Barbados: Infinite variety

By Dr Trevor A . Carmichael, Q.C, Chancery Chambers, Barbados (07/01/2008)

Barbados, with the second oldest parliament outside of Westminster, buttresses a long history of representative government with a tradition of financial stability and economic resilience. With a sound and tested legal system and a developed social and

business infrastructure, the jurisdiction’s sophistication belies its small geographical size of 430 square kilometres.


A growing economy


The Barbadian economy has now recorded six consecutive years of economic expansion,

with an average annual growth rate of 4 per cent. It is in the non-traded sector that the main growth is experienced, with annual rates reaching as high as 5 per cent

as compared to the average annual of 0.5 per cent in the more stagnant traded sector.

Sugar, as part of the traded sector, continues to be in gradual decline and the recent

experience of manufacturing is still not robust. On the other hand, within tourism

and financial services, there is a steady and encouraging increase in performance, as well as a commensurate development of appropriate enabling policies.


Unemployment has in recent years averaged between 8 per cent and 9 per cent, together with an average inflation rate between 6 per cent and 7 per cent. Despite the presence of such rates of unemployment, there is still a heavy reliance on foreign unskilled and partially skilled labour in the construction industry, which is today also echoing the global ‘building boom’ phenomenon. Inflation has recently been showing a small increase as a result of the increased oil prices on the international market.


Within the direct domestic economy, there continues to be an increasing growth in deposits within commercial banks. In the middle of the year 2007, such deposits, including foreign currency deposits, had reached circa US$3,500 million representing a gradual annual growth of about 4 per cent. In keeping with the natural saving propensity of the Barbadian, savings deposits reached circa US$1.6 million towards mid-2007, with savings of private individuals representing approximately 93 per cent of all savings deposits. On the other hand, credit has also shown a steady increase with commercial bank credit averaging about US$2,500,000 million, and at least 20 per cent of that credit being granted to the personal sector. With increased personal savings and moderate borrowings, it is therefore not surprising that membership by Barbadians in credit unions (less formal lending, saving and borrowing institutions) has increased over the year ended December 2006 by the very noticeable 23.4 per cent to 162,402 persons compared to 131,603 persons in 2005. Barbados’ population is about 279,000.


The international business ethos


The jurisdiction continues to record steady increases in the number of entities which are established under the friendly enabling legislation representing international business companies, international banks, captive insurance companies, societies with restricted liability, mutual funds and ship registrations. Its three-tiered trust legislation also continues to be attractive for astute international estate planners.


Up to the middle of 2007, international business companies continued to be increasingly incorporated within a regulatory framework, which requires a rigorous but fair licence application procedure. This relevant legislation was introduced in 1965 and, since that time, the scope and purpose of the user has changed according to tax and regulatory enactments, particularly in Canada, the US and United Kingdom from where many of the users emanate. The legislation’s use has also been influenced by the nature and type of double taxation agreements which Barbados continues to negotiate, and the core treaties which it inherited at its Independence from Britain in 1966. Currently, there are treaties in existence with Canada, the United States of America, United Kingdom, Switzerland, Norway, Sweden, Denmark, Malta, China, Cuba, Botswana, Venezuela, Brazil, Austria and The Netherlands.

However, it is the Society with Restricted Liability (SRL ) which has experienced the most significant growth in recent years. The flexibility of this vehicle, together with Barbados' excellent treaty relationships with China, the United States and Canada, account for multiple uses in the case of joint venture investments within China, as well as for Chinese entrepreneurs who are pursuing global business deals. It provides a mechanism for structuring investments in civil law jurisdictions in Europe and Latin America.

Also, under Barbados law, the SRL is a body corporate and therefore taxable. Yet, for United States tax purposes, it has similar elements to its cousin, the United States Limited Liability Company. Accordingly, the members or quota-holders of the SRL may elect, pursuant to United States tax rules, to treat the SRL as a partnership or branch for all United States tax purposes. By filing a prescribed form with the United States Internal Revenue Service within the stipulated time period, the entity may therefore qualify as a partnership or branch rather than be otherwise deemed as a corporation.

The use of an SRL carries many benefits, including the maximisation by United States individual taxpayers of foreign tax credits. It may allow United States residents to obtain a deduction for tax depreciation, and it will also allow the use of foreign tax credits from lower tier entities by United States corporations. The SRL may also facilitate avoidance of United States subpart F classification in relation to certain deductions as with those from one lower tier non-United States resident entity to another affiliated non-resident United States entity.

The SRL is indeed a very flexible entity and may be formed as an Exempt or Non-Exempt Society, and may be owned beneficially by residents of Barbados. The former is designed primarily for use in international transactions and, therefore, is prevented from doing business with residents of the Caribbean Community. However, the latter, with its more local focus, is able to do business with residents of Barbados and the Caribbean Community, as well as to hold Barbadian real estate opportunities not available to the Exempt or International SRL .

