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This feature focuses on the Caribbean island of Barbados. More famous for its beaches and as a destination for millions of tourists than as a location for offshore business, Barbados has nonetheless developed a well regulated financial services industry offering a surprisingly wide array of offshore products from banking to trusts to insurance. Whilst the island is not quite on a par with the higher profile offshore centres in the region, such as Bermuda or the Cayman Islands, for the investor, Barbados offers economic and political stability along with a number of tax and investment incentives, and close economic ties with the United States.

History, Geography & Economy

Located in the Windward Islands, Barbados is a 270 square mile island about 100 miles east of St Lucia and St Vincent & the Grenadines and 200 miles to the north of Trinidad & Tobago, in the south east of the Caribbean. As one would expect, the climate is mild subtropical all year round, with two distinct seasons: the dry season, which occurs in the first half of the year from December to June (and is generally the most popular period for tourists); and the rainy season which tends to hit in the latter months of the year (also the hurricane season).

As an ex-British colony, the island was first cultivated by settlers to grow tobacco, with sugar soon taking over as the staple cash crop. However, agriculture has been superseded by more modern industries, namely tourism and financial services, and for a quarter of a century, successive governments have welcomed offshore business.

While Barbados can't claim to have any of the world's largest offshore business sectors, it has developed a good mix of successful communities in banking, insurance, International Business Company registration and administration, trusts and shipping. The Barbadian dollar's peg to the US dollar at 2:1 has helped to ensure exchange rate stability and by the end of 2004, a total of 7,600 offshore entities were registered in Barbados.

According to the Central Bank of Barbados, in the first three quarters of 2009, 248 new business licences were issued to International Business Companies. This was 123 less than the number issues over the same period in 2008. A fall in the number of societies with restricted liabilities was also recorded, as only 15 licences were approved in comparison with the 75 granted in the same period in 2008. In addition, 3 qualifying insurance companies, 2 exempt insurance companies, and 2 new offshore banks were licensed in the period. Overall the number of licences issued in this sector fell by approximately 42%, reflecting the difficulties faced by some offshore companies as a result of the global financial crisis.

GDP per head (2009) is about USD18,500 at PPP (among the higher Caribbean figures). Inflation has been under control, but unemployment is a black spot: after reaching as high as 25% during the early 1990s as an IMF austerity programme bit. It had fallen to 11% in 1999, and by 2006 had decreased to 7.6% - the lowest rate for some years. By 2008 however, unemployment had begun to grow again, reaching 8.1% that year, and increasing to just over 10% in 2009. Growth in 2007 was 3.3%, but it fell to 1.5% in 2008, unsurprisingly. The economy contracted by 5.3% in 2009 in the wake of the global financial crisis.

Much of the island's economic exuberance up to 2006 was due to preparations for the cricket World Cup, held in March, 2007. During 2006, real tourism output grew by an estimated 2.5%, reversing the 2.2% decline experienced in 2005, as a rise in long-stay tourism more than outstripped a fall-off in cruise passenger arrivals.

In January, 2006, Barbados was one of six Caricom member states which formally signed a declaration of their governments' compliance with the provisions of the Treaty establishing the Caricom Single Market and Economy (CSM). Heads of government signed a document entitled 'Declaration by Heads of Government of the Caribbean Community marking the coming into being of the Caricom Single Market'. These Member States entered into Single Market arrangements on 1 January 2006.

Most member states of CARICOM had signed up by 2008. It will be a while however before the CSME represents much more than token integration. Initially, freedom of movement for certain categories of people, and some mutual reductions of customs tariffs are the main features of the new grouping. Moves towards a common currency, a regional stock exchange and other economic measures will take longer to achieve.

The last elections held in January 2008, saw the DLP, led by David Thompson, end the BLP's bid for a fourth successive term in government, taking 20 seats in the 30-seat House of Assembly.

A Financial Services Commission, which will regulate the insurance subsector, the cooperative sector, the Stock Exchange, and all non-banking financial sectors in general, is scheduled to become operational by the end of the second quarter of 2010.

