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
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taken reasonable care in researching and presenting
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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has been superseded by more modern industries,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.
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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