Barbados: Double Tax Treaties

Introduction

Barbados has a small number of double tax treaties, but the US and Canadian treaties in particular are extremely favourable for certain types of investor.

As of May 2013, Barbados had 31 tax treaties, including with the following countries: The Caribbean Common Market (CARICOM), the United States, Canada,Austria, United Kingdom, Finland, The Netherlands, Norway, Malta, Sweden, the Seychelles, Switzerland, Cuba, Venezuela, China, Mauritius and Botswana. Treaties with Bahrain, Qatar, Portugal and San Marino are not yet in force. Discussions between Barbadian and Japanese officials over the possibility of a tax agreement took place in August 2006, and Barbados has also explored negotiations for a double tax treaty with India.

Barbados inherited treaties with Switzerland, Sweden, Norway and Finland from the UK, but only the Swiss treaty survived - the other three were replaced with more modern treaties with low rates of withholding, tax-sparing provisions, and limitations on treaty-shopping. The Canadian treaty, dating from 1980 was extensively updated by a protocol signed in November, 2011. The protocol contains provision for the exchange of information and at the time of writing has not yet come into force.

The Finnish treaty has a 51% local ownership limitation of benefits rule, but IBCs and other offshore entities are specifically excluded from the rule, thus giving them access to treaty benefits until a protocol signed in November, 2011, comes into force. The protocol will exclude IBCs and other offshore entities from the benefits.

The Barbados/US tax treaty dates from 1984, and was accompanied by an exchange of tax information agreement (see Other International Agreements below). The treaty creates opportunities for 3rd country investors in US real estate, and is also attractive to US manufacturers. Many US investors are exempted from US accumulated earnings tax on Barbadian profits - this is a rare feature in US tax treaties. A protocol to the US treaty signed in 1991 lowered withholding rates and introduced new 'limitations on benefits' rules.

The US treaty was further amended in 2004 in what was said to be an attempt to counter tax evasion. The second protocol to the 1984 treaty was co-signed by then US Treasury Secretary John Snow and Barbadian Industry and International Business Minister, Dale Marshall.

The protocol was ratified by the US Senate in November, 2004, although some tax experts expressed unease that certain new provisions have found their way into the treaty without being fully reviewed. Judith P. Zelisko, president of the Tax Executives Institute (TEI), whilst supporting the bulk of the new agreement, pointed to concerns over rules expanding the Limitations on Benefits provision to the US treaty network "without thorough analysis." However, Zelisko conceded that despite these reservations, "on balance we agree that ratification of the Barbados Protocol is in the best interest of the country and the business community".

A treaty with Malta entered into force in June, 2002.

A treaty with Mauritius was signed in September, 2004.

As a result of the treaty with China, signed in 2000, Barbados has emerged as the leading jurisdiction for offshore Wholly Foreign Owned Enterprise (WFOE) holding companies in China. Under existing law, payments of dividends by a WFOE to its foreign owners are free of Chinese withholding tax. Payments of interest to foreign lenders are subject to withholding at 20%, typically reduced to 10% under applicable tax treaties. However, where a taxpayer qualifies for benefits under the Barbados-China treaty, the rates are 5% for dividends and 10% for interest.

According to the government of Barbados, the tax treaty with China and its utility in attracting foreign investment to Barbados represents an endorsement of its strategy to expand opportunities for international and pan-Caribbean business in Asia.

In an effort to prevent 'treaty shopping' the Chinese Authorities and Barbados signed an amendment protocol in February, 2010, which has applied since January 1, 2011. Since that date a withholding tax of 5% applies to ownership of 25% or more. Dividends relating to an ownership of less than 25% are subject to a 10% rate.

Technical discussions on the opening of negotiations have also been held with the Republic of Ireland, Brazil and South Africa, while Barbados has also explored the possibilty of new agreements with Slovakia.

In December 2009, the governments of the Netherlands and Barbados signed a protocol which amended the convention on the avoidance of double taxation that they share, in order to quash tax treaty abuse.

The protocol in question amends the convention to prevent Dutch taxpayers from using the treaty to transfer dividends free of tax to a third country through the Caribbean territory.

Upon approval by both governments, the original treaty, in force since January 1, 2008, was thus revised. The new text also stipulates a tax rate of no more than 15% on dividends, and contains more stringent parameters on eligibility.

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