With its commencement in 1983, the international insurance sector is of earlier origin than the SRL regime which was introduced in 1995. This industry has undergone significant changes in the past two decades as the traditional captive is no longer the sole type of structure in use. Indeed, today the insurance industry and securities industries have become so closely intertwined that the traditional definition of a captive insurance product is no longer always accurate. Many of the new special purpose vehicles, which are now used to insure and reinsure catastrophic risks, are embedded within structures which are sometimes more akin to the securities industry than its insurance counterpart. Barbados, like Bermuda and the Cayman Islands, has been the host to many of these new structures; and it has been the regulated flexibility of these jurisdictions that has facilitated the speedy setting up of new re-insurance entities immediately after the September 11th catastrophe.

The insurance industry continues to develop in a sustainable manner, namely not at a very brisk place, but at a speed and in a fashion which allow for continuity. During 2006, nine new applications for exempt insurance and insurance management companies were received compared with fourteen in 2005.  However, in mid-2007, there were already eight new applications. There are currently over 450 registered exempt insurance companies, of which approximately 200 are very active. Of the seventy management companies, at least 25 are actively engaged in management functions. Total assets in the insurance industry are estimated at US$20 billion. There are currently two international super-sized insurance transactions which are being negotiated, and which are likely on their own to more than double the present insurance assets.

Barbados' tax treaties offer benefits which provide tax-planning opportunities to investors who are seeking to minimise their global tax exposure. Most of Barbados' treaties allow for reduced withholding tax rates on dividends, interest and royalties. A case in point is Canadian domestic tax legislation, which provides that dividends paid by a Canadian resident company to a non-resident company are subject to Canadian withholding tax at a rate of 25 per cent. However, under the Barbados- Canada tax treaty, this rate is reduced to 15 per cent.

Many of Barbados' treaties also contain tax-sparing provisions. These allow for foreign companies with subsidiaries that conduct business in Barbados under the Fiscal Incentives Act or the Tourism Development Act and consequently pay no corporation tax to be given credit for the Barbados taxes that would have been paid had the Barbados subsidiary not operated under the above mentioned incentive legislation. The Barbados-UK double tax agreement contains such tax-sparing provisions. In addition, the interaction of the Permanent Establishment (PE) and Business Profits Articles of Barbados' treaties offer protection to Barbadian resident companies from exposure to taxes on business profits earned in another treaty country. The treatment of capital gains is often important to international investors since, in some of Barbados' treaties, the right to tax certain gains lies with the state where the seller is resident. Hence, in cases where the seller is resident in Barbados, and since Barbados does not impose tax on capital gains, no tax is therefore payable in either Barbados or in the other treaty country.

All of Barbados' treaties, with the exception of the CARI COM treaty which is a source-based treaty, provide a credit for underlying taxes in respect of dividend payments. An underlying tax credit is the associated corporation tax paid by the investor in its home country, the after-tax profits of which are used to pay dividends. Consequently, on receiving dividends from a subsidiary, the country in which the parent company is resident grants a credit, not only for the withholding tax on dividends, but also for the tax paid by the subsidiary on its profits out of which the dividends are paid.

A number of Barbados' tax treaties contain a limitation on benefits provision. Such a provision prohibits treaty benefits from being applied to offshore companies which benefit from a special tax regime or prevent non-residents of a treaty country from enjoying benefits of a treaty. Barbados' treaties with Canada, Norway, Sweden, Finland and the UK contain restrictive clauses denying the benefits of the treaty to special incentive companies, such as the international business companies (IBCs). Although the provisions of the Barbados- Canada treaty do not apply to companies that are entitled to special tax benefits in Barbados, the Canadian domestic foreign affiliate rules permit these companies, once resident for tax purposes in Barbados, to utilise special tax benefits under Canada's domestic tax legislation. As a result, such income, when repatriated to Canada, is not subject to tax in Canada. The revised Limitation on Benefits Article of the recently renegotiated Barbados US tax treaty excludes special incentive companies from benefiting from the treaty provisions applicable to dividends, interest and royalties. However, this treaty still has advantages for these companies, principally under the Business Profits Article. There are also benefits for individuals.

Barbados’ more recently concluded treaties, including the treaties with China and Cuba, do not prohibit the use of special incentive entities from obtaining treaty benefits. These treaties provide significant tax-planning opportunities to investors wishing to minimise their costs when repatriating income from theirinvestment. The treaties with China and Cuba contain favourable provisions which make Barbados an attractive jurisdiction through which investments into China and Cuba can be channelled. China is one of the fastest growing economies in the world, and foreign investment therefore remains a strong factor in China’s economic growth. Its presence in the World Trade Organisation also helps to strengthen its ability to maintain strong growth rates. Owing to its historical, political, cultural and economic evolution, Chinese laws are unique and sometimes differ significantly from their foreign counterparts. For instance, tax laws in China are drafted in a much less precise manner, and thus the literal interpretation of those laws becomes difficult.

