Using Barbados to Protect Wealth: China Edition (Part 4)

Securing wealth created by Chinese investors: Barbados Reserved Power Trusts

In relation to retention of appropriate control by settlors, Barbados has also enacted amendments to the Trustee Act to expressly permit the reservation of powers by settlors, without such reservation undermining the integrity of the trust. The recently enacted Trustee (Amendment) Act 2012-21 (the TA Act) relating to reserved power trusts was proclaimed in 2014 and is now in force in Barbados.

The TA Act makes clear that a settlor may expressly reserve certain powers of the trust to himself without, by virtue of such reservation alone, undermining the validity of the trust. The powers which the settlor may reserve to himself are as follows:

1. any power to revoke, vary or amend the trust instrument or any trusts or powers arising thereunder in whole or in part;
2. a general or special power to appoint either income or capital of the trust property;
3. a power in respect of any beneficial interest in the trust property;
4. a power to act as a director or office of any company wholly or partly owned by the trust;
5. a power to give binding directions to the trustee in connection with the purchase, holding or sale of the trust property;
6. a power to appoint, add or remove any trustee, protector or beneficiary;
7. a power to restrict the exercise of any powers or discretions of the trustee by requiring that they shall only be exercisable with the consent of the settlor or any other person specified in the trust instrument; and
8. a power to provide advice on investment of the trust fund or the selection of investment advisors who may be required to act together with the trustee or to act independently of the trustee.

Many prospective settlors will find a great deal of comfort in being able to retain certain powers in relation to the trust and to be able to be directly involved in matters concerning the trust. However, as with all tools, the ability to make such reservation is a good servant but a bad master; and care should be taken in drafting the instrument to ensure that all relevant considerations, including in relation to tax, are borne in mind.

Special Entry Permit Regime and other developments

Savvy Chinese high net worth individuals (HNWIs) are increasingly enjoying the benefits of an international lifestyle and may seek to live or spend significant amounts of time in other countries around the world. Barbados welcomes such persons and has introduced a special entry permit regime which permits certain classes of persons, such as HNWIs with net assets in excess of US$5 million and property or investments in Barbados valued at US$2 million or more to reside indefinitely and work in Barbados, or operate a global business from Barbados, provided that they satisfy the appropriate due diligence requirements.

Residents who are not domiciled in Barbados are only subject to income tax on income derived from Barbados and income derived outside of Barbados that is remitted to Barbados. However, such persons are entitled to claim the foreign currency tax credit in relation to income which is foreign sourced if such income is transferred to Barbados. Depending on the percentage of foreign currency earned in relation to total earnings, potential tax credit can amount to 93% of the income tax that would otherwise be payable in Barbados. It is therefore possible for persons to enjoy an effective tax rate of 2.45% in Barbados in relation to their foreign sourced income which is transferred to Barbados.

Among other noteworthy developments is legislation permitting the creation of foundations, which are popular in civil law jurisdictions. The Foundations Act, 2013-2, has been enacted but not yet proclaimed as at the date of writing). This legislation permits the creation of a foundation which is a hybrid based on concepts of both a company and a trust.

Conclusion

Barbados presents an array of opportunities and advantages for Chinese HNWIs and entrepreneurs – not least of which is our reputation as a substantive clean jurisdiction with appropriate regulation.

In addition, Barbados enjoys political and economic stability and modern infrastructure. Its human capital is well educated and include a cadre of highly skilled professionals and reputable service providers. The island offers an exceptional quality of life for those who live and work here, or visit on business or pleasure. Barbados is certainly a worthy option for wealthy Chinese on the rise.

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.