The six overhangs at each window enhance this cooling effect. With ceiling fans in four of the rooms, a low flow toilet, and taps filled with aerators to reduce water wastage, the house is at the forefront of sustainable energy use. These features are further enhanced by 20 photovoltaic panels and 12 deep-cycle batteries, which power the house.
A wide range of projects aimed at environmental sustainability are being implemented. Measures have been adopted to integrate climate change issues in national development policies and include the successful endorsement of the Second National Climate Change Project with a yield of US$405,000. An initial National Public Perception Survey on Climate Change issues has also been completed, as well as a national assessment of systematic observations systems.
The Global Environmental Facility proposals for sustainable land management initiatives have also been recognised and the jurisdiction has already allocated approximately US$2 million. It has also commissioned two studies geared to formulate national negotiating positions on trade and environment. These are: ‘The Role and Future Use of Eco-labels in Barbados with respect to Trade and Economic Development’ and ‘Benefiting from Trade Liberalisation in Environmental Goods and Services - Identifying the Possibilities’.
Barbados’ success remains integrally linked to the quality of its education. The island’s 98 per cent literacy rate is grounded in its educational policy foresight. This has afforded and facilitated social and economic development within a culture of confidence and sustainability.
Sir Trevor Carmichael QC
Sir Trevor Carmichael, KA,LVO,QC. was born in Barbados and educated at Harrison College and the University of the West Indies, Mona, Jamaica. After pursuing post graduate studies in the United States, he was called to the United Kingdom Bar as a member of the Middle Temple in London and the Barbados Bar in December of 1977. He is a member of the International Bar Association, the Inter-American Bar Association and a Committee Member of the Inter-American Bar Foundation as well as an associate member of the Canadian Bar Association. He holds membership in the International Tax Planning Association, the International Fiscal Association and was one of the parties responsible for establishing a Barbados Chapter of the International Fiscal Association of which he is Charter President. He is the Barbados Country Chairman of the International Litigation Committee on Business Law of the International Bar Association and a former Deputy Secretary General of the International Bar Association. He is a Life Fellow of the Institute for Advanced Legal Studies in the United Kingdom, a Life Member of the Commonwealth Magistrates and Judges Association and a member of the International Law Association.