International Insurance in Barbados
The formation of captives in Barbados essentially commenced in 1984 with the signing of the Barbados-US tax treaty. This legislation allowed an exemption of the 1% to 4% Federal Excise Tax (FET) that was applicable to (re)insurance paid to non-U.S. corporations once domiciled in Barbados. This business was preceded by the enactment of the Barbados Exempt Insurance Act in 1983 that has seen Barbados’ evolution to be the 7th ranked domicile by volume.
The benefits relating to this type of U.S. sourced captive business expired in 1991, but was buttressed with the emergence of the Canadian market that can be traced to the execution of the Barbados-Canada tax treaty in 1980. This treaty historically allowed a Canadian company with a captive in Barbados to take a tax deduction for its insurance premium and still accrue tax free income from the insurance business under the right circumstances.
While the main source countries for international insurance business continues to be Canada and the U.S., the execution of Double Taxation Agreements (DTAs) with Cuba, Venezuela, Panama and latterly Mexico, means that LATAM represents a viable opportunity.
During 2013, it was estimated that there was a net growth globally of close to 250 captives with approximately almost two-thirds coming from the U.S. where more than 30 States have passed captive legislation. The trend has been for the smaller 831(b) captives primarily from the onshore jurisdiction of Utah, now considered a specialist. Barbados is not expected to compete directly with this business in a meaningful way until it establishes Incorporated Cell Legislation. This legislation would allow for the incorporated cell of an Incorporated Cell Company to be a separate legal entity that could enter into contractual arrangements with third parties in its own name.
In his 2014-2015 Budget Presentation to Canada’s House of Commons in February 2014, Minister of Finance James M. Flaherty effectively amended the exception from the FAPI regime for regulated foreign financial institutions by imposing a new criteria list. It has been opined within the industry that these measures seemingly target international tax planning and could impact international insurance business in Barbados. The primary concern relates to “insurance swaps” where an “offshore” captive of a Canadian parent has insured Canadian risks and then exchanges those risks for equivalent foreign risks under a swap arrangement and thus avoiding FAPI treatment to the Canadian parent.
What Barbados however has to its benefit is an extensive Treaty Network that requires greater utilization to respond to the contraction of business out of North America. Barbados is ideally positioned with its vast array of DTAs, while the government is at various stages of discussions with Brazil, Chile, Colombia and Costa Rica in LATAM.
The most interesting prospect appears to be Colombia who in October 2013, through its Ministry of Finance, issued Decree No. 2193 whereupon Barbados has not been recognized on the list of countries and jurisdictions that, for fiscal purposes, are considered tax havens. This clearly represents an opportunity for both Government and the private sector to sound a collective voice that Barbados is open for Colombian and by extension LATAM business.
More robust negotiation is expected with the objective being the execution of a Barbados-Colombia DTA or even a Tax Information Exchange Agreement (TIEA) during 2014. This would supplement other initiatives that should include an Outward Mission to Bogota. With the challenge of sourcing direct air lift out of LATAM mooted as a barrier to doing meaningful international business with the region, it should not escape anyone that headquartered in Bogota, is the second largest airline carrier in LATAM, having the most extensive flight network and credited with the largest and most modern fleet on the continent.
Mexico has however led the way for LATAM captive opportunities to date. This was following Barbados’ removal from the Mexican blacklist with effect from January 1, 2010 following the enactment of the 4th amendment to the Miscellaneous Tax Resolution that was issued on March 31, 2010. The upshot is that Mexican companies can now look to make captives an integral tool in their risk management programs for both their domestic and global operations.
Barbados captives of Mexican companies receives special consideration since the reinsurance of this insurance risk qualifies as “Commercial Activity” provided that “passive income” (e.g. interest income) does not exceed 20% of Gross income in any year. In instances where a Mexican holding company does not have effective control of the Barbados entity, benefits can still accrued through the use of a Barbados Segregated Cell Insurance Company. With no premium taxes and no reinsurance taxes on the fronted policies, the reasons for Mexico are both compelling and real as evidenced by the steady licensing of new captives from this source country.
The most obvious opportunity though is the expansion of the existing business activity whether directly or indirectly. The Barbados captive solution through its regulatory framework provides flexibility in program structures and underwriting as evidenced by the placement of many specialized types of risks. This can be of significant benefit to clients having global operations, including subsidiaries in LATAM.
Apart from Mexico, Barbados has a longstanding relationship of doing international insurance business with Venezuela, where asset preservation planning has been the driver. The message is clear: as the insurance landscape changes in North America, Barbados is almost ideally placed structurally and logistically to consider LATAM.