Economic Substance – Barbados’ Legislation is Now in place

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 […]

By Ernst & Young

February 26, 2020

EY Tax Bulletin Feb 2020

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 That legislation, known officially as the Business Companies (Economic Substance) Act 2018- 41 was then repealed and replaced by the Companies (Economic Substance) Act 2019-43, which came into effect on 1 January 2020.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.

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Ernst & Young

Ernst & Young Caribbean (EYC) is among the largest integrated professional services firms in the Region. We are one firm, with offices in Barbados, Jamaica, Trinidad & Tobago, Curacao and Aruba. As a client serving member firm of Ernst & Young Global Limited (EYG), we offer a global perspective while maintaining our regional insight by seeking alternatives for you - we tap the power of both. Our multidisciplinary teams of professionals leverage a wealth of industry-tailored, practical approaches to help you discover opportunities for your business. Whether your organization is strong and healthy, under stress or facing difficult choices, we work with you to find financial, strategic and operational solutions that improve your liquidity, financial flexibility and stakeholder returns. We're here to help you build a sustainable business in the short and long term. We provide services in four main areas: Assurance, Tax, Transactions, and Advisory. Through these services, we can help you retain the confidence of investors, manage your risk, strengthen your controls and achieve your potential. In a world of change, our commitment to quality remains constant and that means getting the right information, making the right judgements, taking the right actions and maintaining public trust.

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