Barbados enacted the Companies (Economic Substance) Act, 2019-43 (CES Act) on November 27, 2019.
This law was enacted in response to the requirements of the Organization for Economic Cooperation and Development (OECD) and the European Union (EU) to prevent tax avoidance.
A resident company is required to file an Economic Substance Declaration (“declaration”) in the prescribed form annually within twelve (12) months after the last day of the end of each fiscal period.
The CES Act and its Regulations provide the requirements that all resident companies that carry on a relevant activity must satisfy by filing the Economic Substance Test (ES Test) in relation to the relevant activity it carries on and from which it derives income.
A resident company is defined in the CES Act as a company, whether incorporated in Barbados or elsewhere, or a society with restricted liability organized in Barbados, or an association formed in Barbados, other than an association of underwriters, which is managed and controlled in Barbados.
It is also defined by a company incorporated outside of Barbados, that is registered in Barbados as an external company that is not considered a tax resident company in the jurisdiction of incorporation; or
And it is also defined by a company incorporated in Barbados as an entity, but which is not tax resident in any other jurisdiction.
Not Considered a Resident Company
There aren’t considered any unincorporated body or association which does not have separate legal personality, including a general partnership and a limited partnership, a trust, a company (or entity) that is tax resident outside of Barbados and a public Director.
Tax resident outside of Barbados
A company incorporated in Barbados is considered a tax resident outside of this jurisdiction if it is subject to income tax from a relevant activity in another jurisdiction that it is not Barbados.
A company incorporated outside of Barbados and registered in Barbados as an external company, is not considered a resident company if it is tax resident outside of Barbados.
Proof of tax residence: a company stating to be tax resident outside of Barbados is required to provide evidence of its tax residency and that has submitted its tax return to the relevant authority in the other jurisdiction.
Liquidation and Cessation of Business Activity
As long as a resident company exists, it will continue to be subject to its obligations under the CES Act.
It will be required the reporting of any period during which the resident company earns income derived from carrying on relevant activities.
The fact that a company is in the process of liquidation does not exempt it from the filing of the ES declaration.
- Fund Management
- Finance and Leasing
- Holding Company
- Intellectual Property
- Distribution and Service Centre
Economic Substance Test Requirements
If a resident company carries on a relevant activity, then it must satisfy the following requirements in relation to that activity and from which it derives income:
- Companies should be directed, managed and controlled in Barbados.
- The Board of Directors of the company should hold meetings in Barbados at an adequate frequency considering the amount of decision-making required and there must be a quorum of directors physically present.
- The minutes of the board meetings record the making of strategic decisions and such minutes and records are kept in Barbados.
- Core income-generating activities (CIGA) are undertaken in Barbados according to relevant business activity.
- Adequate number of local employees and qualified full-time employees according to the activity in Barbados.
The substance guidelines do not specify a minimum/maximum number of full-time employees for any relevant activity.
Directors can account for a fraction of a full-time employee based on the time commitment of the role in relation to the relevant activity.
- Adequate operating expenditure incurred in Barbados.
- Adequate physical assets in Barbados i.e. maintaining an appropriate place of business or plant, property and equipment.
Outsourcing of Core Income-Generating Activities (CIGA)
A resident company is permitted to outsource its CIGA. However, the resident company must be able to monitor and control the carrying out of the CIGA and those activities must be undertaken in Barbados.
Single Purpose Equity Holding Company
A Single Purpose Equity Holding Company is a resident company that only holds equity participations in other entities and only earns dividends and capital gains.
A resident company meets the criteria to be considered as a Single Purpose Equity Holding Company when it passively receives income from that activity alone.
If a resident company meets the criteria to be considered as a Single Purpose Equity Holding Company, the placing of dividend monies received on a deposit or using them to acquire and passively hold other securitiessuch as government bonds, will not constitute a “relevant activity” and therefore the company will still be considered as a Single Purpose Equity Holding Company.
