Barbados
by
Stuart Gray, September 2004
IMPORTANT
WARNING:
The contents of this report have been compiled in good
faith by Investorsoffshore.com to provide assistance
to investors, but do not constitute investment advice
or recommendations. Investors should not rely upon the
information given in order to choose types or routes
of investment but should make their own independent
enquiries before making choices. Investorsoffshore.com
has taken reasonable care in researching and presenting
the information herein but makes no representations
as to its accuracy and accepts no liability for actions
taken or not taken as a result.
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been superseded by more modern industries, namely tourism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.
Offshore
Banking
Barbados
established an offshore banking sector under the Offshore
Banking Act 1979 (as amended) and the country is home
to 53 offshore banks. 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.
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.
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 high proportion
of these entities originate from the US, taking advantage
of the US/Barbados tax treaty provisions (more on this
later), unavailable to insurers located in the other
main Caribbean jurisdictions.
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.
In
2006, there were 24 local listings and a number of international
companies including 7 banks. In February of that year,
market capitalisation was Bds$11 bn, with cross listings
to other Caribbean markets also capitalised at Bds$11
bn.
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 the
Barbados Investment and Development Corporation (BIDC).
The
jurisdiction 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.
Furthermore, 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.
As of 2006,
Barbados had 14 tax treaties with the following countries:
The Caribbean Common Market (CARICOM), the United States,
Canada, United Kingdom, Finland, Norway, Malta, Sweden,
Switzerland, Cuba, Venezuela, China, Mauritius and Botswana.
Treaties with Austria and the Netherlands were awaiting
signature.
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.
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.
At present, IBCs (of which there were around 8,000 in
Barbados in 2005) pay a maximum corporate income tax
rate of 2.5%. By contrast, the standard rate of corporate
tax was 30% in 2005 (reduced to 25% in 2006). Nevertheless,
this remains a sizeable gap to be bridged and one that
the government must approach very carefully, considering
that the offshore sector contributes around $200 million
annually to the island's economic activity.
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.
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.
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