According to Chinese law, provisions of a treaty to which China is a party prevail over the domestic law in case of inconsistency or discrepancy. Therefore, tax treaties allow foreign investors and their advisers who are interested in investments in China to transact their business with a degree of certainty.


The Barbados-China treaty includes a useful capital gains article. Currently, under

China’s tax legislation, the disposition of property in China is ordinarily subject to a withholding tax at a rate of 10 per cent. Under the Barbados-China treaty, capital

gains arising from the sale of property, other than immovable property situated in China (which would include shares) are taxable only in the contracting state in which the taxpayer is resident. Therefore, an IBC could own shares of a Chinese company, and on the sale of those shares the right to tax the capital gains would rest with Barbados. Since Barbados does not tax capital gains, no tax is payable in Barbados on the receipt of capital gains.This provision therefore makes Barbados a very competitive holding company jurisdiction for international investors with Chinese operations.


The international business sector remains active and forward-looking, and is enhanced by a new agency, Invest Barbados. Using new methods and with a team of blended youth talent and experience, it is capable of catapulting the international business thrust to soaring heights. It has already announced plans which, upon fruition will, in another few years, ensure that the international business in Barbados is keeping pace with the global leaders.


Towards a sustainable economy


Barbados is making commendable steps towards a sustainable economy through initiatives such as the promotion of the use of renewable energy. The major source of

bio-fuel has been bagasse, generating enough electricity for approximately 3 per cent of

the national energy budget. Presently, there is also a plan to produce a high fibre “fuel cane” as a result of a US$100,000 feasibility study. Many issues were considered in the

study, including the correct type of fuel cane to be used which, in turn, could provide

the level and type of energy suited for the island’s climate conditions.


Barbados is also committed to achieving Goal 4 of its National Strategic Plan which involves: Building a Green Economy, Strengthening the Physical Infrastructure and Preserving the Environment. In this regard, during 2006 and 2007, environmental programmes accounted for a government budgetary allowance of circa US$30 million. There are a variety of agencies involved in using these budgeted sums in the interest of guided and careful environmental stewardship: The Environment Unit, The Coastal Zone

Management Unit, the Environmental Protection Department, the National Heritage Department, the National Botanic Garden and the National Conservation Commission.


In the area of marine research, special efforts are being made to restore and protect the integrity of near-shore coral reefs and seagrass beds. The Coastal Zone Management Unit has implemented policies which will lessen the negative impact on those ecosystems. A policy of ‘no anchoring for dive boats’ has been implemented, and a permanent mooring buoy system for popular dive sites is now in use. In further recognition of its obligations to International Maritime Organisation protocols, Barbadian policy-makers have acted by designating certain reef sites as ‘no anchoring’ areas. Furthermore, seagrass beds in designated areas are being monitored and their nearby water quality is being improved.


There are incipient trends towards more environmentally friendly housing, led to a great degree by the Government’s Ministry of Energy and the Environment and private individuals and agencies such as the innovative Environment People and Information.


The Solar House, constructed as a showhouse for the Government of Barbados, is now complete and contains different types of insulation in the roof so as to act as a thermal barrier. The walls also contain insulation and so the extreme exposure to sunlight is reduced. Windows are designed with reflective tint so as to deflect sunlight and allow for more cooling. The six overhangs at each window enhance this cooling effect. With ceiling fans in four of the rooms, a low flow toilet, and faucets filled with aerators to reduce water wastage, the house is at the forefront in sustainable energy use. These features are further enhanced by twenty photo-voltaic panels and twelve deep cycle batteries which give power to the house.


Barbados continues to implement a wide range of projects aimed at environmental sustainability. Measures have been adopted to integrate climate change issues in

national development policies and include the successful endorsement of the Second

National Climate Change Project with a yield of US$405,000. An initial National Public Perception Survey on Climate Change issues has also been completed, as well as a national assessment of systematic observations systems.


Barbados has also recognised the Global Environmental Facility proposals for Sustainable Land Management initiatives, spending approximately US$2 million. It has also commissioned two studies geared to formulate national negotiating positions on trade and environment, which are: “The Role and Future Use of Ecolabels in Barbados with respect to Trade and Economic Development” and “Benefiting from Trade Liberalisation in Environmental Goods and Services - Identifying the Possibilities”.




The old bard reminds us that “age will not wither…nor customs stale her infinite variety”. Barbados, with its old parliamentary system, its graceful weatherworn churches, synagogues and chapels, as well as its well-trodden gullies and its gentle streams yet remains fresh and wellnourished. Its renewed environmentalism, together with its ongoing business internationalism, combine to ensure its continued infinite variety.