Since the enactment of the International Business Companies (“IBC”) Act in 1965, Barbados has become home to over 5,000 IBCs. There are several reasons for the attraction of local and foreign investors to Barbados IBCs. We will consider some of these reasons.
In view of the increasingly global climate in which all countries are forced to operate, many local companies are investigating the export opportunities available to them. This has included export of both goods and services. While there are some tax and other incentives available to encourage such exports, such as those found in the Fiscal Incentives Act, the incentives offered under the IBC Act appear to be the most easily accessible. In order to access the benefits under the IBC Act, a company need only be incorporated under the Barbados Companies Act and licensed as an IBC to carry on international business, which may be loosely defined as business with non-residents of Barbados. Once the company will be conducting this type of activity, an examination is not undertaken as to whether the IBC is engaged in a type of export activity that merits the incentives. Once an entity will be engaged in international business, an IBC license is issued, subject to certain due diligence and other regulatory checks.
On obtaining a license, the method of calculating the taxable income of the IBC will generally be the same as for all other companies incorporated in Barbados. However, the IBC will be taxed at rates ranging from 2.5% down to 1% instead of the prevailing corporation tax rate, in Barbados, of 25%. Also, the IBC would be entitled to a foreign tax credit in respect of taxes paid on foreign source income earned in a foreign jurisdiction so as to reduce the tax payable in Barbados to a maximum of 1% of the taxable income of the IBC. Further, when the IBC pays dividends, interest, royalties, management fees or other fees to non-residents, the IBC is not required to withhold any tax from that amount. In addition, IBCs are exempt from the payment of property transfer tax and ad valorem stamp duty on certain transactions.
Apart from the above, there are some non-tax benefits associated with the establishment of IBCs. For example, a local export operation will, no doubt, have to make regular payments to suppliers in overseas territories. The establishment of an IBC eliminates the need to seek exchange control permission to pay such suppliers. There is therefore little or no risk of delays in making such payments.
Although emphasis has been placed so far on the tax advantages to local businessmen using IBCs for export, foreign investors stand to gain similar benefits by using IBCs or their sister entities called “international societies with restricted liability”. What is an international society with restricted liability (“ISRL”)?
An ISRL is an entity that is created under the provisions of the Barbados Societies with Restricted Liability Act which is taxed in the same manner as IBCs. For Barbados corporate law purposes, an ISRL is treated in the same manner as a company. Hence, many of the provisions of the Barbados Companies Act apply to ISRLs. However, ISRLs offer a degree of flexibility to US investors. This is because ISRLs can elect to be treated as corporations or as partnerships for US tax purposes. This allows US investors to engage in tax planning that may allow for the deferral of the tax payable in the US.
How does Barbados compare with other jurisdictions that offer international business legislation such as the British Virgin Islands, the Cayman Islands and the Bahamas? At first blush, it may be thought that these islands should be the jurisdictions of choice given that they are zero-tax jurisdictions. However, Barbados’ attraction is its existing and expanding double taxation treaty network, as compared with these jurisdictions that have concluded no double taxation treaties in view of their zero-tax status. Hence, the establishment of a Barbados IBC for investment in a country with which it has concluded a double taxation treaty may lead to fantastic tax advantages. Let us examine a few examples.
Barbados is used by U.S. multinational corporations (“MNCs”) that are considering doing business in China as the Barbados/China Tax Treaty contains favourable capital gains provisions. The U.S. MNC could establish an IBC or ISRL to acquire or form a company in China. By virtue of the provisions of the Barbados/China Tax Treaty, no capital gains tax would be payable either in China or in Barbados on the gain generated from the sale of the shares of the China company. Further, the repatriation of the gain in the form of dividends to the U.S. would be exempt from tax in Barbados, as the IBC and SRL Acts provide that no tax should be withheld on the remittance of profits/distributions to non-residents of Barbados. Under certain conditions, the Barbados/Canada Tax Treaty offers similar advantages as outlined above with regards to capital gains.
There are added benefits for a Canadian investor that invests in China through a Barbados offshore vehicle. This is specifically due to the existence of the exempt surplus rules under the Canadian domestic tax law. Subject to certain conditions, this would allow an IBC or SRL to repatriate dividends/distributions to Canada without any tax being payable on receipt of such amounts in Canada.
Another example is the use of a Barbados IBC or ISRL to make various mutual fund investments. The use of a Barbados entity would be advantageous inasmuch as tax treaties often allow for reduced withholding taxes on dividends and interest being paid from the treaty country where the investment income arises.
Presently, Barbados has signed double tax treaties with Austria, Botswana, Canada, Caricom, China, Cuba, Finland, Malta, Mauritius, Norway, Sweden, Switzerland, the U.S., the United Kingdom and Venezuela. Barbados has also signed a treaty with the Netherlands which is yet to be ratified. Negotiations are underway with strategic treaty partners that may facilitate the channeling of even more foreign direct investment through Barbados. Investors and service providers, therefore, need to pay close attention to the opportunities available via this expanding treaty network.
There are no restrictions as to the type of activities that may be carried on by an IBC/ISRL. These entities may simply hold investments or may license intellectual property, engage in procurement activities, mutual fund business, or provide financing to affiliates. Investors may also examine how other pieces of Barbados legislation can be used effectively to further their business interests. For example, reference may be made to the segregated cell company structure. Under this structure, a company is entitled to create one or more cells. Each cell may issue shares to the same or different investors. In any case, the liabilities and assets of each cell are isolated from the liabilities and assets of all the other cells of the company. Thus, an IBC or ISRL could be used for various investments while segregating the liabilities related to one investment from the liabilities associated with other investments. This structure may be used effectively, for example, where investments are to be made in various debt or equity instruments in China or in any other country with which Barbados has a favourable tax treaty, where the different investors may have differing appetites for risk.
Indeed, the numerous benefits of the IBC and SRL Acts, combined with Barbados’ tax treaties and the excellent infrastructure in Barbados, make the IBC and ISRL unique options to facilitate local and international investment.
(Please note that this article was first published in Business Barbados 2007 edtition and some of the tax rates may have changed. Refer to our Taxation Guide for the rates)