One of the inescapable ironies of economic development is the increasing inclination towards similarity of products, ideas, cultures, economies and even life styles. For while development seeks to raise individual living standards and expand national performance indicators, globalisation as a concept and in practice leans towards uniformity. Within such competing aspirations and yet increasingly similar product offerings, it becomes a sine qua non for individual jurisdictions to define a competitive edge as a means and a guarantee of success in financial services. Such an edge, however, is ineffectual unless it portrays the jurisdiction in its totality. For the advantage is not merely in the number of financial service products or physical attributes within the jurisdiction, but in the unique and distinctive quality of those wide and varied offerings. Barbados is particularly poised to exploit that competitive edge because of a mix of unique historical and geophysical features and special financial services protocols.
Legislative developments
Barbados has developed as a hybrid jurisdiction with a tax treaty network inherited at independence in 1966 but widely expanded in the past two decades. It records steady increases in the number of entities established under the friendly enabling legislation, representing international business companies, international banks, captive insurance companies, societies with restricted liability, mutual funds and ship registrations. Its three-tiered trust legislation is also attractive for astute international estate planners.
Up to the middle of 2007, international business companies were increasingly incorporated within a regulatory framework that requires a rigorous but fair licence application procedure. This legislation was introduced in 1965 and, since then, the scope and purpose of the user has changed according to tax and regulatory enactments, particularly in Canada, the US and UK – from where many of the users emanate. The legislation's use has also been influenced by the nature and type of double taxation agreements that Barbados negotiates and the core treaties it inherited at its independence from Britain in 1966. There are treaties with Canada, the US, UK, Switzerland, Norway, Sweden, Denmark, Malta, China, Cuba, Botswana, Venezuela, Brazil, Austria and The Netherlands.
However, it is the Society with Restricted Liability (SRL) that has experienced the most growth in recent years. The flexibility of this vehicle, together with Barbados's excellent treaty relationships with China, the US and Canada, account for multiple uses in joint venture investments within China, as well as for Chinese entrepreneurs pursuing global business deals. It provides a mechanism for structuring investments in civil law jurisdictions in Europe and Latin America. Also, under Barbados law, the SRL is a body corporate and therefore taxable. Yet, for US tax purposes it has similar elements to its cousin, the US Limited Liability Company. So the members or quota holders of the SRL may elect pursuant to US tax rules to treat the SRL as a partnership or branch for all US tax purposes. By filing a prescribed form with the US Internal Revenue Service within the stipulated time period, the entity may therefore qualify as a partnership or branch rather than a corporation.
The use of an SRL carries many benefits, including the maximisation by US individual taxpayers of foreign tax credits. It may allow US residents to obtain a deduction for tax depreciation, and it will also allow the use of foreign tax credits from lower tier entities by US corporations. The SRL may also facilitate avoidance of US sub-part F classification in relation to certain deductions as with those from one lower tier non-US resident entity to another affiliated non-resident US entity.
The SRL is very flexible and may be formed as an Exempt or Non-Exempt Society, and may be owned beneficially by residents of Barbados. The former is designed primarily for international transactions and therefore is prevented from doing business with residents of the Caribbean community. However the latter, with its more local focus, is able to do business with residents of Barbados and the Caribbean community, as well as to hold Barbadian real estate opportunities not available to the Exempt or International SRL.
With its commencement in 1983, the international insurance sector is of earlier origin than the SRL regime that was introduced in 1995. This industry has undergone significant changes in the past two decades as the traditional captive is no longer the sole type of structure. Indeed, today the insurance industry and securities industries have become so closely intertwined that the traditional definition of a captive insurance product is no longer always accurate. Many of the new special purpose vehicles, which are now used to insure and reinsure catastrophic risks, are embedded within structures that are sometimes more akin to the securities industry than its insurance counterpart. Barbados, like Bermuda and the Cayman Islands, has been host to many of these new structures; and it has been the regulated flexibility of these jurisdictions that facilitated the speedy setting up of new reinsurance entities immediately after the September 11 2001 attacks.
Importance of tax treaties
Barbados's tax treaties offer benefits that provide tax-planning opportunities to investors that are seeking to minimise their global tax exposure. Most of Barbados's treaties allow for reduced withholding tax rates on dividends, interest and royalties. A case in point is Canadian domestic tax legislation, which provides that dividends paid by a Canadian resident company to a non-resident company are subject to Canadian withholding tax at a rate of 25%. Under the Barbados-Canada tax treaty, this rate is reduced to 15%.
