Barbados - New approaches: What the revised China-Barbados tax treaty means for investors
For offshore investors looking to put money into Chinese real estate, Barbados was for several years the first port of call. To this day, 55% of the China-focused companies registered in the Caribbean island nation list property as their sole interest.
The reason was simple: Under the double taxation agreement (DTA) between the two countries, a Barbados resident company selling shares in a Chinese real estate project didn’t have to pay any capital gains tax on profits arising from the transaction. Other DTAs couldn’t match these terms.
In February of this year, Barbados and China signed a protocol to their DTA that changes the landscape considerably. Gone are the zero-tax provisions on capital gains: Beijing will levy a 10% tax unless the China-related portion accounts for less than 50% of the transaction (for property) or 25% (for non-property). Dividend payments, once taxed at 5% across the board, now only qualify for that rate if the Barbados investor owns at least 25% of the Chinese company. Otherwise it’s 10%.
In short, the Barbados-China DTA now resembles most other treaties China has signed.
“Barbados is on an equal footing with other jurisdictions,” said Ben Arrindell, an independent tax consultant to the Barbados government who has participated in DTA negotiations for the last 12 years. “The competitive advantage has disappeared but Barbados is not now at a disadvantage.”
Indeed, as authorities within and outside China place greater emphasis on transparency in offshore finance centers, Barbados’ collection of 20 DTAs should remain a strong draw.
Yet in addition to the tax treaties, the country offers investors access to nine bilateral investment treaties (BITs). Offshore hubs typically don’t pursue BITs but Barbados saw it as a logical step. “When international investors enter a new country they want certainty in terms of tax treatment, so you have DTAs. If they are investing in a country where the political environment may be unstable, they need the protection of a BIT,” said Arrindell.
BITs protect assets from appropriation by government and offer guarantees that profits generated by investments can be repatriated. If anything goes wrong, the matter is resolved by a foreign arbitration panel – useful in countries where the government holds sway over the courts.
While Barbados has a BIT with China, service providers are more excited about the mid- to long-term prospects of investment coming out of China.
For example, 15% of China-focused companies registered in Barbados are controlled by Venezuelan shareholders, largely thanks to the BIT and DTA between Barbados and the South American nation. Given the rising number of Chinese companies pursuing overseas assets, many expect this trend to be reversed.
“Structuring Chinese investments in Venezuela through Barbados is the perfect situation,” said Derk Scheltema, Shanghai managing director of Amicorp, a corporate service provider. “With the unrest in the country, it makes sense to use Barbados from a political, business and tax perspective.”