Offshore Banking

Barbados established an offshore banking sector under the Offshore Banking Act 1979 (as amended) and the country is home to 52 offshore banks as of early 2010. Licenses are made available to 'eligible companies' and 'qualified foreign banks'. A licensee needs to be a limited liability company incorporated under the Companies Act 1982; to restrict its activities to offshore banking from Barbados; to have at least one resident Barbadian citizen among its directors; and to meet minimum capital requirements set by the Central Bank.

Effective February 1, 2006, returning Barbadian nationals may hold foreign currency accounts with a limit up to the equivalent of BDS100,000 provided the funds credited to such accounts represent foreign currency earnings from abroad in the form of pensions, rental income, interest, dividends or other foreign income. Barbadian residents and CARICOM nationals resident in Barbados who earn foreign exchange may hold foreign currency accounts with a limit up to the equivalent of BDS20,000 without exchange control permission provided the accounts are funded by foreign exchange of at least BDS50,000 annually. For limits in excess of BDS20,000 exchange control permission is required.

In its 2007 financial statement, the government announced that all exchange controls relating to Caricom would be abolished by the end of that year. Eventually, all restrictions with respect to non-Caricom transactions are to be removed, although the 2007 statement specified no time frame for this.

The Central Bank has recently strengthened its vetting procedures over applicant banks in response to international money laundering and criminal concerns. Subsidiaries of foreign banks have to provide written authorisation from the parent supervisory authority, and the activities of in-house corporate treasury operations must be consolidated into published group accounts.

Licence fees for financial institutions were increased by the 2008 budget, from January 1, 2009: Local – main branch: BDS250,000 per bank; Local – other branches: BDS20,000 per additional branch; Local – ATM’s: BDS1000 per ATM other than at branches; International banks BDS100,000 per bank.

Trusts

On trust matters there is a sophisticated community of professional advisers in Barbados, and trust management has been a considerable activity in the jurisdiction for more then three decades, much of it conducted by the trust departments of banks. Individuals can provide trust services without registration, but companies offering trust services must be licensed by the Central Bank under the Offshore Banking Act 1979. Both foreign and Barbados-resident companies may obtain licenses. The International Trusts Act 1995 gave Barbados a modern, comprehensive, business-oriented trust regime which has proven particularly attractive to corporate users.

Licence fees for trust management companies were increased to BDS100,000 per company in the 2008 budget, with effect from January 1, 2009.

Insurance

The Insurance sector meanwhile is governed by Barbados Exempt Insurance Act of 1983, and is overseen by the Ministry of Finance and Economic Affairs. More than 300 insurers are licensed under the Act, with annual premiums of approximately US$2bn and assets of US$10bn. A majority of these insurers originate from the US, and are taking advantage of the provisions of the Barbados/US Double Tax Convention, which are not available to insurers located in the other main Caribbean jurisdictions. The Convention allows captives and other insurers in Barbados to write business in the US while avoiding the creation of a permanent establishment, and thus to escape much US taxation.

Under the Exempt Insurance Act, qualifying companies must be incorporated in Barbados with minimum issued capital (or reserves, in the case of a mutual insurer) of BDS$250,000, and at least one of the directors must be a resident citizen of Barbados. Exempt Insurance companies are taxed on their profits at the rate of 0% for the first 15 years, rising to 2% on the first $250,000 of profits (2004 rates). They are also exempt from withholding tax and exchange control restrictions.

Shipping

A Shipping Registry was established under the Shipping Act 1994 and the island has been a member of the International Maritime Organisation since 1969, subscribing to all the main maritime safety and environmental conventions. The Shipping Act provides for registration of all types of vessel, however owned, but the new Registry is particularly aimed at 'foreign-going' vessels, meaning those which sail to and from Caricom states (but not within Caricom) or outside Caricom altogether.

The Shipping Corporations Act 1996, which mirrors the provisions of the Companies Act 1982, provides a stand-alone basis for incorporation of a ship ownership or management company, whether the ships concerned are registered in Barbados or elsewhere. Shipping Corporations are non-residential and are exempt from taxes, and the Barbados/US Tax Convention provides particularly favourable opportunities to US shipping owners and operators, who can obtain domestic tax benefits by operating through a Barbados resident.

