25 July 2019
The Business Companies (Economic Substance) Act, 2018 – 41 (the “ES Act”) was enacted in Barbados on 1 January 2019 in response to Action 5 of the OECD’s Action Plan on Base Erosion and Profit Shifting.
Barbados is not unique in this context and similar legislative enactments have been implemented in a number of leading international financial services jurisdictions such as Anguilla, the Bahamas, Bahrain, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, Turks and Caicos Islands.
In essence, the ES Act requires a Barbados resident company to satisfy an economic substance act in relation to any relevant activity carried on by it.
Who is a “resident company” and what is “relevant activity”?
A resident company is defined in the ES Act as a company whose business is centrally managed and controlled from Barbados. It is therefore focused on companies which are tax resident in Barbados and seek to enjoy the benefits of the corporate tax regime applicable in Barbados.
The ES prescribes 9 types of relevant activity as follows:
What is the economic substance test?
The test for economic substance prescribed in the ES Act has four limbs and requires the following in relation to the conduct of the relevant activity by a resident company:
In relation to the direction, management and control of the relevant activity in Barbados, this limb of the test will be satisfied where:
In relation to intellectual property holding business, as intellectual property is deemed to be vulnerable to a greater risk of profit shifting from high to low (or no) tax jurisdiction as a highly mobile activity, the application of the economic substance test is different from other categories of business. Please feel free to contact us to discuss this further, should this be relevant for your business.
What are the consequences of non-compliance with the ES Act?
The consequences of non-compliance with the ES Act or failure of the economic substance test are varied and include financial penalties, disclosure to the competent authority in the jurisdictions where the holding company, ultimate holding company and ultimate beneficial owner(s) reside, as well as enforcement action.
It is also important to note that a failure to provide information required by the regulator or provision of inaccurate information to the regulator attracts a penalty. A right of appeal exists in relation to penalties which have been ordered by the regulator.
What does this mean for you?
If you have, advise or are otherwise responsible for a Barbados resident company whose activities could constitute “relevant activity”, you should seek legal advice as to the extent to which the ES Act may be applicable. If the ES Act is applicable, a critical assessment should be made as to whether the company’s activities satisfy the economic substance test and steps taken to supplement substance in Barbados.
© FT Legal 2019