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The establishment of businesses of substance that create jobs and contribute to economic activity has been a feature of Barbados’ international brand since the establishment of the international business sector, several decades ago. From inception, Barbados was deliberate in building its international business sector on the strong foundation of treaty-based agreements that included provisions for the exchange of information.
Investors choosing Barbados as a preferred business jurisdiction do so, among other key reasons, for its high reputation anchored on the tenets of compliance, transparency, and consistency. The OECD’s Global Forum, in its initial report published in April 2009, recognised Barbados as the only independent, Caribbean nation which had substantially implemented the internationally agreed tax standard.
Barbados continues its commitment to the implementation of global standards. Barbados is one of the first countries in the Caribbean to converge its local and international tax rates, making its tax system globally competitive, while bringing the country in line with the OECD’s Base Erosion and Profit Shifting (BEPS) Initiative. By implementing the new regime, Barbados has formalized and fulfilled its commitment to be fully compliant with the BEPS Action 5 addressing harmful tax practices
A resident company must satisfy the economic substance test in relation to any relevant activity carried on by it.
Relevant activities are defined as any of the following businesses
Banking
Insurance
Fund Management
Finance & Leasing
Headquarters
Shipping
Holding Company
Intellectual Property
Distribution & Service Centre
A company is considered to have met the economic substance test in relation to a relevant activity carried on by the company where
The company is directed, managed, and controlled in Barbados in relation to the relevant activity carried on:
The company’s board of directors meets in Barbados at an adequate frequency having regard to the amount of decision-making required at that level
There is a quorum of directors physically present in Barbados at said board meetings
Minutes of said board meetings record the making of strategic decisions of the company made at the meeting
The directors of the company have the necessary knowledge and expertise to discharge the duties of the board
The minutes of all board meetings and records of the company are kept in Barbados
The minimum number of directors that must be present at any meetings to make the proceedings of the meeting valid.
Having regard to the level of relevant activity carried on in Barbados
There is an adequate number of employees physically present in Barbados to support the activity whether employed by the company or by another entity and whether on temporary or long-term contracts.
There is adequate expenditure incurred in Barbados
There are adequate physical assets in Barbados
The company conducts its core-income-generating activities in Barbados
In the case of core income generating activity carried out for the relevant company by another entity, it is able to monitor and control the carrying out of that activity by the other entity
Understanding Core Income Generating Activities (CIGA) in Barbados
The Companies (Economic Substance) Act, 2019 (ESA) in Barbados mandates that entities conducting relevant activities demonstrate substantial presence and real economic activity within the jurisdiction. A critical component of this legislation is the requirement for entities to engage in Core Income Generating Activities (CIGA) within Barbados. Below, we explain what is meant by CIGA under the ESA.
What Are Core Income Generating Activities (CIGA)?
Core Income Generating Activities (CIGA) refer to the activities that are of central importance to a resident company in terms of generating income. These activities must be conducted in Barbados to meet the economic substance requirements. Each type of relevant activity has specific CIGA associated with it. Here are some general principles and specific examples for different business types:
General Principles of CIGA
Central Importance: CIGA are activities that are crucial for the generation of income within the entity. They are not peripheral or ancillary tasks but are at the core of the business’s operations.
Conducted in Barbados: To comply with the ESA, these activities must be carried out within Barbados. This ensures that the business has a substantial economic presence in the jurisdiction.
Direct Oversight and Control: Even if certain activities are outsourced, the company must maintain oversight and control to ensure compliance with the substance requirements.
Examples of CIGA by Business Type
1. Intellectual Property (IP) Businesses
Research and Development (R&D): Activities that advance scientific knowledge or develop new applications for existing technologies.
Product Design and Development: Creating and improving products that leverage the company’s intellectual property.
Brand Development and Management:
Activities related to enhancing and maintaining the value of trademarks and brands.
2. Finance and Leasing Businesses - Funding Decisions: Setting the terms and conditions for financing and leasing arrangements.
Loan and Lease Management: Monitoring and managing the execution of loan and lease agreements, including risk assessment and management.
Financial Reporting and Compliance: Preparing and managing financial reports and ensuring compliance with regulatory requirements.
3. Insurance Businesses
Underwriting: Evaluating and deciding the risk and premium for insurance policies.
