Melanie Jones and Tara Frater consider the impact of recent legislative developments such as Reserved Power Trusts and the IB Act on Barbados as a financial centre.
It is not uncommon (and arguably not unnatural) for persons seeking to create trusts to harbour significant anxiety about the prospect of transferring their hard earned fortune to unfamiliar professional trustees in a distant island jurisdiction. Notwithstanding the many assurances from their professional advisers that the arrangement which they intend to create is rooted in years of legal history, is considered to be one of the finest creations of English law and that the pedigree of the professional trustee in question is unimpeachable, such persons (or settlors) will often still wish to retain a certain level of control over or in the structure.
The challenges of striking the balance between accommodating appropriate control by a settlor without jeopardising the trust or creating adverse tax implications are real and must remain a critical consideration for the wealth planners and advisers. Barbados’ recent legislative amendments in relation to trust and corporate law are a welcome addition to the toolbox of such professionals.
Reserved Power Trusts
The recently enacted Trustee (Amendment) Act 2012-21 (the TA Act) relating to reserved power trusts was proclaimed in 2014 and is now in force in Barbados.
The TA Act makes clear that a settlor may expressly reserve certain powers of the trust to himself without, by virtue of such reservation alone, undermining the validity of the trust. The powers which the settlor may reserve to himself are as follows:
any power to revoke, vary or amend the trust instrument or any trusts or powers arising thereunder in whole or in part;
a general or special power to appoint either income or capital of the trust property;
a power in respect of any beneficial interest in the trust property;
a power to act as a director or office of any company wholly or partly owned by the trust;
a power to give binding directions to the trustee in connection with the purchase, holding or sale of the trust property;
a power to appoint, add or remove any trustee, protector or beneficiary;
a power to restrict the exercise of any powers or discretions of the trustee by requiring that they shall only be exercisable with the consent of the settlor or any other person specified in the trust instrument; and
a power to provide advice on investment of the trust fund or the selection of investment advisors who may be required to act together with the trustee or to act independently of the trustee.
Many prospective settlors will find a great deal of comfort in being able to retain certain powers in relation to the trust and to be able to be directly involved in matters concerning the trust. However, as with all tools, the ability to make such reservation is a good servant but a bad master; and care should be taken in drafting the instrument to ensure that all relevant considerations, including in relation to tax, are borne in mind.
Private Trust Companies
The Private Trust Companies Act, 2012-22 (the PTC Act) relating to private trust companies was proclaimed in 2014 and is now in force in Barbados. The statute enables the establishment of a private trust company (PTC) in Barbados which is exempt from the licensing requirements which would otherwise apply to a company conducting trust business.
Under the PTC Act, a PTC is required to conduct exclusively “connected trust business” (ie, trust business in respect of trusts the settlors of which are connected to each other through the specified relationships of blood or by adoption. It is prohibited from soliciting or receiving assets to be held on the terms of the trust from members of the public.
In terms of regulation, the PTC is required to be registered on establishment and to renew such registration annually. In addition, it is required to have a registered agent who maintains copies of the trust instrument (and any variation documents) in respect of the trusts of which the PTC acts as trustee at the registered office and which registered agent has an obligation to take reasonable steps to ensure that such PTC complies with all statutory requirements.
In order to ensure that the PTC is properly administered, it is required to have at least one director who is appropriately qualified and is resident within Barbados. There are no capitalisation requirements for the PTC and there is a statutory obligation of confidentiality in relation any application made in connection with a prospective PTC and generally in relation to the affairs of the PTC.
A PTC will not be subject to income tax in Barbados, where it is managed by a licensee under certain legislation and its activities are restricted to investment activities. No tax, duty or other impost will generally be levied on a PTC, its shareholders or transferees in respect of any transfer of assets to a non-resident of Barbados or a resident of Barbados licensed under certain legislation.
A settlor may therefore establish a PTC (of which he and/or other persons he selects act as a director) to act a trustee of his family trust or trusts. In this way, a settlor can become directly involved in the administration of the trust and retain an appropriate level of control. Naturally, the usual considerations in relation to proper administration by a trustee are relevant, notwithstanding that the trustee is a PTC.
Other legislative developments: International Business Companies and Societies with Restricted Liability
The International Business (Miscellaneous Provisions) Act, 2014 (the IB Act) was enacted and proclaimed in 2014. The IB Act implements certain changes to the statutes relating to international business companies (IBCs) and international societies with restricted liability (ISRLs), the most significant of which was to enable the issuance of indefinite licences.
Previously, a licence to conduct international business was grantedto an IBC or ISRL, as the case may be, on an annual basis. This necessitated applications for renewal being made on an annual basis, otherwise the entity would not, as a matter of Barbados law, be entitled to conduct international business or be entitled to the special low tax regime applicable to activity. This requirement was especially problematic in the context of transactions, where it became evident (usually at the eleventh hour) that for some reason the application for renewal of the licence had not been made and it was essential for the purposes of a time sensitive transaction that the entity qualify to conduct international business under Barbados law.
Under the new regime, on establishment of an IBC or ISRL, a licence to conduct international business is issued - which licence remains valid unless cancelled. To be clear, a government fee is still required to be paid on an annual basis within the prescribed period, and compliance with such requirement is a condition of the licence. However, a licence would have to be cancelled by the positive act of the relevant government authority, which cancellation would require a notice of the intention to cancel (and the reasons therefor) being given to a licensee.
Separately, it is useful to note that the maximum rate of income tax applicable in Barbados to an international business company and an international society with restricted liability is 2.5 per cent on profits up to US$5million, and that the applicable income tax progressively decreases as the profits of the entity increase. The [Societies with Restricted Liability (Amendment) Act 2012] and the [International Business Companies (Amendment) Act 2012], which came into force in 2013, reduced the lowest level of income tax payable by an IBC and an ISRL to 0.25 per cent on profits in excess of US$15 million.
Undoubtedly, these changes to the licensing regime and tax rates applicable to IBCs and ISRLs in Barbados will simplify the administration of these entities, substantially eliminate the scope for time consuming licensing issues to arise in the context of transactions and render the applicable tax rates comparable to that which obtains in other international finance centres.
Barbados has long been prized by savvy tax planners and practitioners for its ever expanding double taxation treaty network which, as at the date of writing, extends to 34 countries (Austria, Bahrain, Botswana, Canada, China, Cuba, Czech Republic, Finland, Iceland, Luxembourg, Malta, Mauritius, Mexico, Netherlands, Norway, Panama, Seychelles, Singapore, Spain, Sweden, Switzerland, the UK, the USA, Venezuela, and the Caribbean countries which constitute CARICOM. In addition, it has 9 bi-lateral investment treaties with the following countries: Canada, China, Cuba, Germany, Italy, Mauritius, Switzerland, United Kingdom, Venezuela.
Barbados’ recent amendments to its legislation will, no doubt, serve to increase its attractiveness and relevance in the context of international structures.
Tara E. Frater, TEP
Tara is Principal and Founder of FT Legal Attorneys-at-law in Barbados, specialising in FinTech, Corporate and Commercial, Finance, Securities Regulation, Trust & Estates, Immigration and Real Estate. Tara has extensive and high quality experience earned over 15 years from leading law firms in Barbados and the British Virgin Islands; and has been recognised in the Citywealth IFC Power Women Top 200 List for multiple years. Tara has contributed a number of articles to the STEP Journal, Barbados International Finance and Business Barbados. She is Director of Caribbean Blockchain Alliance, Former Chairperson of STEP Barbados and Former Director of Barbados International Business Association.