Understanding Economic Substance Presentation in International Business Units

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The presentation focuses on the Economic Substance Act (ESA), outlining the scope of resident companies under ESA, relevant activities requiring annual declaration, the Economic Substance (ES) test criteria, outsourcing possibilities, and the Reduced ES test for specific holding companies in Barbados. It emphasizes the importance of compliance with economic substance requirements for companies operating in Barbados.

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Uploaded on Jul 30, 2024 | 4 Views

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Presentation Transcript

ECONOMIC SUBSTANCE Presentation by the international business unit

SCOPE OF THE ESA A Resident Company for the purposes of the ESA includes: A company whether incorporated in Barbados or elsewhere or an SRL organised in Barbados or an association formed in Barbados (other than an association of underwriters) which is managed and controlled in Barbados A company incorporated outside Barbados and registered as an external company that is not regarded as a tax resident company in the jurisdiction of incorporation A company incorporated in Barbados but not tax resident in any other jurisdiction

RELEVANT ACTIVITIES A Resident Company has to file an Annual Declaration within 12 months after the last day of the end of each fiscal period as to, inter alia, whether it has carried on a relevant activity . Relevant Activities are listed as follows: Banking business Insurance business Fund management business Finance and Leasing business Headquarters business Shipping business Holding company business IP business Distribution and service centre business

ECONOMIC SUBSTANCE (ES)TEST A Resident Company that derives income from the carrying on of a relevant activity must satisfy the economic substance test in relation to that activity. To satisfy the ES test in relation to a Relevant Activity, a Resident Company must: Conduct its CIGA in Barbados Be directed, managed and controlled in Barbados in relation to that activity Having regard to the level of income derived from the relevant activity : Have an adequate number of full time qualified employees physically present in Barbados Have an adequate amount of operating expenditure incurred in Barbados Have adequate physical assets (i.e. maintaining a place of business or plant, property and equipment) in Barbados

OUTSOURCING A Resident Company may still satisfy the ES Test in relation to a relevant activity if its CIGA for that activity are conducted by any other person in Barbados and the Resident Company is able to monitor and control the carrying out of CIGA by that other person.

REDUCED ES TEST Single Purpose Equity Holding Company A Resident Company that only holds equity participations in other entities and only earns dividends and capital gains Barbadian Company A Resident Company which is controlled by residents of Barbados and that is not part of a Multi-National Group which is carrying on a relevant activity and deriving income solely from such relevant activity

HIGH RISK IP BUSINESS A Resident Company carrying on High risk intellectual property business is subject to a higher burden of proof in demonstrating that it maintains adequate economic substance in Barbados.

WHAT DOES ADEQUATE MEAN? What is adequate for each Resident Company will depend on the particular facts and circumstances of the company and its business activity. A Resident Company has to ensure that it maintains and retains records to demonstrate the adequacy of resources utilized and expenditures incurred.

WHAT ARE CIGA? CIGA are activities that are of central importance to a resident company and if carried on in respect of a relevant activity, must be carried on in Barbados. For each relevant activity, a Resident Company must conduct the appropriate elements of CIGA. For example, for finance and leasing business, CIGAs include: (i) agreeing funding terms; (ii) identifying and acquiring assets to be leased (in the case of leasing); (iii) setting the terms and duration of any financing or leasing; (iv) monitoring and revising any agreements; (v) managing any risks

DIRECTION AND MANAGEMENT To be considered to be directed and managed in an appropriate manner in Barbados will require: that the Resident Company s Board of Directors have the necessary knowledge and expertise to discharge the duties of the Board that the Board of Directors meets in Barbados at an adequate frequency given the level of decision making required, and that there is a quorum of the Board of Directors physically present in Barbados at such meetings that the minutes of such board meetings record the strategic decisions made at these meetings; and retention of all board minutes and records in Barbados

FAILURE TO SATISFY THE ES TEST The penalty for failure to satisfy the ES Test for a relevant activity in relation to a fiscal period is an amount not exceeding $300,000.00 A financial penalty may also be imposed for a failure to satisfy the ES Test for a further fiscal period Failure to satisfy the ES Test for 2 consecutive years may result in the Resident Company being struck off the Register of Companies.

KEY DATES & NEXT STEPS The Law and accompanying Regulations will provide a timetable for compliance and reporting. FILING BEGINS: January 1, 2020 FILING BEGINS: January 1, 2021(Grandfathered) Reporting: within 12 months after the last day of the end of the fiscal period It is important to note that the international standards emanating from the OECD and the EU with respect to economic substance will continue to develop and consequently the Barbados ES Law and Guidance will evolve accordingly.