Reduced Economic Substance Test
A resident company that is a Single Purpose Equity Holding Company is subject to a reduced Economic Substance test if it complies with all applicable filing requirements under the Companies Act, Cap. 308, Societies with Restricted Liabilities Act, Cap. 318B, and the Income Tax Act, Cap. 73.
Also, if it has adequate human resources and adequate physical assets in Barbados for holding and managing equity participations in other entities.
And it is also considered if it submits confirmation of its compliance with paragraphs (a) and (b) to the Director in the prescribed manner.
IP Holding Company
In relation to a high-risk intellectual property company, the Director of International Business must determine that the Economic Substance test was not met during a fiscal period unless the company provides sufficient information to satisfy the Director that the test was met.
Sufficient information is defined as information which demonstrates that the high-risk intellectual property company exercises a high degree of control over the development, exploitation, maintenance, enhancement and protection of the intellectual property asset.
Which high degree of control has historically been and is exercised by suitably qualified employees of the company who are physically present and perform their functions within Barbados.
Reporting Requirements – Filing of Economic Substance Declaration
A resident company is required to file an Economic Substance Declaration (“declaration”) in the prescribed form annually within twelve (12) months after the last day of each fiscal period.
The declaration and any additional documents must be filed by an officer of the company designated to handle all matters related to Substance, a corporate and trust service provider or any other appointed officer.
Information which must be filed together with the declaration includes the following:
- whether or not they are carrying on a relevant activity;
- whether or not they derive income from a relevant activity;
- amount and type of income by relevant activity;
- amount of operating expenditure by relevant activity;
- for IP holding companies: detailed business plans which demonstrate the commercial reason for holding the IP assets in the jurisdiction;
- if the resident company is carrying on a relevant activity, then it must determine whether or not all of the company’s income related to the relevant activity
- is subject to tax in a jurisdiction outside of Barbados and, if so, shall provide appropriate evidence to support the liability to tax as may be required by the Director; or
- is compliant with Economic Substance requirements in a jurisdiction outside of Barbados and, if so, shall provide appropriate evidence to support that Economic Substance as may be required by the Director;
- confirmation of whether any CIGA have been outsourced and if so, provide relevant details;
- employee information, including level of experience, type of contracts, qualifications and duration of employment;
- evidence that decision making is taking place within Barbados;
- whether it is beneficially owned or controlled by residents of Barbados
- the date of the end of its fiscal period.
Penalty for Non-Compliance
The penalty for failing to provide information on the declaration or if the information provided is deemed inaccurate is BBD 10,000 (USD 5,000).
The Director of International Business Unit may impose a penalty not exceeding BBD 300,000 (USD 150,000) in any subsequent year payable within 30 days of the date of notice of the imposition of the penalty.
However, if the resident company fails to meet the requirements of the test because it does not have an adequate number of employees physically present in Barbados, depending on the breach, the Director may issue a notice to the resident company to rectify the breach within 12 months of the date of the issue of the notice.
If the resident company fails to rectify the breach within the time given, the Director shall issue a second notice with the amount of penalty imposed on the company and the date from which the penalty is due, being not less than 30 days after the issue of the notice.
If the resident company fails to meet the Economic Substance test after two (2) consecutive years, the Director will notify the Registrar of Corporate Affairs to have the company struck off the register of companies.
A resident company that was in existence prior to the commencement of the CES Act must be in compliance beginning on January 1, 2019.
A resident company that was not in existence prior to the commencement of the CES Act must comply from the date on which the said resident company commenced the relevant activity.
Timeline for Grandfathered Resident Companies
A grandfathered resident company shall not be required to comply with the CES Act until January 1, 2021.
A grandfathered resident company must demonstrate that it is in compliance with the provisions of the Act from January 2, 2021.
If you need further information and/or assistance on how to file the declaration or the next steps to follow, OMC Group can provide this service by contacting us at [email protected].
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