Like many international financial services jurisdictions, Barbados introduced Economic Substance legislation in response to the OECD’s framework on substantial activity factors. The scope of this legislation impacts the following business operations in the country:
- Finance and leasing
- Intellectual property
- Distribution/service centers
- Holding companies
- Fund management
The Barbados Companies (Economic Substance) Act passed in November 2019 requires that the ‘core income-generating activities’ of tax resident entities supporting the above business operations conducted from and within Barbados, must satisfy a substance test. The act also implements an annual reporting obligation for these entities. It is important to note that resident entities that carry on more than one activity are required to satisfy the economic substance test in relation to each relevant activity.
To meet Barbados’ Economic Substance test, a tax resident entity must:
- Be directed, managed, and controlled in Barbados
- The Board of Directors meets in Barbados at an adequate frequency to satisfy the amount of decision-making called for at that level
- A quorum of directors must be physically present at the meetings
- An exception has been made for meetings to be convened virtually under some conditions due to the Covid-19 pandemic
- The Directors have the necessary knowledge and expertise needed to discharge the duties of the Board
- Strategic decisions are made at the meetings and are reflected in the meeting minutes
- Meeting minutes and company records are kept in Barbados
- Have an adequate level of employees who are physically present in Barbados
- Have an adequate operating expenditure in the country
- Have adequate physical assets present in the country
- Conducts its core income-generating activities in Barbados
To show that an entity complies with the rules, an annual declaration to the Barbados Director of International Business must be submitted confirming that the entity meets the economic substance test. The annual declaration should be supported by documentary evidence. These documents must be kept by the company and provided to the Director for inspection when requested.
A ‘tax resident’ entity is defined as:
- A company, society with limited liability or association incorporated or organized in Barbados or elsewhere, that is managed and controlled in Barbados.
- A company incorporated outside Barbados, that is registered in Barbados as an external company and is not considered a tax resident of the country where it was incorporated.
- A company that is incorporated in Barbados and is not a tax resident in any other country.
The act also outlines fines for non-compliance. Failure to meet the reporting requirements may incur a penalty of up to US$150,000 per year missed. There is also a penalty of US$75,000 for withholding or providing inaccurate information. It is expected that Barbados' regulators will revise the act to include the ability for the Registrar to strike off any non-compliant entities.
For more information on meeting Barbados’ Economic Substance requirements and ensuring the compliance of your international entities, contact a CT representative at (844) 322-6993 (toll-free U.S.).