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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 However, agriculture has been superseded by more modern industries, namely tourism and financial services, and for a quarter of a century, successive governments have welcomed offshore business.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.