By now most businesses are well aware of the Organisation for Economic Cooperation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) Action Plan. Simply put, it is an initiative designed to prevent international companies from evading tax by shifting profits to no-tax or low-tax jurisdictions where they carry on no substantive economic activity.
Barbados has spent the better part of two years changing its tax legislation to comply with BEPS, literally dismantling a decades old tax structure that enabled international businesses to be taxed at far lower rates than local companies. Offshore and internationally licensed entities are now things of the past. As of 1 January 2019, all companies are now regular Barbados companies governed by one tax regime. At the same time another piece of legislation was introduced to ensure that Barbados clearly articulated the demands for “economic substance” stipulated by Action 5 of the BEPS initiative. That legislation, known officially as the Business Companies (Economic Substance) Act 2018- 41 was then repealed and replaced by the Companies (Economic Substance) Act 2019-43, which came into effect on 1 January 2020.
The new Act, commonly called the ESA, stipulates that any company “resident” in Barbados which derives income from “relevant activities”, must demonstrate “economic substance” in Barbados. In essence, this means the company must conduct a substantive business – one that occupies and operates from permanent offices, hires the requisite number of managers and employees with the skills needed to run the business, and is managed from here.
Furthermore, companies must take a test to determine whether or not they meet the economic substance requirements on an annual basis.
In this bulletin, we have tried to anticipate and answer some of the questions you might have about the ESA and what it might mean for businesses. As usual, there is more to the Act than we can include in a bulletin. So we encourage you to contact us to answer questions and fill in the details.