With its pristine beaches, first class hotels and five star restaurants, Barbados is undoubtedly one of the premiere vacation destinations in the Caribbean. However Barbados is more than just a holiday destination. With the rapid growth of its offshore industry, Barbados is now a globally recognized international financial sector which has much to offer the savvy international investor. One investment vehicle Barbados offers is the establishment of a trust.
A trust is arguably the most secure of all investment vehicles available to investors to protect their assets. There is a high duty of care imposed by law on a trustee and a degree of flexibility inherent in the establishment of a trust and its administration. Trusts can also provide a certain amount of mobility, enabling settlors and beneficiaries to avoid threats of a military or political nature. Settlors and beneficiaries can obtain additional protection against asset seizures and freezes, restrictive exchange control and tax regulations, and general risks of publicity associated with substantial wealth.
A Barbados trust provides for distributions at any time during the lifetime and upon the death of the settlor. Further, as Barbados has no capital gains tax or estate duty, a Barbados trust is a useful tool for testamentary disposition.
Types Of Barbados Trust
Various legislation governing trusts facilitate creative tax planning for international investors. Such legislation includes the Trustee Act 1985 Cap. 250 of the Laws of Barbados (the “TA”), the International Trusts Act 1995 Cap. 245 of the Laws of Barbados (the “ITA”), and the International Financial Services Act 2003 Cap. 325 of the Laws of Barbados (the “IFSA”).
Domestic Barbados Trust
Where the trustee is a Barbados resident individual or company, and where the trust deed does not specify that it is an international trust, it will be considered a domestic trust. Domestic trusts are generally entitled to double taxation treaty benefits. This substantially reduces or even eliminates tax in the other treaty jurisdiction. Domestic trusts have the following features:
- the majority of trustees must be Barbados residents
- the trustee can be an individual or a trust company licensed under the Financial Institutions Act 1997 Cap. 324A of the Laws of Barbados
- worldwide income is taxable
- expenses are subject to value added tax (VAT) in Barbados
- exemption from exchange controls may be received if the trust has foreign assets, non-resident beneficiaries, and deals primarily in foreign currency
- perpetuity period of 80 years, and
- no registration or filing requirements.
The ITA allows for the creation of purpose trusts and asset protection trusts. This legislation also provides for the establishment of non-charitable purpose trusts which may have no named or ascertainable beneficiaries. One of the key attractions of the purpose trust is that it need not be set up for charitable purposes and may therefore be established for a group that does not otherwise meet the criteria of a charity. Thus the purpose trust is used for many diverse business transactions.
To qualify as an international trust:
- at least one trustee must be resident in Barbados
- the settlor must be resident outside of Barbados
- the beneficiary should not be a resident of Barbados (with certain exceptions)
- the trust instrument must specify that the ITA applies
- no immovable property must be owned in Barbados, and
- registration is required but does not become publicly available.
An international trust also has the following features:
- VAT is zero-rated, exempt from exchange controls, and Barbados withholding tax
- perpetuity period is up to 100 years, and
- income derived within Barbados is taxed or remitted to Barbados.
An offshore trust is created when the trustee is licensed under the IFSA. The settlor and beneficiaries must be resident outside of Barbados and the trust assets must consist solely of foreign currency or securities. The offshore trust is exempted from all Barbados taxes, duties, and exchange control requirements.
The IFSA also provides protection to beneficiaries by requiring the trustee to keep all assets held in trust separated from its other assets. Furthermore, a trustee may maintain one or more common trust funds and invest the assets held in those trust accounts in a common trust fund. The trust instrument and any co-trustee must give explicit permission for this investment.
There are no registration or filing requirements for an offshore trust, so confidentiality is easily maintained. The perpetuity period of the trust can be up to 80 years and income can be accumulated for the perpetuity period.
Stringent provisions have been included in the ITA to ensure that trustees maintain confidentiality of all international trust documents and any other person involved in the administration of the trust. It is an offence punishable by fine and/or imprisonment for a person or a body corporate (in the majority of cases, the trustee) to make or assist in making a report, return, notice or other document that contains an untrue statement of a material fact, or omits to state a material fact.
In order for a trust to be considered a tax resident of Barbados, the trustees must be resident in Barbados and the administration and management of the trust should be in Barbados. A domestic trust is taxed at the same rate as are individuals. The trustee is liable for payment of that tax, assessed on worldwide income of the trust. In determining taxable income, allowance is made for expenses incurred as well as any amounts payable to beneficiaries. Distributions made to non-resident beneficiaries will only be taxable on income derived from Barbados.
An international trust is deemed to be non-domiciled in Barbados for taxation purposes, and is subject to tax only on its Barbados source income and overseas income remitted to Barbados. In particular, income and capital gains are exempt from tax in Barbados; amounts allocated to non-resident beneficiaries out of income are not subject to tax in Barbados; and the trust is exempt from indirect tax or other imposts on transactions undertaken pursuant to its activities. As mentioned before, international trusts are also exempt from exchange control restrictions, Barbados withholding tax and VAT is zero-rated.
In the case of trusts regulated pursuant to the IFSA, no tax is payable either by the trust or beneficiaries.
The establishment of double taxation treaties with various nations also increases the tax benefits available to an investor. At present Barbados has income tax treaties with Austria, Botswana, Canada, CARICOM countries, the People’s Republic of China, Cuba, Denmark, Finland, Malta, Mauritius, Mexico, Norway, Seychelles, Sweden, Switzerland, the United Kingdom, the US, Venezuela, Luxembourg. The government of Barbados continues to pursue its commitment to promote and develop the international business sector in Barbados. In this regard, the government is actively seeking to negotiate additional beneficial tax treaties with countries that it views as potential trading partners.
The Barbados trust structure allows for flexibility, security and confidentiality. Further, as our trust model was developed primarily based on equitable and common law rules, the English Trustee Act 1925 and the Northern Ireland Trustee Act 1958, there is some predictability in how trust decisions will be decided by the Courts.
The investor who chooses Barbados will benefit from tax advisers, lawyers, accountants, and other professionals who have used trusts in effective tax planning and wealth management for high-net-worth persons and in facilitating commercial transactions. With the legislative, administrative and legal framework in place, the Barbados trust is a sound investment vehicle for estate planning and wealth management.