Barbados Stock Exchange

Barbados is one of the handful of Caribbean states with its own stock exchange, created by an Act of Parliament in 1982. Although the original trading facility, which opened its doors in 1987, was reincorporated in 2001, the institution's status as a non-profit organisation privately owned by its members remains unchanged. The year 2001 also saw the traditional open outcry trading system replaced with an electronic trading and order-routing platform.

The Barbados Stock Exchange, although not large, has been moderately successful. In February 2007, the BSE had 26 local listings and a number of international companies including 7 banks. Its market capitalisation was BDS9.9 bn, with cross listings to other Caribbean markets also capitalised at BDS11 bn. However, in 2008 market capitalization fell by 28% from BDS19 billion to BDS13.5bn. In early 2010, market capitalisation was BDS11.3bn.

Tax and Investment Incentives

In addition to offshore financial services, commercial activity and manufacturing - especially in high technology - have also been encouraged by Government with the granting of a number of tax and other investment incentives. Examples include a 10-year tax holiday, exemption from import duties, subsidised factory space available within 10 fully-serviced industrial parks, grants for worker training and free consulting services provided by Invest Barbados.

A one-stop service for investors is provided by Invest Barbados, a special agency established by the Government to facilitate investors and promote industrial development; it offers a wide range of investment incentives applying broadly to manufacturing industry. Some of these are as follows:

• Full exemption from taxes on corporate profits for fifteen years for export-only manufacturing companies;
• Special tax rate for export industries of only 2.5% after the expiration of the tax exemption period;
• Tax rate of 1% - 2.5% on profits of Information Services companies;
• Full exemption from import duties on components, raw materials, production machinery and other production related equipment such as computers and spare parts;
• Expedited customs clearance procedures with minimal paper work and no delays;
• Full and unrestricted repatriation of capital, profits and dividends;
• Subsidised factory/office space available for rental in well-planned industrial parks;
• Industrial training grant scheme to subsidize the cost of worker training;
• A tax rate of 1% - 2.5% on the profits of International Financial Services Companies and International Business Companies;
• Exemption from VAT on the importation of raw materials and packaging for registered exporters earning at least 40% of their revenues from export sales.

From 2007, dividends earned by resident companies, including IBCs, from holdings in foreign (non-resident) companies are exempt from tax, provided the Barbados company owns more than 10% in of the dividend-paying company and the holding is not merely a portfolio investment.
Dividends paid to non-resident shareholders by Barbados companies are exempt from withholding taxes on the portion of income derived from foreign sources.

Barbados-resident companies apply withholding tax at 15% on dividend payments to non-residents and 12.5% to residents. Dividends paid out of foreign source income do not attract withholding tax.

Barbados has a number of tax treaties, but by far the most significant and beneficial of these is the US/Barbados Tax Treaty established in 1984 (alongside a Tax Information Sharing Agreement). The treaty creates opportunities for third country investors in US real estate, and is also attractive to US manufacturers. Many US investors are exempted from US accumulated earnings tax on Barbadian profits - a rare feature in US tax treaties. An additional protocol to the US treaty signed in 1991 lowered withholding rates but introduced new 'limitations on benefits' rules. In July 2004, then US Treasury Secretary John Snow and Barbadian Industry and International Business Minister, Dale Marshall signed the Second Protocol to the 1984 agreement. This sought to tighten the provisions of the treaty by updating the anti-treaty shopping provisions and preventing fiscal evasion.

Barbados inherited treaties with Switzerland, Sweden, Norway and Finland from the UK, but only the Swiss treaty survived - the other three were replaced with more modern treaties with low rates of withholding, tax-sparing provisions, and limitations on treaty-shopping. The Canadian treaty, dating from 1980, also includes limited tax-sparing provisions. The Finnish treaty has a 51% local ownership limitation of benefits rule, but IBCs and other offshore entities are specifically excluded from the rule, thus giving them access to treaty benefits.

In April, 2010, at the signing of the Barbados-Luxembourg Double Tax Agreement in London, Barbados Minister of International Business and International Transport, George Hutson, said that the continued expansion of the jurisdiction's tax treaty network is enhancing its reputation and attractiveness as a place to do business.

