For a long time, individuals have been incorporating international business companies (IBCs) in St Lucia and Barbados for international tax planning purposes to benefit from little or no corporate income taxes in those countries.

These IBCs structures also offered no withholding taxes (WHT) on certain payments, such as interest and management fees, to non-residents.

It is for these reasons why St Lucia and Barbados were ideal jurisdictions to set up IBC structures.

Consequently, it came as no surprise when these countries were placed on the European Union (EU) blacklist in 2017 as being tax havens which offered “preferential tax regimes”.

Being on the EU blacklist has certain reputational issues for countries, as companies may be reluctant to do business in those blacklisted countries and certain EU development and investment funds may be restricted from being channelled or routed through entities in the blacklisted countries.

St Lucia and Barbados were removed from the EU blacklist in 2018, having made significant changes to their tax legislations in compliance with EU directives.

These tax changes will have serious impact on the way in which entities conduct business within these countries. Below are some of the changes that were made to the tax legislations of St Lucia and Barbados.

Changes in the tax

1. St Lucia has introduced a territorial tax system, whereby only income derived or sourced from St Lucia is subject to income tax.

2. IBCs incorporated from January 1, 2019 will be considered St Lucian resident companies for tax purposes and subject to corporate income tax at a rate of 30 per cent on St Lucian source income.

3. WHT will apply on certain payments (such as management fees and interest) from St Lucia to non-resident entities/individuals. The general WHT rate may be reduced by the presence of a Taxation Treaty.

4. IBCs incorporated prior to December 1, 2018 have been grandfathered and will continue to benefit from little or no corporate income tax and no WHTs on payments to non-residents until June 30, 2021.

St Lucia has also passed legislation for economic substance requirements. Therefore, companies incorporated in St Lucia will be required to maintain economic substance such as having sufficient employees and premises therein. The level of economic substance will depend upon

Changes in the tax legislation of Barbados

1. Barbados has abolished its IBC legislation which means that no more IBCs will be able to be incorporated therein.

2. The corporate income tax rate in Barbados is on a graduated scale from a rate of a minimum of one per cent to a maximum rate of 5.5 per cent, depending on the income of the company.

3. Barbados grandfathered IBCs incorporated prior to October 17, 2017 will continue to have the tax benefits previously afforded to IBCs until June 30, 2021.

4. Barbados has made significant changes to its WHT regime and has introduced Thin Capitalization Rules, which introduces conditions for the deductibility of interest expenses having regard to the company’s debt/equity ratio.

5. Companies with 100 per cent foreign earnings can apply for a Foreign Currency Permit to obtain exemption from exchange controls and certain taxes.

6. There are also economic substance requirements in Barbados, the level of which is dependent on the business activities taking place therein. Failure to comply with these requirements will result in penalties.

What does that mean for businesses operating in St Lucia and Barbados?

(a) Entities that are incorporated in St Lucia or Barbados are now required to meet economic substance requirements, which varies according to their nature of business. This means, the leaders in each company need to have an assessment done of what economic substance requirements would apply to them, whether such requirements are satisfied and if not decide on the steps necessary to satisfy them.

(b) Increase corporate income tax rates for IBCs operating in St Lucia. This means, the responsible officers in each company need to have an assessment done about whether the sources of their income are such that they would be subjected to income tax and whether there are more tax efficient alternatives available to them.

(c) WHT implications on certain payments from St Lucia or Barbados to non-residents.

(d) Persons who do business with, provide services to or own shares in companies within Barbados or St Lucia need to review the terms and recalculate the tax consequences and cash flow which will result from any payments they expect to receive from these companies.

(e) Thin capitalisation rules requirements in Barbados. This means, the responsible officers of each company need to review their debt equity ratio and its impact on the deductibility of interest for the purpose of calculating chargeable income as well as put in place monitoring mechanisms to avoid and alert officers of impending breaches.

The changes and impending changes are so far reaching that directors of St Lucian or Barbados IBCs may have some tough decisions to make based on the following questions they should ask themselves:

1. What tax rate will apply to the future director’s fees I will earn?

2. What tax rates will apply to payments which will be made to non-residents from a company resident in St Lucia versus a company resident in Barbados, taking into consideration the nature of such payments?

3. Am I informed well enough to carry out my fiduciary responsibilities?

4. What is the value of potential tax savings relative to the cost of getting advice to bring me up to speed?

5. When is the right time to act, given that some changes will take effect July 1, 2021?

Denzil Whyte, Vice-president and head of tax and Shadae Byfield O’Connor, tax manager and legal counsel, Sygnus Group. Denzil may be contacted at denzil@sygnusgroup.com and Shadae may be contacted via shadae@sygnusgroup.com or you can visit the Company’s website at sygnusgroup.com/. This article is for general information purposes only and does not constitute legal or tax advice.