The government of Barbados has toiled hard to make the country a safe haven for investors, enforcing high standards and strict laws on companies licensed there.
Why invest in Barbados? Low tax jurisdictions are plentiful and varied, so what is it about this Caribbean island state that should draw investors to the country?
The answer is two-fold. First, Barbados has had to build a reputation that puts customers at ease in dealing with companies located on the island. And second, it has had to provide a compelling case for companies to invest and open offices.
Meeting the first objective has been partly a matter of geography but mostly it has been hard work sustained over a long period of time. Its relative proximity to North America while being well-serviced by European airlines means that it is easy to get to the island. For the rest, it has toiled to build its reputation.
Beefed up regulations
The island has a well-established reputation for confidentiality, statutorily enforced. Internationally, it is considered “clean”. Tough know-your-client regulations have been further beefed up amid global concern of terrorism-related money transfers. Historically, regulators in Barbados have placed a high premium on ensuring that companies observe high standards and the rule of law.
Standards of regulation and supervision are rigorous. Any company that offers financial services must be licensed and is therefore carefully vetted and continuously regulated by the Central Bank of Barbados. As most offshore banks on the island are subsidiaries of top international banks, clients have additional peace of mind.
The country’s world-class and cost-efficient telecommunications systems mean that clients are always able to contact their banks. Similarly, the banks are fully integrated into world markets with information at the touch of a button.
Also, political and economic stability means that discriminating high net worth private and corporate clients can sleep easy.
Barbados has been a financial services centre since the enactment of the International Business Companies Act in 1965. In the past 15 years, the government has stepped up the pace, developing a wide range of legislation designed to promote international business and financial services. With its reputation as a well-regulated, clean jurisdiction, its impressive network of tax and bi-lateral investment treaties and core of highly qualified investment professionals, Barbados’s appeal to international investors has grown.
With about 7000 licensed offshore entities doing business in Barbados, many of them financial services firms, the numbers speak for themselves. The country is now considered to be a growing international financial services centre.
The International Business Companies Act, which was subsequently amended in 1991, permits international business companies (IBCs) that do not “trade in the Caribbean region” to establish their headquarters in Barbados. Such companies pay only 2.5% tax on net profits. Even then, taxes paid to a foreign country may be credited against tax payable in Barbados, although the credit cannot reduce the tax payable to less than 1% of the taxable income for the particular income year.
Tax incentives
Capital gains are not subject to tax in Barbados. Also, there are no withholding taxes on dividends, royalties, management fees, interest payments and other fees paid by an IBC to non-residents or to another IBC. An IBC is exempt from exchange control restrictions and may keep its records and financial statements in a foreign currency.
Other benefits include tax breaks for expatriate staff. Not only can such employees readily obtain work permits, but they are also exempted from income tax and exchange control on up to 35% of their remuneration from an IBC. An IBC may also import, free from all customs duties, equipment, machinery and materials for use in its business.
In addition, the government guarantees the existing IBC benefits for at least 15 years.
To qualify as an IBC, a company must be incorporated in Barbados or be a local branch of a foreign corporation. It must not trade in goods or services in Barbados or any of the Caribbean countries that form part of the Caribbean Community and Common Market.
Bi-lateral tax agreements ensure further benefits. For instance, Barbados has a comprehensive double taxation treaty with Canada. As such, dividends paid out of the active business income of a foreign affiliate operating in Barbados are fully deductible in the determination of the taxable income of a recipient Canadian resident corporation.
Barbados is certified as a North American Area country and therefore business convention expenses that US corporations and organisations incur there are automatically deductible in the US against US taxes.
Profits of an IBC whose shares are wholly owned by a trust that is managed by a licensed offshore bank are exempt from tax.
Offshore banking
The Offshore Banking Act came into effect in 1979, providing incentives by way of tax reductions and other exemptions and benefits for offshore banking carried out from within Barbados. Offshore banking is broadly defined under the Act. It covers the process of receiving foreign funds through acceptance of foreign money deposits payable on demand, after a fixed period, or after notice; sale or placement of foreign bonds, certificates, notes or other debt obligations, or other foreign securities; or any similar activity involving foreign money or foreign securities. It also covers use of the aforementioned foreign funds to finance loans, advances and investments or the activities of the person carrying on the business. And it includes the acceptance in trust of amounts of money in foreign currencies or foreign securities; foreign personnel or movable properties; and real or immovable property outside Barbados from persons resident outside the country.
These incentives include a low rate of tax on net profits (maximum 2.5%); no capital gains tax; no taxes on dividends or interest paid to non-residents; no estate, inheritance or succession tax on shares, securities or assets beneficially owned by non-residents; no tax or duty in respect of the transfer of securities or other assets to non-residents; no tax on the incremental value of property or other assets in Barbados; and no tax on trusts established by a non-resident for the benefit of another non-resident if trust assets consist solely of foreign currency or foreign securities.
The government is willing to provide guarantees regarding future taxation. Confidentiality relating to the affairs of the banks’ non-resident customers is guaranteed. This includes no requirement for public filing of financial statements.
Other structures and entities enjoy similar incentives and tax treatment.
Other incentives
The Exempt Insurance Act was introduced in 1983 to establish Barbados as a domicile for international insurance activities. The approach of the Act is both modern and flexible, and it facilitates the licensing of exempt (captive) insurance companies and the registration of management companies and holding companies. Barbados has developed into a viable alternative to Bermuda for the location of exempt insurance companies and generally for the conduct of international insurance business.
The Societies with Restricted Liability Act, enacted in 1995, allows for the creation of a true hybrid entity, which may be recognised as either a corporation or a partnership, depending on the nature of its organisational documents. A society with restricted liability (SRL) is an entity with full judicial personality, but whose members will enjoy the advantage of limited liability available to limited partners of a limited partnership. One or more persons may organise a society by signing and sending articles of organisation in the prescribed form to the registrar together with the prescribed fee.
Part of what makes Barbados unique is the island’s network of tax treaties with many of the world’s major economies and the rising stars, such as China. This has contributed considerably to removing the negative associations often tagged onto low-tax jurisdictions.
