Yolande Bannister and Annick Reifer details why Barbados has become a successful IFC, examining the tax treaty benefits and wealth management tools available.
Once upon a time the mention of Barbados to the average person may have evoked images of sun, sea and sand as the island was recognised widely as a premier tourist destination. However, Barbados to the discerning investor is well known as an international financial centre of repute, with its political and economic stability, transparency, attractive taxation regime, and a well-educated and skilled work force.
The Barbados Government is resolute in its commitment to ensuring that Barbados continues to be a centre of excellence for global business and in an environment of fiscal regulation and prudence, such that Barbados was the first independent Caribbean country to be included in the OECD list of jurisdictions deemed to have substantially implemented internationally agreed tax standards.
Barbados is known as a low tax jurisdiction, which uses its network of tax treaties to the benefit of investors. There are currently 18 tax treaties in force with 24 countries including the UK, Canada, China and USA, CARICOM (our regional grouping). Treaties with Belgium, Czech Republic, Italy and Vietnam have been initialled.
The Tax Treaties provide reduced withholding tax rates on dividends, interest and royalties, thus benefiting the investor. For example,Canadian domestic tax law stipulates that dividends paid by a Canadian resident company to a non-resident company are subject to a withholding tax rate of 25 per cent. However, by virtue of the Barbados-Canada tax treaty, this rate is reduced to 15 per cent.
Additionally, dividends received by a Canadian corporation from the business earnings of a foreign affiliate resident in Barbados are categorized as ‘exempt surplus’ and are non-taxable in Canada.
Dividends paid to non-residents out of foreign sourced income are exempt from Barbados withholding tax. Withholding tax exemption also applies to interest and royalties paid to non-residents by International Societies with Restricted Liability (ISRLs) and International Business Companies (IBCs).
The Treaties afford benefits to corporations resident in the contracting state. Foreign companies with subsidiaries conducting business in Barbados under the Fiscal Incentives Act or the Tourism Development Act pay no corporation tax. The Barbados-UK Tax Treaty has tax-sparing provisions which provide credit for the Barbados taxes that would have been paid had the Barbados subsidiary not received the incentives of the mentioned legislation.
For the US, the Second Protocol to the Barbados – US tax treaty provides a new Limitation of Benefits Article allowing:
In order for an IBC to receive the benefits of the Treaty therefore, there is the element of engaging in the active conduct of a trade or business with the income derived from the other contracting state being connected, or incidental to that trade or business, as well as satisfying the other conditions as defined.
Discretion is afforded by Clause 3 of Article 22 to the competent authority of a state in which income arises to afford benefits to a person not entitled to benefits under the Treaty.
The Barbados – Venezuela Tax Treaty provides reduced rates of withholding taxes in relation to dividends, interest and royalties. A Barbados resident subsidiary making investments in Venezuela would face reduced taxation on dividends (five per cent) and in addition, profits would be exempt from withholding taxes in Venezuela. Art 22 of the treaty provides that a resident of Venezuela receiving income which by virtue of the treaty is taxable in Barbados is exempt from further taxation on that income in Venezuela.
The Barbados- China Tax Treaty, by virtue of Article 13 provides that 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. This would be particularly beneficial to an IBC resident in Barbados, owning shares in a Chinese company. If such shares were sold, Barbados would have the right to tax such shares. Since, however, Barbados does not tax capital gains, no tax would be payable.
Bilateral Investment Treaties
Barbados has entered Bilateral Investment Treaties (BITs) with a number of countries, which establish the terms for private investments by investors in one contracting state, be it an individual or company, in another contracting state. The Treaties address the scope and definition of foreign investment, national and most favoured nation status compensation, guarantees for expropriation of property, war and civil unrest, and guarantee that funds will be able to be transferred in foreign currencies and without delay. Such treaties offer benefits to nationals working in treaty nations, protect bilateral intellectual property and provide trading advantages.
The Trust is a useful vehicle in asset management. The ‘International Trust’, which is a creation of the International Trust Act, may be used where both the settler (ie, the person establishing the trust) and the beneficiary of the trust are non- resident. Such a trust is subject to a zero rate of tax. There are no capital gains or inheritance taxes, and the rule against perpetuities does not apply. International Trusts are also exempt from exchange controls, indirect tax or stamp duty.
Asset protection is fostered by the Act’s stringent privacy provisions ensuring confidentiality of all international trust documents; the Act also strengthened protection against forced heirship provisions, non-recognition of foreign judgments and protection against creditors, claims and seizures.
A ‘Purpose Trust’ is an interesting vehicle, which does not require a specific beneficiary but rather an attainable purpose. Such trusts may be used for a range of purposes, including philanthropic, provided such purpose is specific, reasonable and capable of fulfillment and are often used for more diverse business operations.
Barbados offers philanthropic opportunities to the international investor through various vehicles: The International Trust can be used as a Purpose Trust.
The government of Barbados, recognising the international climate of philanthropy, recently established the Better Barbados Foundation in 2008, with hopes of attracting foreign philanthropic capital from the Barbadian diaspora.
While the non-quantifiable benefits one receives from charity works cannot be discredited, there are also financial advantages offered by philanthropy in Barbados. The network of taxation treaties allows for tax benefits to be attributed to one’s endeavours. For example, Article 22 of the Barbados - US Double Taxation Treaty, as amended by Protocol 2, provides that an “entity that is organised and operated exclusively for religious, charitable, scientific, literary or educational purposes, and that by virtue of that status, is generally exempt from income taxation in its contracting state of residence” is entitled to the benefits of the Treaty, ie, tax credits and exemptions.
The World Economic Forum, a Swiss based independent international organisation released their Global Competitive Report for the 2011-12 period and Barbados has emerged with a ranking of 42nd behind US, Canada, Chile and Puerto Rico in the Western Hemisphere and ahead of the majority of Caribbean and Latin American nations.
Barbados retains its position as one of the most competitive places to do business in the Western Hemisphere and an excellent jurisdiction for wealth management, as the world grapples with effects of the recession and prudent investors seek out favourable investment locations.
Yolande Bannister QC and Annick Reifer LLB, Alpha and Omega, Barbados