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Barbados ... An Alternative Offshore Jurisdiction, with Treaties
Peter Jesson, International Tax Partner, PricewaterhouseCoopers, Barbados
Maria Robinson, International Tax Partner, PricewaterhouseCoopers, Barbados

By combining offshore entities with our double taxation treaties, Barbados is able to offer multinational companies the opportunity for creatively structuring their businesses so as to increase their competitive advantage world-wide.

Tax regime
Here in Barbados, all companies are incorporated under the Companies Act. As well, taxable income is determined for all companies using the provisions of the Barbados Income Tax Act (ITA). However, a licensing regime for offshore companies, which is based on the proviso that such companies engage only in international trading and financial services activities from Barbados, determines the rate at which such profits are subject to corporation tax. Companies not licensed as offshore entities pay tax at the regular rate of 40%. Companies licensed under the various offshore enactments generally pay corporation tax at rates ranging from 2.5% down to 1%. However, there are a few offshore entities which pay no income tax at all.

Types of offshore entities
Barbados' offshore legislation provides for a variety of entities to meet the needs of the multinational corporations and a range of international investors. The International Business Company (IBC) is a versatile vehicle which can be used for selling goods or services internationally, as well as for manufacturing products for sale on the international market. The IBC is exempt from withholding tax on any of its dividends, interest, royalties, management fees and other fees paid to non-residents. This entity also pay corporation tax at rates ranging from 2.5% down to 1% with all annual profits over US $15 million being taxed at the 1% rate. To the extent that there is foreign withholding tax on income earned by the IBC, a foreign tax credit can be obtained insofar as the IBC pays a minimum tax of 1%. Unfortunately there's no provision for the carry forward of unused foreign tax credits from year to year.

Generally, the attributes of a International Society with Restricted Liability (ISRL) are identical to those of the IBC. However, this entity is established under separate legislation such that it has a limited life of fifty years and transfers of ownership (called quotas) can only be effected with the agreement of all of the investors. These characteristics permit the ISRL to be treated as a partnership and so make it eligible for "check-the-box" treatment in the United States.

The Offshore Bank (OB) Act permits is licensee to take deposits and securities in foreign currencies and lend or advanced such monies to non-residents. The OB is subject to the same rates of corporation tax as the IBC and ISRL. Withholding tax exemptions, however, apply only to distributions of dividends and interest to non-residents. Also, the ability to utilize foreign tax credits is not specifically mentioned in the Offshore Banking Act and so the provisions of the ITA apply. The OB is regulated by the Central Bank of Barbados. Although licensing requirements are relatively straightforward, prospective owners and business plans are scrutinized thoroughly. To date therefore, only some forty-five offshore banking licenses have been issued; thereby ensuring the integrity of the jurisdiction.

Barbados' offshore legislation includes a captive insurance entity known as an Exempt Insurance Company. Although this is essentially a non-taxed entity, provisions also exist within the domestic insurance legislation which permit a locally licensed insurance company to carry on international insurance business and be subject to tax in Barbados. Such an entity is permitted to claim certain tax credits under the ITA such that, where 81% or more the company's income is derived from international insurance business, than it is entitled to a tax credit equal to 93% of the regular corporate tax rate. This has the effect of reducing the insurance companies effective tax rate 2.8%. However, it also allows access to treaty benefits, since the insurance company then becomes a (tax-paying) resident of Barbados for treaty purposes.

To the extent that an IBC or an ISRL does not satisfy the needs of the multinational company, Barbados has Foreign Sales Corporation (FSC) legislation on it statute books. Designed to facilitate US manufacturers with export sales, the FSC pays no corporation tax in Barbados. Nor is it subject to a franchise tax as in the case of the United States Virgin Islands. It is estimated that U.S. manufacturers currently own 5,000 FSCs and, of this number, some 2,800 (or approximately 55% of the total) are Barbados FSCs.

Barbados has recently enacted a Mutual Funds Act. Once regulations are finalized (expected later this year), it is anticipated that the ability of mutual fund managers and administrators to work from a regulated environment in Barbados will combine favorably with the Barbados treaty network to attract them to our island. In this regard, or government's plans to expand the treaty network into Latin America is particularly welcome, especially with respect to those countries with which the USA does not currently have a tax treaty of its own.

Double taxation treaties
Barbados has double taxation treaties with the following countries, in alphabetical order:

Canada;
Caricom (this is an economic grouping of the former British colonies of the Caribbean);
Cuba (signed but not yet in force);
Finland;
Norway;
Sweden;
Switzerland;
The U.K.;
The U.S.; and
Venezuela (signed but not yet in force).

