17 February 1997 External T.I. 9617535 - BARBADOS ENCLAVE ENTERPRISES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether or not a Barbados Enclave Enterprise is a resident of Barbados for treaty purposes and Draft Regulation 5907(11.2)

Position:

While 10 year tax holiday would not, in and of itself, disqualify enterprise from being considered as being a resident of Barbados, it is a question of fact whether the enterprise is otherwise liable to tax.

Reasons:

a) The exemption from Canadian taxation of dividends paid by a foreign affiliate of corporation resident in Canada out of exempt surplus is intended to be a simplified foreign tax credit system. As the Canada-Barbados Income Tax Agreement specifically provides that Barbadian branches of Canadian companies eligible for a tax holiday under the Financial Incentives Act are also eligible for tax sparing it is appropriate that the exempt surplus rules be available where a Canadian resident company invests in Barbados through a foreign affiliate as long as that foreign affiliate is otherwise fully liable to tax in Barbados.

b) Consistent with the position previously taken with respect to Barbadian Captive Exempt Insurance Companies (which was fully supported by the Department of Finance) only those Enclave Enterprises which are otherwise fully liable to tax (i.e. on world income) are to be considered resident of Barbados and consequently eligible to earned exempt surplus. As the exempt surplus rules are designed as a simplified ftc system it is not appropriate that they apply to income which does not bear and will likely never bear Barbadian income tax.

	                                  	961753
XXXXXXXXXX	                              David R. Senécal

Attention: XXXXXXXXXX

February 17, 1997

Dear Sirs:

Re: Barbados Enclave Enterprises and Regulation 5907(11.2)

This is in reply to your letter of May 1, 1996, wherein you requested our views as to whether a corporation classified as an "Enclave Enterprise" pursuant to the Barbados Fiscal Incentives Act, 1978 ("FIA") would be considered as being a resident of Barbados for purposes of the Canada-Barbados Income Tax Agreement (the "Agreement") and subsection 5907(11.2) of the Draft Regulations. We apologize for the delay in responding to your enquiry.

Facts

Our understanding of the facts is as follows:

• The FIA provides the basis for granting certain tax benefits to "approved enterprises". In particular, the FIA grants a total exemption from income tax for periods of up to 10 years depending on the type of company. An Enclave Enterprise qualifies for the maximum tax holiday of 10 years.
• An Enclave Enterprise is any company registered in Barbados which has been approved by the Minister for the purpose of conferring a benefit under FIA and which manufactures approved products exclusively for export outside the Caribbean Community and Common Market ("CARICOM").
• The FIA provides that, notwithstanding the Barbadian Income Tax Act, an Enclave Enterprise is entitled to relief from income tax from the date of production in respect of profits and gains accruing to it for the period of the 10 year tax holiday. The provisions of the Barbadian Income Tax Act will, however, apply from the first year of income following the year of income during which the period of the tax holiday ends.

Comments

In our view, the fact that an Enclave Enterprise may enjoy a 10 year tax holiday from Barbadian income tax would not, in and of itself, cause the Department to consider such an enterprise as not being a resident of Barbados as defined in paragraph 1 of Article IV of the Agreement. Having said this, we believe that it remains a question of fact as to whether any particular Enclave Enterprise, in the absence of the tax holiday, is actually "liable to taxation" in Barbados in the sense to be given to those words in paragraph 1 of Article IV, namely, that of full liability to tax, being the most comprehensive form of taxation of a person under the law of Barbados (i.e., taxation based on world income).

For instance, it is our understanding that, while an Enclave Enterprise must be registered in Barbados, it need not be incorporated in Barbados to qualify for the tax holiday. A company which is not incorporated in Barbados would not necessarily be taxed on its world income. For instance, our research would indicate that recent amendments have been made to the International Business Companies Act of Barbados (the "IBC Act") which allow branches of foreign corporations to qualify as International Business Corporations ("IBCs"). Furthermore, the tax regime governing IBCs has been extended to cover manufacturing operations whose tax holiday under the FIA has expired.

Pursuant to subsection 10(5) of the IBC Act, an IBC which is incorporated outside Barbados is only subject to income tax in Barbados on profits and gains accruing or deemed to be accruing to the company from its branch operations in the Barbados.

Consequently, where a particular Enclave Enterprise is eligible to take advantage of the incentive provisions of another tax regime in Barbados, such as the IBC Act and does so, and this effectively results in the enterprise, in the absence of or subsequent to the tax holiday provided by the FIA, not being subject to taxation in Barbados on its world income, it is our position that the enterprise would not be a resident of Barbados for purposes of the Agreement and subsection 5907(11.2) of the Draft Regulations.

We trust that the above comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch