Using Barbados to Protect Wealth: China Edition (Part 2)

18 January 2016

Securing wealth created by Chinese investors: Barbados Trust law

Barbados’ trust law is based on the principles of English common law, as varied by Barbados statute. It permits the creation of three broad categories of expressly created trust: the international trust, the offshore trust and the domestic trust.

An international trust carries features which are de rigueur for trusts established in leading offshore jurisdictions, such as protectors, non-charitable purpose trusts, asset protection and anti-forced heirship provisions. In relation to asset protection, claims must be brought by creditors within 3 years of the date of disposition The core requirements of an international trust are: a direction in a written trust instrument that the International Trusts Act applies; settlors and beneficiaries (subject to certain exceptions) who are not resident in Barbados at the time of creation of the trust or the addition of assets; at least one Barbados resident trustee; and trust assets which do not include Barbados real estate. An international trust is deemed to be non-domiciled in Barbados for tax purposes and only Barbados sourced income and overseas sourced income which is remitted to Barbados is subject to tax. Income and capital distributions to non-resident beneficiaries are not subject to tax and the international trust is exempt from exchange control restrictions and indirect tax, ad valorem stamp duty or other imposts on transactions undertaken by its trustees.

An offshore trust is a trust, the trustee of which is licensed under the International Financial Services Act, the settlors and the beneficiaries (subject to certain exceptions) of which are non Barbados resident and the assets of which are solely comprised of foreign currency or securities. Its main attraction is its exemption from all taxes, duties and exchange control requirements in Barbados. Subject to the terms of the trust instrument, and the consent of any co-trustee, the assets of an offshore trust may be invested in a common trust fund established by the international financial institution and the scope exists for the sale of interests in a common trust fund between offshore trusts. An offshore trust can also offer substantial tax planning advantages when a Barbados international business company (an “IBC”) is incorporated in the structure. An IBC, all of the shares of which are part of a common trust fund, enjoys a zero rate of tax, provided, amongst other things, that its activities are restricted exclusively to the business of buying, selling, holding or managing securities. Ordinarily, IBCs are subject to low corporation tax rates ranging from 0.25% to 2.5% depending on income levels. However, incorporating an IBC in an offshore trust can result in an effectively tax free structure and offers tremendous scope for creative tax planning.

A domestic trust is one in which the trustee is a Barbados resident individual or company licensed under the Financial Institutions Act. Its worldwide income is taxable; it is subject to value added tax; and it may only be exempt for exchange control restrictions if the trust has foreign assets, non-Barbados resident beneficiaries and deals primarily in foreign currency. The central advantage of a domestic trust is that, if properly administered, it may be used in the context of Barbados’ expanding double taxation treaty network - especially where the use of international business vehicles is prohibited under the relevant DTT.

Originally published as part of an article which appeared in Protecting Wealth Guide: A Jurisdictional Guide | China Edition

If you have any questions in relation to the foregoing, please do not hesitate to contact Melanie Jones, Partner and Tara E. Frater, Partner.