As companies continue to make billions of dollars in profits, most of those earnings are taking flight to their new homes in the Eastern Caribbean in the form of tax-free dividends. With Prime Minister Andrew Holness looking to encourage the repatriation of assets back to Jamaica, let’s explore the reasons why everyone plants their flag in the Eastern Caribbean in the first place.

When a company wants to pay shareholders from its net profit, it typically declares a dividend to its shareholders. Dividends paid by a Jamaican company to an individual resident in Jamaica for tax purposes are taxed at 15 per cent in the form of a withholding tax. Note that someone doesn’t have to be a Jamaican citizen to be a Jamaican resident for tax purposes.

It doesn’t matter if someone owns one share, 10 per cent, 30 per cent, or all of a company. Any dividends paid are taxed at the 15 per cent rate; however, if someone sets up a company in another Caricom (Caribbean Community) jurisdiction and has that company receive those dividends, there is no tax applied on those dividends.

If a Jamaican company resident in Jamaica owns less than 25 per cent of a company, any dividends it receives from a Jamaican company are taxed at 15 per cent as well. If it owns more than 25 per cent of the company, then it receives its dividends tax free. Individuals who are non-residents of Jamaica for tax purposes and don’t benefit from a tax treaty of their home country are taxed at 25 per cent, while non-resident companies are taxed at 33 1/3 per cent.

However, if owning more than 25 per cent of a company results in there being no withholding tax on dividends, why set up business in St Lucia or Barbados?

Firstly, both jurisdictions have no inheritance or estate tax and have set up different forms of legislation regarding trusts, which are a popular vehicle to manage assets and wealth. When a Jamaican dies, there is transfer tax of 1.5 per cent applicable on the net market value of stocks, shares, and real estate owned by the deceased person, which is payable within a year after the person passed away. The tax-free threshold on a person’s estate is $10 million, which means that any estate above that point is taxed at the 1.5 per cent rate.

Secondly, the Caricom double taxation treaty effectively means that moving capital between jurisdictions becomes tax free. Even after the reform of the St Lucian International Business Companies (IBC) Act which resulted in all domestically earned income being taxed at 30 per cent, income earned from sources outside of St Lucia continues to remain tax free. Thus, instead of having to try and manage paying taxes at 25 per cent in Jamaica managing a holding company, for example, you can effectively have tax-free income through St Lucia. Barbados has a progressive income tax regime for IBCs, but the highest rate is currently 5.5 per cent, which will increase to nine per cent in 2025.

Thirdly, the privacy afforded by these jurisdictions are quite high. With both countries relying on the services provided to these holding companies, there is a high degree of secrecy present. As a result, only the memorandum and articles of association, the registered agent and office are public records, while the shareholders and beneficial owners, directors, and officers remain confidential. This confidentiality means that these companies must always keep current with their company filings. In Jamaica, annual company filings are around 40 per cent compliance, and while a company incorporated in another jurisdiction can own a Jamaican firm, all other information such as share classes and so on are public knowledge. Also, the speed offered in other jurisdictions to process transactions can be way faster than it can be in Jamaica.

These are all major hurdles that would be difficult for Jamaica to overcome in attracting assets back to Jamaican shores under indirect Jamaican ownership. Jamaica was just removed from the European Union’s (EU) list of non-cooperative jurisdictions for tax purposes in February 2023 after amending the Special Economic Zone (SEZ) Act. Barbados and St Lucia have had to make significant changes to their domestic framework after receiving significant pressure from the Organization for Economic Cooperation and Development (OECD). The Commonwealth of Dominica even abolished their IBC regime in January 2022 from that pressure. These pressures are being further compounded by a push for a minimum global tax of 15 per cent by OECD members.

Approximately 12 companies from 100 companies were responsible for 80 per cent or $29.74 billion in dividends paid on the JSE in 2022. Most of these companies have parent companies incorporated in St Lucia or Barbados, with other major shareholders being IBC’s or pension funds, which enjoy tax-free treatment.

Amongst these companies, GraceKennedy Limited is the most widely held entity, while Scotia Group Jamaica Limited (SGJ) and Sagicor Group Jamaica Limited (SJ) were amongst the most concentrated in terms of ownership. Thus most dividends paid by GraceKennedy to its wide and diverse shareholder base is taxed. In the case of SGJ, Scotiabank Caribbean Holdings Limited, which is based in Barbados, owns 71.7768 per cent of the company and would have received its $3.13 billion in dividends tax free. Sagicor Life Inc and Pan Jamaica Group Limited, which own 79 per cent of SJ, would have received a combined $4.96 billion in dividends tax free. Although Pan Jamaica Group is a Jamaican company, it already benefits from the substantial holding provision. By setting up that intermediary layer through Barbados, Bank of Nova Scotia isn’t exposed to a $1.04 billion withholding tax, while Sagicor Life Inc is not exposed to a $1.02-billion withholding tax.

With the continued consolidation of listed companies, dividend flows, aka profits, will continue to flow up to parent companies’ tax free for their desired use. The recent reorganisation of Mayberry Investments Limited to create Mayberry Group Limited (MGL) has come with an added benefit to shareholders since MGL is incorporated in St Lucia. As a result, shareholders now enjoy their dividends from the Mayberry-affiliated companies without a withholding tax. Jamaica effectively abolished withholding taxes on dividends in 2002 but was brought back as a 15 per cent withholding tax in April 2013, which exists to this day.