"I believe that coupled with our Bilateral Investment Treaty (BIT), this Convention will certainly enhance our investment infrastructure and product offerings," Hutson said. "Investors in our countries will have access to more opportunities with the added assurance of the promotion and protection of their investments.”

"It is also important to note that this Convention makes abundantly clear the commitment of our two countries to the principles of transparency and tax information exchange that we have agreed upon," he added. "I am pleased, therefore, that we have been able to take the opportunity to bring the language of our Convention into conformity with [this].”

"I look forward to investors taking advantage of the opportunities in areas such as financial services, tourism, cultural services, research and development, and educational services," Hutson added. "I am also hopeful to see our people collaborating in joint ventures to provide new and innovative solutions and fill niches in the respective markets.”

Barbados currently has double tax agreements with the Caribbean Community (CARICOM), the United States, Canada, the United Kingdom, Finland, Norway, Malta, Sweden, Switzerland, Cuba, Venezuela, China, Mauritius, Botswana, Austria, the Netherlands, the Seychelles, Mexico and Ghana.

Additionally, to promote and protect investments, Barbados has signed BITs with Cuba, Venezuela, China, Canada, Germany, Switzerland, the United Kingdom, Mauritius, Ghana, Belgium and Luxembourg. Furthermore, a list of priority countries has been devised for additional agreements, including Vietnam, the United States and Brazil.

Second round tax treaty negotiations are under way with India and Iceland. Treaties with Spain and Italy have been negotiated and await signature. Discussions on conventions with Belgium and France have also been arranged, Hutson said.

Tax

Whilst Barbados offers a benign tax regime to offshore and international businesses, there is a marked disparity with the domestic regime, and the country faces some tough choices on the tax front in the years ahead. Not only must the country undergo reform as part of its commitments to the CSME (Caribbean Single Market and Economy), but the government also has to deal with the consequences of the 'commitment' letter which secured its removal from the OECD's 'harmful tax competition' black-list. In basic terms, this required the jurisdiction to converge the dual domestic/offshore tax system.

On the personal tax front, the system is not quite so benign. Taxable income is defined very broadly in Barbados, and includes everything from employment income to director's fees, taxable profits from a trade or business, interest, dividends, annual payments, royalties, social benefits, trust income, partnership income, income from the disposal of shares issued to employees and the benefit of loans at under-value. Residence for tax purposes is defined as presence in the country for more than 182 days in a calendar year (which is the tax year), and then applies to the whole year.

Until 2002 chargeable income (after all allowances) was taxed at 25% on the first BDS$24,200 and at 40% thereafter. The basic rate was reduced to 22.5% in 2003 and to 20% in 2004, and the top rate was reduced to 37.5% in income year 2005, and from 37.5% to 35% in income year 2006.

In 2006 the government introduced enhanced tax concessions for specially qualified individuals employed in the International Financial Services Sector, as follows:

• Up to $150,000 per annum 35%;
• Over $150,000 but less than $500,000 50%;
  Over $500,000 60%

Among other taxes, there is an annual land tax at 1% on unimproved land up to BDS$100,000 in value, and 1.5% on value in excess of BDS$100,000; on improved land the tax is 0.4% of the value up to BDS$500,000 and 0.75% on value in excess of BDS$500,000. There are also property taxes, although the first BDS$125,000 of a property's value is exempt from the taxes. Stamp Duty is payable in a number of situations in Barbados, including transfers of real estate and shares (1%), leases (1%), and mortgages (BDS$5 on the first $500, and $3 on each subsequent $500).

Property Transfer Tax is payable on the transfer by gift, sale or other method of any direct or indirect interest in land. This fairly hefty tax is charged at 5% for citizens and permanent residents, and 8% for vendors who are neither citizens nor residents. There are no capital gains, estate, inheritance or gift taxes although VAT was recently introduced, replacing the old sales taxes.

With regard to expats looking to live or work in Barbados, non-residents need work permits, although these are issued quite readily if it can be shown that there is no suitably-qualified Barbadian for the job. Non-residents may purchase real estate in Barbados with foreign currency that has been registered with the Central Bank.