Claims Processing: Assessing and processing insurance claims.
Risk Management: Activities related to identifying, assessing, and managing risks covered by insurance policies.
Key Requirements for Conducting CIGA
Adequate Personnel: The entity must have a sufficient number of qualified employees in Barbados to carry out CIGA. This can include hiring local staff or ensuring that existing employees are based in Barbados.
Physical Presence: The entity must have adequate physical presence in Barbados, which includes office space and other necessary facilities to perform CIGA.
Expenditure: The entity must incur adequate expenditure in Barbados proportionate to the level of activity. This means spending on resources, infrastructure, and personnel must be aligned with the scale of the business operations.
Specific examples
Intellectual Property (IP) Businesses
Example: A company holding patents and trademarks must actively manage and exploit these IP assets within Barbados. This includes activities like research and development (R&D), product design, and brand development.
How to Conduct in Barbados: Establish an R&D facility staffed with qualified researchers and developers. Conduct regular strategic planning meetings in Barbados to oversee IP management. Maintain proper documentation and minutes of these activities.
Finance and Leasing Businesses
Example: A company involved in leasing and financing operations should manage financial assets and liabilities, including funding and leasing transactions, from Barbados.
How to Conduct in Barbados: Set up a financial management office with experienced professionals in Barbados. Ensure financial decision-making, such as loan approvals and lease agreements, occurs within Barbados. Conduct regular board meetings with a majority of directors resident and physically present in Barbados.
Insurance Businesses
Example: An insurance company must handle underwriting, risk management, and claims processing within Barbados.
How to Conduct in Barbados: Establish an underwriting department that evaluates and approves insurance policies. Maintain a risk management team (with an in-house or outsourced local actuary) that regularly assesses and mitigates risks. Process claims and maintain customer service operations in Barbados.
Outsourcing CIGA
The ESA allows for the outsourcing of CIGA to service providers in Barbados, provided that:
Monitoring and Control: The resident company must retain the ability to monitor and control the outsourced activities.
Adequate Supervision: There must be adequate supervision to ensure that the service provider’s activities meet the substance requirements.
Documentation: Detailed records of the outsourced activities must be maintained to demonstrate compliance with the ESA.
Intellectual Property (IP) Businesses Example: Outsourcing some R&D activities to specialized firms.
Responsibilities: Ensure the outsourced firm operates under the company’s strategic direction. Maintain oversight through regular reporting and performance reviews. Document all outsourced activities and integrate them into the company’s operations.
Finance and Leasing Businesses
Example: Outsourcing loan processing or customer service functions.
Responsibilities: Monitor outsourced activities through regular updates and performance metrics. Ensure that the service provider operates under strict compliance guidelines. Conduct periodic audits and reviews to ensure adherence to standards.
Insurance Businesses
Example: Outsourcing claims processing or customer service to specialized agencies.
Responsibilities: Ensure that the outsourced agency adheres to the company's protocols and regulatory requirements. Maintain oversight through regular reporting and audits. Integrate outsourced activities into the company’s overall management framework.
Monitoring and Control Responsibilities
When outsourcing CIGA, the resident company must ensure:
Adequate Supervision: The company should have adequate supervision of the outsourced activities, with the service provider's resources in Barbados being taken into consideration when determining compliance.
Documentation: Maintain precise details of the resources employed by service providers, using timesheets or other evidence to verify employee numbers and activities.
No Double Counting: Ensure that employees' time and resources are not counted multiple times if services are provided to more than one resident company.
Compliance with Economic Substance Requirements
The company remains responsible for accurate reporting and compliance. Regular audits and reviews should be conducted to ensure that all CIGA, whether conducted internally or outsourced, meet the required standards set by the Barbados Economic Substance Act.
By adhering to these guidelines, companies can effectively manage their core income generating activities within Barbados while leveraging outsourcing options to maintain efficiency and compliance.
Conclusion
Core Income Generating Activities (CIGA) are essential to fulfilling the economic substance requirements in Barbados. By ensuring that these activities are conducted within the jurisdiction, companies can demonstrate substantial economic presence and compliance with local regulations. Whether conducted in-house or outsourced, maintaining oversight and documentation of CIGA is critical to meeting the legislative requirements.
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