A tropical paradise, Barbados lies at the easternmost edge of the Caribbean Island chain. From discovery in 1627 until Independence in 1966, Barbados remained a British colony, and was best known for sugar cane, its appeal as a holiday destination and its world class cricketers.

Today Barbados is a respected high quality low tax domicile, offering a variety of products to the international investor. The country is not a tax haven, rather a low tax jurisdiction which has entered into double taxation treaties with CARICOM, Canada, US, UK, Finland, Norway, Sweden and Switzerland.

Barbados' success as a domicile is attributable to a stable colonial and post-independence history as well as to the fore-sight and pragmatic leadership of the modern leaders who created the legislation that has facilitated the development of this sector. Barbados has become an attractive place to do business, as it combines fiscal incentives with a strong underlying social infrastructure.

The Island offers an excellent network of paved roads; dependable electric power; good water; sophisticated telecommunications systems with full Internet access; television and radio stations; postal and courier services; an international airport which is served by daily connections to major cities and a sea port with all the modern amenities.

The country’s workforce is highly literate in traditional terms and by today's computer literate standard. A ready source for the higher skills required by the thriving computer software industry, Barbados is sought out more for the skilled aspects of this industry than for just basic data processing.

The education system has also turned out a number of highly trained professionals who, over the years, have gained experience in the industry at home and abroad and are now able to provide quality local accounting, banking, legal and insurance services.

In Barbados, quality is stressed over quantity. The country prefers to measure its success not by counting the annual increase in offshore entities formed, but by noting the ability of international financial planners to use the Island's incentives, treaties and financial services for the clients' benefit.

International Business Companies

The main corporate entity in the financial sector in Barbados is the international business company (IBC). An IBC is a company that is in the business of international manufacture or trade from Barbados, but whose sphere of operations is outside of the Caribbean region. Such a company is taxed on its profits at a reducing rate from 2.5% to 1% per annum and requires an annual licence to operate, the cost of which is US$100 annually.

Offshore Banks

An eligible company, or qualified foreign bank requires a licence from the Minister of Finance before it may carry on the business of offshore banking. This sector is super-vised by the Central Bank of Barbados through which applications for licences are made.

Offshore banks are taxed on a reducing scale from 2.5% to 1% per annum. There are no other direct tax or capital gains tax on the profits or gains of the bank and no tax is levied on distributions to a non-resident person or another licensee, nor on the transfer of its assets or securities.

Offshore banks also enjoy a number of other specific tax and exchange control exemptions and concessions including the absence of controls on interest rates.

Societies with Restricted Liability (SRL)

An SRL is neither a company nor a partnership. It is an entity designed to take advantage of the significant benefits that can be achieved in the US through the use of hybrid non-US entities characterised under local legislation as corporations but treated as partnerships under US tax legislation. It is similar in many respects to the limited liability companies found in civil law jurisdictions.

An SRL has the following characteristics:

  • a maximum of 50 years duration;
  • limited liability;
  • the legal personality of an individual;
  • restriction on the right of transfer of quotas in the society; and
  • eligibility for exempt status that will allow it to benefit from special tax concessions.

An SRL will qualify as a partnership for US tax purposes if it fails to satisfy two of four corporate characteristics, namely: continuity of life, centralised management, limited liability and free transferability of interest in the society. The Barbados SRL clearly lacks continuity of life and free transferability of interest.

An SRL may be either exempt or non-exempt. Exempt SRLs are designed for use in international transactions and are treated as IBCs for the purposes of taxation and other concessions. Exempt SRLs are taxed on a reducing basis from 2.5% to 1% and are precluded from transacting business with residents of Caricom and from holding or acquiring freehold land in Barbados.

Non-exempt SRLs can do business with Caricom and within Barbados, and are taxed at the normal corporate rate. They should, therefore, be eligible to benefit from Barbados' double taxation treaties. Unlike IBCs and exempt SRLs, participation by Caricom residents in non-exempt SRLs is not restricted to 10% of the equity, a significant difference for local investors.

The attraction of SRLs is that members can use a corporation type vehicle (and benefit from limited personal liability) yet receive partnership treatment, ie the flow through of income and losses to the members without taxation of the company itself.

International Trusts

The Barbadian international trust facilitates the securing of trust assets in Barbados either as a means of estate planning or for asset protection purposes.

To establish such a trust:

i) The settlor must be resident outside Barbados at the time of the creation of the trust.

ii) At least one of the trustees must be resident in Barbados.

iii) The trust property must not include any immovable property situated in Barbados.

iv) The assets of the trust must not be part of the trustee's estate.

v) Title to the trust assets must be held in the name of the trustee or by someone on behalf of the trustee.

vi) The trustee must be accountable for the management and administration of the trust.

The trust can only be created by instrument in writing and ends automatically on the 100th anniversary of the date of creation of the trust, if not terminated sooner. The rule against perpetuities does not apply to trusts set up under this Act. Advantages of using the International Trust Act are that it:

i) Does not recognise claims against assets based on forced heirship laws of a foreign state.

ii) Protects assets from future liability.

iii) Minimises estate/inheritance income and capital gains taxes.

iv) Permits the use of assets in the trust to earn income through use of the Offshore Banking Act and International Business Company Act.

v) Provides for exemption from the provisions of the Exchange Control Act and Succession Act.

Mutual Funds

The legislation creating mutual funds is relatively recent, yet a number of mutual funds have been established over the last few years on the Island, benefitting from various concessions in the Income Tax Act. The most significant aspect of the new Act is the allowing of pooling of funds, and the use of unit trusts, companies and limited partnerships in initial funds structures.

Foreign Sales Corporations (FSC)

An FSC is a company incorporated under the Barbados Companies Act and licensed under the FSC Act and which is qualified to be regarded as a FSC under the US inland revenue regulations. Once qualification is obtained and the mainly administrative requirements under the Act are complied with, the company is allowed a reduction on the federal income tax that it pays on earnings from products manufactured in the states and sold overseas. FSCs are not taxed in Barbados, but pay an annual license fee of US$1,000.

Barbados' strength as a domicile lies in the diversity of the services and incentives offered, coupled with its comprehensive legislative infrastructure (including regulatory requirements) and its political and social stability. A great place to do business, all in all.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to iofch@mondaq.com