WHY THIS LEGISLATION?
Barbados has passed into law the Business Companies (Economic Substance) Act 2018-.41 The legislation came into effect on January 1, 2019. Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man and Jersey have all done the same. The legislation is one of the features of the EU/OECD attempts to prohibit base erosion and profit shifting.
WHAT TYPE OF BUSINESS DOES IT AFFECT?
Barbados had for many years sought to distinguish itself as a jurisdiction which focused on attracting business of substance. Arguably the legislation is consistent with this policy - in a sense. The legislation seeks to target what may be considered the core of the international business sector as follows:
1. banking business;
2. insurance business;
3. fund management business;
4. finance and leasing business;
5. headquarters business;
6. shipping business;
7. holding company business;
8. intellectual property holding business;
9. distribution and service centre business; and
10. such other activities as the Minister may by order prescribe to be relevant activities
WHAT IS THE ECONOMIC SUBSTANCE TEST?
In examining the core business of the entity, a resident company meets the economic substance test in relation to the activities identified in the legislation in connection with the following circumstances:
1. where the company is directed, managed and controlled in Barbados in relation to that activity;
2. having regard to the level of relevant activity carried on in Barbados there is an adequate number of employees in relation to that activity who are physically present in Barbados, whether or not employed by the resident company or by another entity and whether on temporary or long-term contracts;
3. there is adequate expenditure incurred in Barbados;
4. there are adequate physical assets in Barbados;
5. the company conducts its core-income generating activities in Barbados;
6. and in the case of Barbados core-income generating activity carried out for the relevant company by another entity, it is able to monitor and control the carrying out of that activity by the other entity
WHAT HAPPENS WHEN THE TEST IS NOT MET?
Where the Director determines under section 7 that a resident company has failed to meet the economic substance test for a financial year, the Director must within 21 days of the date of that determination
a. issue a notice to the company notifying it that he has determined that the resident company does not meet the economic substance test for that year;
b. state the reasons for that determination;
c. state the amount of penalty imposed on the company and the date from which the penalty is due, being not less than 28 days after the issue of the notice;
d. advise what action he considers should be taken by the company to meet the economic substance test.
The Director may impose a penalty not exceeding $300 000 payable within 30 days of the date of notice of the imposition of the penalty.
Fundamentally this legislation was implemented in Barbados in order to satisfy the Organisation for Economic Cooperation & Development. As such it is not grounded in any Barbados policy mandate. The legislation therefore does not sit right within the legal framework of Barbados. It is early days yet as we wait to see how it will be enforced.
Barbados like many other jurisdictions which are considered to be low tax have implemented a similar piece of legislation
Barbados' Treaty starts with Europe as it was a British Colony. DTAs exist with the United Kingdom, Finland, Norway, Sweden and Switzerland. Barbados also has treaties with Canada and the United States of America. Within the Caribbean there is a CARICOM Double Taxation Agreement. as well as an agreement with Cuba. In Africa Barbados has agreements with Rwanda and Botswana. Further afield Barbados has negotiated an agreement with China.
The full list includes Austria, Bahrain, Botswana, Canada, CARICOM, China,, Cuba, Cyprus, Czech Republic, Finland, Iceland, Italy, Luxembourg, Malta, Mauritius, Mexico, Netherlands, Norway, Panama, Portugal, Qatar, Rwanda San Marino, Seychelles, Singapore, Spain, Sweden, Switzerland, UAE, United Kingdom, United States. of America and Venezuela.
Barbados is a nation which fully embraces its role in the international community. Its membership includes CARICOM, the Organisation of American States, the United Nations and the World Trade Organisation.
Barbados has modern business legislation, much of it based on English and Canadian law.
The Financial Services Commission and the Central Bank of Barbados are the key regulatory authorities for financial services.
Barbados' infrastructure is strong and implements the recommendations coming out of such bodies as the Financial Stability Forum, the OECD on tax matters as well as the Financial Action Task Force. .