BARBADOS

BARBADOS: AN ATTRACTIVE DOMICILE FOR CAPTIVES

Barbados is ahead of the curve on many of the reasons a captive owner would choose a domicile, meaning an upward trajectory for the Caribbean island, writes Geralyn Edward on behalf of Invest Barbados.

“Engaging Barbados’ local workforce ensures that long-term relationships can be built with clients.” WAYNE FIELDS, DGM

When insurance industry professionals discuss the trending captive insurance segment, invariably the nation of Barbados emerges as one of the increasingly dominant domiciles. Its competitiveness profile in this area is rising based on confidence by its major registrants from Canada and the US.

The country has been operating in the captive insurance segment for about four decades and is ranked no. 7 among the global players. It is important to note, however, that Barbados continues to be open to all forms of international insurance business even as its dominance grows in this niche.

The Eastern Caribbean country’s involvement in the traditional insurance market is a canvas of rich history dating back to 1840. That year was the formation of what has matured into the multibillion-dollar insurance and financial services firm Sagicor Financial Company, which trades on the Toronto Stock Exchange.

This bit of history is a key backdrop because it begins to explain why the jurisdiction has welcomed and fulfilled the substance requirements implemented by the Organisation for Economic Co-operation and Development (OECD) for captives.

For many other competitors, economic substance standards are a barrier to expansion of their captive insurance sectors.

“Barbados provides a key gateway to international business activity in the burgeoning Latin American market.”

High skills

Over the years, the island has produced a cadre of top-flight professionals in many of the key insurance requirements such as legal, financial, actuarial, accounting, management and compliance.

Putting this in context is Wayne Fields, the president of DGM, and a veteran provider of captive management services in Barbados.

“Insurance companies operating in jurisdictions such as Barbados, which offer competitive tax rates, must implement substance legislation to prevent the use of shell companies being set up to exploit low taxation,” Fields explains.

“This initiative is in keeping with Barbados’ modus operandi. One of the main drivers of Barbados’ entry into the insurance industry was to create jobs as well as transfer skills, locally. Therefore, Barbados welcomed the introduction of substance requirements as part of the OECD initiative to end exploitative tax practices and create a level playing field worldwide.

“With the implementation of substance requirements, we now have a major opportunity and advantage over many of our competitors. This belief is founded on our historical emphasis on skills transfer to our local people rather than relying solely on the importation of a foreign and transient workforce to fill these positions.

“The cost of doing business in Barbados remains favorable relative to our competitors which have much stronger currencies and must pay foreign workers high salaries to encourage them to relocate,” he added.

“Furthermore, engaging Barbados’ local workforce ensures that long-term relationships can be built with clients, avoiding the constant churn that results from a transient workforce.”

As Justin Cole, vice president of management services with DGM Captive Management noted during a Invest Barbados discussion on the local captive insurance market, the OECD’s introduction of its base erosion and profit shifting (BEPS) initiative in response to low tax (such as Barbados) and no-tax jurisdictions did not represent a seismic shift for the island.

In fact, Barbados was viewed as ahead of the curve, as in practical terms, its global business sector was already fulfilling the mind and management requirements which the OECD implemented.

“The Barbados insurance sector has always prided itself on being a jurisdiction with mind and management on the ground, which is always a consideration for the Canadian companies.

“Barbados is very used to this and, as a country, we welcome the BEPS initiative in our existing model,” Cole remarked.

Barbados’ legislation on economic substance states that “a resident company meets the economic substance test in relation to the relevant activity carried on by the company, where it conducts its core income-generating activities in Barbados and the company is directed, managed, and controlled in Barbados in relation to that activity”.

A prime choice

In an environment where there are many jurisdictions from which to choose to establish a captive, one might ask what else makes Barbados a prime choice.

Barbados has a competitive tax regime with the maximum corporation tax rate of 5.5 percent. Capital gains are not subject to tax in Barbados.

