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:
- banking business;
- insurance business;
- fund management business;
- finance and leasing business;
- headquarters business;
- shipping business;
- holding company business;
- intellectual property holding business; and
- distribution and service centre business.
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:
- direction, management and control of the relevant activity in Barbados;
- having regard to the level of relevant activity: an adequate number of employees who are physically present in Barbados, adequate expenditure incurred in Barbados, and adequate physical assets in Barbados;
- conduct of the core income generating activities in Barbados; and
- where its core income generating activities are carried out by another entity, the ability to monitor and control the conduct of that activity by the other entity.
In relation to the direction, management and control of the relevant activity in Barbados, this limb of the test will be satisfied where:
- meetings of the board of directors are held in Barbados with adequate frequency having regard to the amount of decision making required at that level;
- at meetings of the board of directors, there is a quorum of directors who are physically present in Barbados;
- the minutes of such board meetings record the making of strategic decisions at the meeting;
- directors possess the necessary knowledge and expertise to discharge the duties of the board of directors; and
- the minutes of all board meetings and records of the company are maintained in Barbados.
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.
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.