Legislation for the incorporation of IBCs were first enacted in 1967, but it was not until the decade of the eighties that any substantial growth was seen in the sector. The present governing legislation is the IBC Act of 1991.
An IBC is a corporation which by virtue of its incorporation under the Companies Act of the Laws of Barbados (which Act is based on the Canadian Business Corporations Act), is resident in Barbados. It must consist of the following key characteristics:
- Not more than 10% of its shares are owned by Caricom (Caribbean) residents.
- It carries on the business of international trade or manufacture in goods or services for the sale or benefit of residents outside the Caricom area.
- The Company is licensed under the Act.
BENEFITS OF AN IBC
No withholding tax is levied on dividends, interest, royalties, rent or management fees paid to another IBC or to a non resident of Barbados. The purchase or sale of foreign assets, including real estate or on the transfer of shares in an IBC is exempt from stamp duty or other tax as long as the transfer does not involve a Barbadian resident.
IBCs are exempt from Exchange Control regulations and may import equipment and raw materials required for its business, free of all duties.
There are no minimum capitalisation rules for an IBC while such companies are exempt from the requirement of filing annual financial statements with the local Registrar. The books and records of the Company may be kept in a foreign currency.
Any information disclosed on the application for a licence is treated with confidentiality while the Act makes provision for a guarantee of benefits under the IBC Act for a period of 15 years.
Another feature of the Act is that it allows for dual residency of IBCs. This facilitates the setting up of a branch that becomes resident when registered in Barbados. Such a branch is taxed only on branch profits arising in Barbados.
Once an IBC is granted a licence to operate, it is taxed at the following concessionary rates:
(a) 2.5% on all profits and gains up to BDS$10,000,000;
(b) 2% on all profits and gains exceeding BDS$10,000,000 but not exceeding BDS$20,000,000;
(c) 1.5% on all profits and gains exceeding BDS$20,000,000 but not exceeding BDS$30,000,000.
(d) 1% on all profits exceeding BDS$30,000,000
To incorporate such a company the following information is needed:
1. The proposed name of the company and an alternative.
2. The names, addresses and occupation of the Directors.
3. The address of the registered office.
After incorporation, application has to be made for an IBC licence. To obtain the following must be submitted:
1.The proposed business of the company.
2. The names and addresses of the shareholders and the proposed percentages that they will be holding.
The costs of incorporation (listed in US dollars) are set out below.
Incorporation of the company, provision of By-Laws and the holding of the Organisational Meeting of the company - $1,500.00.
Registration fee for the company $375.00 Miscellaneous expenses $150.00-$250.00 Obtaining an IBC licence $100.00 (this is an annual fee)
Provision of a registered office and secretarial services to the company cost in the vicinity of $1,500.00 per year. The services of a local director can be provided at a cost of $1,500.00 per year.
SOCIETIES WITH RESTRICTED LIABILITY
On January 2nd 1996 the new Societies with Restricted Liability Act 1995 was proclaimed bringing into force legislation that allowed for another form of business association in the rapidly developing financial sector of Barbados.
An SRL, as the entity is known, is neither a company nor a partnership but rather an entity which is designed to take advantage of the significant benefits that can be achieved in the United States through the use of hybrid entities, namely non-US entities which are characterised under local legislation as Corporations but which are treated as partnerships under US legislation for US tax purposes. It is similar in many respects to the Limited Liability Companies that are well utilised in civil law jurisdictions.
An SRL has the following characteristics:
- A maximum of 50 years duration
- Limited liability
- The legal personality of an individual
- Restriction on the right of transfer of quotas in the society
- Ability to apply for and be granted exempt status that will allow it to benefit from special tax concessions.
Should an SRL elect to be treated as exempt then the following benefits are available.
- A sliding rate of tax from a maximum of 2.5% to 1%.
- Exemption from all withholding taxes.
- Tax credit on taxes paid outside Barbados but only for an amount that will reduce the tax payable in Barbados to the 1% maximum.
- The ability to import free of duty machinery or materials for use in the business.
- The ability to pay 35% of the income of a needed foreign employee in foreign currency.
An SRL will qualify as a partnership for US tax purposes if it fails to satisfy two of four corporate characteristics, the four being continuity of life, centralised management, limited liability and free transferability of interest in the society. The two that the Barbados SRL clearly lack are continuity of life and lack of free transferability of interest.
NON-CONTINUITY OF LIFE
Under the legislation, there is a restriction on the life of an SRL of up to fifty years after which dissolution is automatic. However, at least one year before the period fixed for the duration of the society, the society must file a statement of intent to dissolve with the Registrar.
Dissolution may also automatically occur, if the Articles do not prohibit, on the death, retirement, resignation, expulsion, bankruptcy or insolvence of a member. Both of these provisions are anathema to the status of a Corporation.