Although it is efficiently regulated by the Financial Services Commission (FSC), the insurance market in Barbados is designed to be relatively simple for incorporation and the tax rates range from 0 to 2 percent depending into which of the three classes the incorporated company falls.

Establishing a captive is relatively cost-effective with an annual registration fee for core companies of US$25,000. The minimum capital requirement for an insurance company writing all its risk outside of Barbados is US$125,000.

The global insurance market is generally regarded as one that is hardening with rising rates that are becoming more prohibitive. Furthermore, a slew of risks is no longer being covered or new limits are being imposed. Under these conditions, the advantages of self-insurance are becoming more apparent and appealing.

The starkest examples have arisen from the ongoing COVID-19 pandemic and many of its related risks such as cyber terrorism and supply chain issues have reinforced the reasons for more corporates to examine jurisdictions such as Barbados to establish captives for their unique requirements.

“Leading insurance companies have sought to limit their exposure to ransomware losses, and as a result, restrictions in coverage and the increase in pricing have created the perfect opportunity for captive use,” notes Barbadian Nicholas Crichlow, senior vice president at Marsh Management Services.

By mid-2021 Barbados had almost 300 captives registered, at least 145 of them with Canadian parents. The Canadian captives especially have relied on the strong and highly effective double taxation agreements (DTAs) that Barbados has negotiated over the years, to their advantage.

That extensive network of treaties with 40 countries has proven its worth. Many competitors have chosen the route of tax information exchange agreements, and although useful, they are not viewed as being as comprehensive as DTAs.

Barbados provides a key gateway to international business activity in the burgeoning Latin American market. It has established DTAs with Mexico, Panama, and Venezuela. A Tax Information Exchange Agreement with Colombia is awaiting ratification.

Solvency too

Another significant consideration in Barbados’ favor is its sensible and consistent solvency requirements. In the first year, assets must exceed liabilities by US$125,000. After the first year, where premium income is US$750,000 or less, the assets must exceed liabilities by US$125,000. With premium income up to US$5 million, assets must exceed liabilities by an amount equal to 20 percent of the previous year’s premium income.

For companies with premium income exceeding US$5 million, assets must exceed liabilities by an amount equal to 20 percent of the previous year’s premium income for the first US$5 million in premium income plus an additional 10 percent of premium income earned above US$5 million.

Apart from the legal, regulatory and resource capacity available on the island for companies seeking to establish captives, Barbados is a great place to live and work.

An aspirational destination for hundreds of thousands of annual holiday travelers, its appeal to returning visitors has spawned a vibrant second home real estate market.

During the COVID-19 pandemic, its innovative Welcome Stamp Visa program attracted over 3, 000 applicants to the 12-month live and work initiative. By the end of 2021, the Barbados government had approved 2,163 applications from individuals and families who wanted to escape the strictures of the pandemic by living and working from the Caribbean island under the hassle-free project.

Applicants have come mostly from the US, the UK, Canada, Nigeria, and India, with occupations in fields of technology and communication, marketing, finance, manufacturing, education and training, law, distribution and logistics, and public administration.

Barbados is a stable parliamentary democracy, the world’s newest republic, and remains a member of the British Commonwealth of nations.

Its well-educated workforce, developed infrastructure, modern telecommunications and utilities network combine to offer significant benefits to both individuals and corporations.

Of the future for the captive insurance sector, there is consensus among the experts in the field that Barbados remains on a trajectory for steady growth. Canada, a reliable mainstay, is expected to continue to lead the expansion in this market for Barbados, while Latin America with its expanding conglomerates is set to contribute to the surge.

Moreover, the global minimum tax rate, which is imminent, is unlikely to halt Barbados’ rise in the captive insurance market. There is general agreement among industry professionals that the captive sector’s resilience will hold. This is based on the fact that these entities are established, not for tax purposes, but for risk mitigation, thus providing a shield for these companies.

To find out more visit: www.investbarbados.org

Geralyn Edward is a Barbadian business writer and communications specialist. This article is submitted on behalf of Invest Barbados.

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