Many of Barbados's treaties also contain tax-sparing provisions. These allow for foreign companies with subsidiaries that conduct business in Barbados under the Fiscal Incentives Act or the Tourism Development Act and consequently pay no corporation tax to be given credit for the Barbados taxes that would have been paid had the Barbados subsidiary not operated under this incentive legislation. The Barbados-UK double tax agreement contains such tax-sparing provisions. In addition, the interaction of the Permanent Establishment (PE) and Business Profits Articles of Barbados's treaties offer protection to Barbadian resident companies from exposure to taxes on business profits earned in another treaty country. The treatment of capital gains is often important to international investors since, in some of Barbados's treaties, the right to tax certain gains lies with the state where the seller is resident. Hence, in cases where the seller is resident in Barbados, and since Barbados does not impose tax on capital gains, no tax is payable in either Barbados or in the other treaty country.
A number of Barbados's tax treaties contain a limitation on benefits. This prohibits treaty benefits from being applied to offshore companies that benefit from a special tax regime or prevent non-residents of a treaty country from enjoying benefits of a treaty. Barbados's treaties with Canada, Norway, Sweden, Finland and the UK contain restrictive clauses denying the benefits of the treaty to special incentive companies, such as the international business companies (IBCs). Although the provisions of the Barbados-Canada treaty do not apply to companies that are entitled to special tax benefits in Barbados, the Canadian domestic foreign affiliate rules permit these companies, once resident for tax purposes in Barbados, to use special tax benefits under Canada's domestic tax legislation. As a result such income, when repatriated to Canada, is not subject to tax there. The revised Limitation on Benefits Article of the recently renegotiated Barbados-US tax treaty excludes special incentive companies from the treaty provisions applicable to dividends, interest and royalties. However, this treaty still has advantages for these companies, principally under the Business Profits Article. There are also benefits for individuals.
Barbados's more recent treaties, including with China and Cuba, do not prohibit the use of special incentive entities from obtaining treaty benefits. These treaties provide significant tax-planning opportunities to investors wishing to minimise their costs when repatriating income from their investment. The treaties with China and Cuba contain favourable provisions that make Barbados an attractive jurisdiction through which investments into China and Cuba can be channelled. China is one of the fastest growing economies in the world, and foreign investment therefore remains a strong factor in China's economic growth. Its presence in the World Trade Organisation also helps to strengthen its ability to maintain strong growth rates. Owing to its historical, political, cultural and economic evolution, Chinese laws are unique and sometimes differ a lot from foreign counterparts. For instance, tax laws in China are drafted in a much less precise manner, and the literal interpretation of them becomes difficult. According to Chinese law, provisions of a treaty to which China is a party prevail over the domestic law in case of inconsistency or discrepancy. Therefore, tax treaties allow foreign investors and their advisers that are interested in investments in China to transact their business with a degree of certainty.
The Barbados-China treaty includes a useful capital gains article. Under China's tax legislation, the disposition of property in China is subject to a withholding tax at a rate of 10%. Under the Barbados-China treaty, capital gains arising from the sale of property, other than immovable property situated in China (which would include shares) are taxable only in the contracting state in which the taxpayer is resident. Therefore, an IBC could own shares of a Chinese company, and on the sale of those shares the right to tax the capital gains would rest with Barbados. Since Barbados does not tax capital gains, no tax is payable in Barbados on the receipt of capital gains. This provision therefore makes Barbados a very competitive holding company jurisdiction for international investors with Chinese operations.
Reverberating success
A financial services jurisdiction enhances its competitiveness through its unique or special physical attributes of. In the case of Barbados, while the attributes are myriad, some stand out. The enhancement itself is, however, not merely physical. For it is now a virtual truism that balance, position, presence and juxtaposition all separately and together create a metaphysical character that clearly transcends the physical. The presence in such a small island of a large number of special spaces reverberates success in many untold forms.
| Author biography |
Dr Trevor A Carmichael, QC
Chancery Chambers
Dr Carmichael is a member of the International Bar Association, the Inter-American Bar Association, the International Tax Planning Association, the International Fiscal Association, a former Deputy Secretary General of the International Bar Association, a life fellow of the Institute for Advanced Legal Studies in the UK and a life member of the Commonwealth Magistrates and Judges Association.
He serves as a panel member of the International Centre for Settlement of Investment Disputes of the World Bank in Washington, the Founder Chairman of the Barbados Youth Business Trust and the Chairman of the United World Colleges Selection Committee for Barbados. A visiting professor of Caribbean Foreign Investment Law to the Florida State University Summer Programme at the University of the West Indies, he is a trustee of Europhil in the UK, and sits on the legal affairs and properties committee of the International Council of Museums in Paris, France and is a trustee of the Duke of Edinburgh International Award Association.
Dr Carmichael is the co-author of Land Use Under The Law – A Commentary and Compilation of Select Legislation in Small Island Developing States, the editor of Barbados: Thirty Years of Independence, the author of the book Passport to the Heart: Reflections on Canada Caribbean Relations, the co-author of Commonwealth Caribbean Trusts Law and the author of Gully Adventures: A Stream of Barbadian Life.
He is the Principal of Chancery Chambers, a Barbados law firm engaged primarily in international business law, environmental law and the law relating to charities. |