Restrictions on the Free Transferability of Interests
This is the second corporate characteristic that the SRL lacks - the inability for the "quotas" owned by members to be freely transferred like the shares in a company. The legislation provides in sections 14(5) and 14(6) as follows:
Section 14(5) - A member may transfer his quotas in the manner provided in the by-laws, but the transferee shall not became a member of, participate in the management of the business and affairs of the society unless all of the other members of the society unanimously consent in writing to the transfer.
Section 14(6) - A transferee referred to in subsection (5) who does not become a member of the society is only entitled to receive dividends or other compensation by way of income and the return of contributions to which the transferor would, but for the transfer, been entitled.
Even though the legislation provides that on a purported sale the new owner is entitled to receive dividends, the fact that he is not entitled to participate in management without the unanimous consent of the other owners strikes against free transferability.
TYPES OF SRL
The Act provides for the formation of two types of SRLs namely an "exempt society" or a "non-exempt society".
Exempt SRLs are designed for use in international transactions and are treated as IBCs for the purposes of taxation and other concessions. The rate of tax is similar to that imposed on an IBC namely on a reducing basis from 2.5% to 1%. SRLs are precluded from holding or acquiring land in Barbados other than as leasehold land and like IBCs they are precluded from transacting business with residents of Caricom.
Non-Exempt SRLs unlike IBCs can be used to transact business with Caricom and indeed within Barbados. The society is taxed at the normal corporate rate in Barbados and as such, should be able to obtain any benefits available under Barbados' double taxation treaties which presently number seven including treaties with the United Kingdom, the United States and Canada.
It should be noted that participation by residents of the Caricom region including Barbados in SRLs is not restricted to 10% of the equity as with IBCs and Exempt SRLs a significant difference for local investors.
FORMATION AND FEATURES OF AN SRL
Both types of SRLs are formed in a similar manner namely by the filing of Articles of Organisation with the Registrar of Companies. A Certificate of Organisation is issued by the Registrar prior to the commencement of business. An exempt SRL must also obtain a licence before it commences its operations.
An SRL must have at least one manager who must be elected on an annual basis and two members. The manager's duties to the SRL are akin to a Director's duty to a company. The manager must, subject to any restrictions which may be imposed by the by-laws exercise the powers of the SRL and direct the management and business of the SRL. The manager must call an annual meeting at which the business akin to that held at the annual meeting of the shareholders of a company is to be conducted.
Evidence of participation in the equity of an SRL is signified by the holding of quotas in the society. Quotas are personal property but are not freely transferable as the ability to transfer is dependent on the consent of other members. An SRL may issue as many classes of quotas with such rights, privileges, restrictions and conditions as its Articles provide. Like shares in a company, there are of no par value and may not be issued until the full amount of the consideration has been paid in cash or property.
A Non-Exempt SRL must have a registered office in Barbados whilst an Exempt SRL must in addition have a registered agent in the island.
There is free corporate mobility under the legislation in that an SRL may migrate to Barbados or emigrate from Barbados if the jurisdiction it is moving to or from, has laws permitting same. With respect to emigration this will only be permitted by the Registrar if the emigration will not adversely affect its creditors or members.
Confidentiality is ensured in that disclosure of information is limited to that which is filed with the Registrar of Companies. Financial statements need to be filed annually.
BENEFITS OF USING SRLS
As adverted to before, the SRL is similar to the limited liability corporation which is in wide use in the United States and is therefore familiar as a means of tax planning to investors in the U.S. The attraction of SRLs is that members can use a corporation-type vehicle and yet receive partnership treatment, i.e. the flow through of income and losses to the members without taxation of the Company itself. On the one hand, members benefit from limited liability and on the other from direct attribution of profits for tax purposes on an individual basis rather than tax being imposed at corporate level prior to any distribution.
Under the legislation, it is possible to receive a written guarantee from Government that the Exempt SRL will obtain the benefits of the legislation such as the special tax concessionary rate for 30 years.
SRLs are required to file tax returns and financial statements in the same manner as companies. Those with year-ends prior to September 30th must file by the following March 15th, and all others by the following June 15th. Prepayment of tax is required and this is based on a percentage of the tax payable in the previous year's return.
The legislation allows for accounting books and records to be kept outside of Barbados, but adequate accounting records still need to be kept in the island to allow the managers to ascertain the financial position of the society with reasonable accuracy. Where the gross assets of the society or its Gross Revenues exceed US$500,000, a qualified local auditor must be appointed.
Government fees and licence $500.00 Professional fees with respect to the organisation of the SRL including the provision of by-laws and the holding of the organisational meeting $1,500.00
In addition to the above, some miscellaneous charges will be incurred depending on the amount and type of communication with the client.
For Exempt SRLs there is a yearly Government license fee of $100.00. The typical range on the island for the provision of annual services with respect to an SRL is as follows:
Corporate secretarial services $1,000-2,000 (including provision of a registered office) Provision of a local manager $1,000-2,000 Tax compliance services $1,000-2,000 Audit $2,500-7,500 Accounting $1,000-3,000
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.