Barbados has much to offer the investor, expat or manufacturer, with a sound offshore legislative environment and an array of tax incentives to encourage industry and commerce. Whilst the country faces some tough challenges ahead as it integrates into the Caribbean Single Market and to keep onside with the OECD, it is certainly not alone in this. These are concerns that are being felt right across the region, not just in Barbados, and the country is likely to remain a viable financial and business centre for some time to come.

Real Estate

It is widely believed that property in Barbados is owned by only the rich and famous. Although there are many wealthy owners, over the years the market has spread and diversified with prices ranging from US$145,000 to US$40m.

It is true that the west coast has some of the highest property prices in the world. The west coast of Barbados begins on the outskirts of Bridgetown (Capital of Barbados) in the south and extends northward to Harrisons in the parish of St Lucy at the northern tip of the island. There are a number of west coast luxury beachfront developments and luxury homes such as Portico, Coral Cove, The Sands, Schooner Bay, and Waterside, to name a few, on this stretch of coast with prices ranging from US$700,000 – US$40m. Cluttons Barbados has just launched The “Weston” Residences in St James, Phase one includes 21 apartments with one to four bedrooms with prices starting at just US$145,000. There will be 45 apartments in total. Phase one will be completed in October 2011.

The south coast begins at Carlisle Bay in Bridgetown and heads in an easterly direction towards East point on the Atlantic east coast. The south coast has seen tremendous growth within the last five years. There are a number of new developments under construction and the prices are lower than on the west coast, which suit the middle market and investment purchaser very well. Higher end developments include The Palm Beach Condominiums, which are spacious and offer very good value with quality finishes. These units are 2,200 sq ft and larger and start at US$900,000. The Sapphire Beach Condominiums and White Sands Villas are two very good examples of new developments in the heart of the south coast. They both have direct beach access and start at US$700,000 for a one bedroom unit. Prices on the south coast range from US$250,000 – US$2m.

In January, 2010, real estate agent Cluttons said that now is the time to buy in Barbados, with a buzz returning to the market. The firm is optimistic about 2010, with figures over the last quarter showing significant signs of improvement in property sales enquiries and actual transactions. The number of serious enquiries are up by 80% this December and January compared with the same period last year.

In his Christmas address, Prime Minister David Thompson seemed to agree that the island might be about to turn the corner, saying that: "Obviously 2009 has been a tough year. 2010, based on all the forecasts, should be the year in which there will be a reversal of that trend, but obviously it depends very much on what is happening in the United States of America and Europe, in particular, and of particular importance to Barbados, Canada.”

Now Cluttons says that the worldwide economic downturn has created some “never seen before” opportunities in the Barbados property market as some vendors and developers are forced to reduce prices to increase enquiries and reduce transaction times. This phenomenon is extremely rare in Barbados and the firm does not expect this situation to last for too much longer.

The first six months of 2009 were fairly quiet except for buyers with US$4m or more to spend. However, Barbados has an extremely strong property market and the level of offers and sales increased after July 2009.

Kieran Kelly from Cluttons Barbados says: “Now is the time to buy. The Barbados property market, like everywhere else in the world, saw the number of transactions reduce in 2009, and the number of buyers looking for discounts increase. The economic downturn created a buyers' market and it took a little while for owners and developers to accept it, with an initial stalemate between the buyers' and vendors' expectations. We are now seeing more flexibility in vendors' willingness to negotiate and as a result, more sales, most due to price reductions. During an economic downturn, it is always the exclusive locations that win through first. Places such as Central London and Barbados will be fine. For buyers and for good reason, there is a certain comfort level attached to securing a good deal or discount on a property in Central London or Barbados!”

Kelly continued: “Barbados is an extremely strong brand and clients want a safer market that can offer good potential on the upturn. If anything, this financial crisis has placed Barbados in a better position as competing and alternative destinations have faltered quite dramatically. Our homes are stunning; the people are lovely; the economy is stable; there are top end restaurants and beach bars everywhere; the pure white sandy beaches are heaven; and, the clear blue waters of the Caribbean Sea provide many with the opportunity to truly relax and escape the world’s woes.”