With the exception of the Caricom treaty, all of Barbados' double taxation agreements are based on the OECD model treaty, with modifications as negotiated by the treaty parties. The Caricom treaty is based on the "source" principle of taxation, such that income arising in a treaty country is subject to tax only in that state. This tax is treated as a final tax and so there is no mechanism for the inclusion of income in the receiving state with a credit for withholding taxes paid. Only the U.S., Caricom and Swiss treaties permit entities established under Barbados' offshore legislation to utilize treaty benefits directly.

US-Barbados Treaty Article
The tax convention between Barbados and the United States ("US treaty") was signed in 1984: its Protocol in 1991. The Protocol is important especially because it included a new Limitation of Benefits article ("Article 22") and lowered the withholding tax on interest and royalties to 5% (The withholding rate for dividends was already 5% where the beneficial owner is a company holding at least 10% of the payer's voting stock: a 15 % rate applies to other dividends).

Two hurdles face anyone who wishes to derive a US treaty benefit from having US source income earned in Barbados: the income must be owned by a resident of Barbados and the latter must have substance enough to avoid the limitations set in Article 22. For individuals, there are the usual OECD type "tie-breaker" provisions created to determine residence for US treaty purposes and, for companies, they are resident in Barbados if they are managed and controlled here. Essentially, this last condition means that the company's directors must truly exercise their executive power over the company and do so from Barbados, no matter where (outside the U.S.A) the company may be incorporated.

For those familiar with the US Netherlands' Limitation of Benefits article, the US treaty's Article 22 is benign and short. E.g. if the main class of shares of a Barbados resident company (wherever incorporated outside the U.S.A.) is well traded on NASDAQ or on some other SEC recognised national stock exchange, Article 22 has no impact. Also, if a Barbados resident company carries on an active trade or business in Barbados (including being a bank or an insurance company) which earns income from the U.S.A., then the restrictions of Article 22 do not apply to the US income.

In the context of this active trade or business exemption, it should be noted that not all the activity need physically take place in Barbados, provided that Barbados management is actually involved so that it can indeed be said to be carrying on that business in Barbados. For instance, if the size or source of goods make it inconvenient for them to be produced in Barbados, the Barbados IBC could have a branch/hybrid (for US purposes) in another location to carry out the physical activity, with suitable oversight by Barbados management.

Once a Barbados resident qualifies for treaty benefits, then any US source not-effectively-connected income can enjoy low US withholding tax and then that resident's US trade or business income obtains protection from US tax under the US treaty's "permanent establishment'' (PE) provision. Under this PE provision, only US trade or business income of the Barbados resident which is effectively connected to the PE can be taxed in the US. A Barbados IBC, ISRL or Offshore Bank which organises its US business through independent agents (acting in the ordinary course of their business) could then enjoy complete exemption from US tax, for instance.

In addition, once the appropriate level of active trade or business is reached, reduced withholding on interest charged to related US operations may also be possible, provided there is a suitable degree of connection with the Barbados business. Access to capital gains exemption and other benefits would also be possible under a similar scenario.

Finally, another exception to the Article 22 limitation applies where both (a) more than 50% of each class of issued shares of a Barbados resident company (by number) is owned, directly or indirectly, by US citizens or else by either an individual or another company (which passes the Article 22 "traded shares'' or "active trade or business'' test) who/which is resident in the US or Barbados for purposes of the US treaty and (b) not more than 50% of that Barbados resident company's gross revenue is used to pay interest, royalties or other expenses to persons who are resident in neither the US nor Barbados. This allows a Barbados IBC to enjoy treaty benefits, for instance, if it is controlled by an appropriate US treaty resident, provided it retains enough revenue to pass the second leg of this test. This retention should be painless enough, considering the IBC'S top rate of tax is 2 .5%; and there is no Barbados dividend withholding tax for an IBC!

A final note
Notwithstanding the benefits of using the US treaty, Barbados is also attractive due to its treaties with third countries. For instance, the Canada-Barbados treaty can allow the earnings of a Barbados hybrid owned by a Canadian parent to be free from Canadian tax (even when paid back to Canada as dividends). Use of the hybrid in Barbados - a branch of the Canadian parent for US tax purposes - also allows
exemption from US tax on that branch's US trading profits where there is no PE in the United States. Payment of 22% tax in Barbados thus allows both US and Canadian tax to be (at worst) deferred to the Canadian shareholder level.

Although it is recognised that the signing of a full tax treaty between Barbados and Cuba on June 17, 1999 does not have immediate use for US companies living under the Cuban embargo, it does position Barbados as a favoured fiscal entry point into Cuba by residents of other countries and it does give strategic positioning for us in respect of the huge pent-up US investor demand should the embargo be lifted in the near future.

(Taken from Business Barbados 2000 Edition: The Premier International Business & Investment Publication - Pages 28,30,32)