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New Protocol to Canada-Barbados Treaty - Barbados Regains Advantage Over TIEA Countries

Canada

A new protocol amending the Canada-Barbados Income Tax Agreement was signed by the contracting states on 8 November 2011. If the Protocol is implemented by Canada and Barbados, the main changes to the existing Treaty, which were well anticipated, will be the introduction of a modernised exchange of information article and the expansion of the list of persons currently covered by the limitation of benefit provision. The LOB Provision as it currently reads only precludes the application of the Treaty to companies that are entitled to special benefits under the Barbados International Business Companies Act or to companies entitled to any special tax benefit under any similar law enacted by Barbados. Taxand Canada explores the main advantages of the new tax treaty and how this will benefit businesses trading between Canada and Barbados.

There is some confusion resulting from the apparent requirement under the Barbados domestic tax laws that the IBC's central management and control must be in Barbados in order to be considered a resident of that country for domestic tax purposes. This is why some IBCs, in order to avoid the 2.5% tax rate, intentionally establish central management and control outside Barbados and do not file Barbados tax returns as Barbadian residents. That scenario, however, is quite different from the more common Canadian structures where the IBCs are filing tax returns in Barbados as domestic tax residents and voluntarily paying the Barbados taxes based on their view, and presumably the view of the Barbadian tax authorities, that their central management and control is in Barbados. In those situations where there is a dispute between the two contracting states as to the true location of the IBC's central management and control, the application of either the tie-breaker rule or the MAP Article should now be of significant relevance.

Taxand Canada discusses the new protocol in greater detail

Taxand's Take


The advantages of expanding a corporation's operations in Barbados are many. The tax rate for an IBC is 2.5% on up to the first US$5 million of income of the IBC for a year. The rate then drops by 0.5% for each successive US$5 million of income of the IBC for the year until it hits 1% for income in excess of US$15 million for the IBC for the year. Barbados has developed an excellent reputation with respect to its economic, political and social stability. In addition, Barbados has long been known to be investor-friendly while offering a favourable tax environment, a strong legal system and a stable financial sector. In this regard, the treaty network developed by Barbados is sophisticated and extensive, which offers stability and peace of mind to multinational entities. However, once the active business profits earned by an IBC get material, many Canadian companies prefer a structure utilising a TIEA country that has a zero tax rate.

Your Taxand contacts for further queries are:
Jim Wilson
T. +1 613 786 0196
E. james.wilson@gowlings.com

Tim Wach
T. +1 416 369 4645
E. timothy.wach@gowlings.com

Pierre Alary
T. +613 786 0132
E. pierre.alary@gowlings.com

Taxand's Take Author