Captives in Barbados: what’s in it for the US?

Barbados entered the captive insurance world in 1984, around the same time as it signed a Double Taxation Agreement (DTA) with the US. This agreement exempted the Excise Tax (4 percent for direct written premiums; 2 percent for reinsurance premiums) for insurance or reinsurance premiums being paid by a US company to a re/insurance company outside of the US.

It gave Barbados an advantage over other offshore domiciles that were subject to the Excise Tax.

This resulted in several US-owned insurance companies incorporating in Barbados—and therefore quick industry growth. Indeed, some companies now on the New York Stock Exchange, such as XL Insurance, started in Barbados. In those days, US-owned insurance companies formed most of the insurance companies incorporated in Barbados.

In 1991 the US signed a protocol to the DTA with Barbados, removing the Excise Tax benefit. After that, we saw a slowdown in the new incorporations of US-owned insurance companies. Meanwhile, with the Barbados/Canada Treaty in place, the growth of Canadian-owned insurance companies continued—in fact, most companies licensed in Barbados are now Canadian-owned insurance companies.

Barbados is well placed to attract these new opportunities for several reasons, including: Stability: Barbados has a long history of political, social and economic stability. Established on 26 June, 1639, the Parliament of Barbados is the third oldest legislature in the Americas and is among the oldest in the Commonwealth of Nations.

Independent: Barbados became independent from the UK in 1966 and legislators from the UK cannot influence our legislation—unlike in domiciles that are still attached to the UK.

Reputation: Barbados has fared well from the increased scrutiny and regulation of financial services by international organisations such as the Organisation for Economic Co-operation and Development (OECD). The OECD itself has determined that the Island’s regulations, tax and other bilateral treaties work effectively to provide adequate transparency and exchange of information to its trading partners. It has earned a reputation as an appropriately regulated jurisdiction.

Workforce: A well-educated and skilled workforce, teamed with a developed infrastructure and a modern telecommunications system, provides significant benefits to international corporations and individuals alike.

Cost-effective: The formation and licensing of insurance companies is cost-competitive and efficient. The overall cost of doing business in Barbados is less than in many other international jurisdictions.

Competitive tax rates: Insurance companies are taxed based on the licence they hold. A class 1 licence (a company insuring related party business) is taxed at 0 percent on its earnings and pays an annual licence fee of $12,500. A company with a class 2 licence (a company insuring third party risk), is taxed at 2 percent on the company’s net earnings and pays an annual licence fee of $25,000.

Tax treaty network: Barbados has a well-developed tax treaty network which provides attractive incentives and eliminates double taxation. If US-owned insurance companies in Barbados can meet the requirements of the US Tax Code, they may receive savings on withholding taxes on dividends, which countries without a tax treaty cannot benefit from.

Solvency: The solvency requirements in Barbados remain unchanged and sensible. They are as follows:

First year: Assets must exceed liabilities by $125,000

After first year:

• Premium income of $750,000 or less: Assets must exceed liabilities by $125,000
• Premium income up to $5 million: Assets must exceed liabilities by an amount equal to 20 percent of the previous year’s premium income
• Premium income above $5 million: Assets must exceed liabilities by an amount equal to 20 percent of the previous year’s premium income for the first $5 million in premium income, plus an additional 10 percent of premium income earned above $5 million
• For long-term insurance business, the solvency requirement is that assets must exceed liabilities.

Capital: The minimum capital for an insurance company writing all its risk outside of Barbados is $125,000.

As part of the OECD initiative, 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. 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 to transfer skills locally. Therefore, Barbados welcomes the introduction of substance requirements as part of the OECD initiative to end exploitative tax practices and create a level playing field worldwide.

In fact, 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.

Due to a beneficial exchange rate and a larger local workforce, the cost of doing business in Barbados remains favourable relative to our competitors who have much stronger currencies and must pay foreign workers higher salaries to encourage them to relocate.

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

Our Financial Services Commission licenses Barbados’ management companies that are qualified to provide captive insurance management services to licensed insurance companies. This helps to ensure the provision of quality services.

In addition, the “Big 4” accounting firms have offices in Barbados staffed with locals. The presence of these well-known companies deepens the level of trust that shareholders can place in an audit opinion. Our banking sector is dominated by three of Canada’s largest banks, some of which have been doing business in Barbados for more than 100 years.

It is also worth remembering that Barbados has built international relationships through an extensive network of 40 DTAs which provide benefits to our partners and are a lot stronger than the Tax Information Exchange Agreements seen in competing jurisdictions. Barbados has DTAs with several European countries including the UK and Spain, as well as with Canada and the US.

Under section 831 (enacted in 1986), stock and mutual property and casualty insurance companies compute their tax as provided in IRC section 11, subject to the special rules for calculating their taxable income.

Under section 831(b), small property and casualty insurance companies that meet the requirements, including a premium limitations amount, may elect to be subject to an alternative tax based only on taxable investment income. Under this alternative tax, the underwriting profits of the electing insurance company are exempt from federal income tax.

As a result of perceived abuses, Congress changed the requirement for qualification under section 831(b) effective for taxable years ending after December 31, 2016, and at the same time increased the premium limitation amount now requiring an electing company to:

1. Be an insurance company;
2. Have net written premiums for taxable years that do not exceed $2.2 million;
3. Meet the diversification requirements; and
4. Make an election to be taxed under section 831(b).

The diversification requirements were added by Congress as anti-abuse measures to address estate and gift tax evasion issues. Barbados supports the changes that were made by congress so that any 831(b) incorporation does not carry out activity that could bring Barbados’ good name into question by attracting such entities.