Aminews | July 2012
 
 
MEXICAN OPPORTUNITIES IN BARBADOS:
THE BARBADOS-MEXICO DTA
 
The removal of Barbados from Mexico’s blacklist of tax havens is a pivotal landmark. Now Mexican residents have secure and reliable alternatives for outbound investments through the use of Barbados entities.
 
Using Barbados as a platform, this new development provides excellent tax planning opportunities for Mexican clients. In this context, we will highlight the new solutions and structures that will benefit clients in Mexico and how Amicorp can be of assistance to them.
 
The following are key provisions of the Mexico-Barbados double taxation agreement (DTA):
 

Dividends:
There is a reduced taxation rate on Dividends paid by Companies as follows:

(a) 5 percent of the gross amount of the dividends if the recipient beneficial owner is a company which owns at least 10 percent of the voting shares issued by the company paying the dividend;

(b) 10 percent of the gross amount of the dividend in all other cases.

Interest:
If the recipient of the interest is the beneficial owner, such interest could be taxed in the source country at the maximum rate of 10 percent of the gross amount of the interest. The DTA also provides that interest paid can only be taxed in the contracting state in which the beneficial owner resides, in specific cases such as where the beneficial owner is one of the contracting states or its Central bank; or where the interest arises and is paid with respect to loans granted, guaranteed, insured etc by specific banking or government financial institutions.

Royalties:
Royalties paid to a resident of a contracting state could be taxed in the state where they arise (source country) but where the recipient of such payments is the beneficial owner of the royalties the tax charged shall not exceed 10 percent of the gross amount of the royalties.

Capital gains:
Gains obtained by a resident of a contracting state from the sale of immovable property located in another contracting state, or from the sale of shares or any other benefit in a company whose assets are mainly constituted, directly or indirectly, of immovable property located in one of the contracting states, may be taxed in that other contracting state. In addition, gains obtained by a resident of a contracting state or any other legal person who is a resident of the other contracting state from the sale of shares or other rights in the capital of a company may be taxed in that other contracting state, provided that the recipient of the gain had a participation (either directly or indirectly) of at least 25 percent in the capital of such company or legal entity, during the 12-month period preceding such sale.

 
The Barbados Domestic Company
 
As we mentioned above, Barbados is no longer on Mexico’s blacklist of tax havens. Thus, a new jurisdiction is open to Mexican clients. Amicorp has created a set of structures using the regular Barbados company (RBC), sometimes called the Barbados domestic company (BDC). The RBC has no business restrictions and therefore offers both international and domestic business opportunities. Furthermore, unlike the Barbados international business company (IBC), an RBC is eligible for treaty benefits and can freely apply all provisions of the DTA.
 
While it is taxed at 25% on profits and gains worldwide, it is also eligible for a tax credit with respect to taxes paid abroad, which has the effect of possibly reducing to zero the taxes the RBC would be liable to pay in Barbados.
 
Another attractive feature of note relates to payment of dividends from an RBC to its nonresident shareholder, a Mexican resident for example. Where the dividends paid are derived from income earned from sources outside of Barbados, that is, income from operative Mexican companies, those dividends are completely tax exempt.
 
For a Mexican client who wishes to implement an exit to its dividends in Mexico, we propose the following model:
 
Proposed Structure Using the RBC/BDC
 
 
Interest -10% withholding
Royalties -10% withholding
Dividends - 0% withholding under certain conditions
Capital Gains - 0% under certain conditions
 
It should be noted, however, that pursuant to Mexican tax legislation, dividends distributed by a Mexican corporation are not subject to any withholding tax in Mexico because taxation is paid at the level of the immediate distribution (if any) made by the company. As such, for dividends alone, although the Barbados IBC cannot qualify for the DTA, a Barbados IBC would be able to hold shares of a Mexican subsidiary and be subject (in Barbados) to a more attractive tax regime (as described below) than the RBC.
 
Barbados IBC and Trust Combination Structure
 
For Mexican clients who wish to implement a comprehensive estate planning structure, another useful and popular structure involving Barbados entities is the combination of the Barbados IBC and a Barbados licensed trustee trust.
 
The Barbados International Business Company (IBC)
 
Below is a list of some attractive features of the Barbados IBC:
  • Low corporate income tax rate on the profits and gains of the IBC between 2.5 percent and 1 percent for all profits and gains between USD 5 million and USD 15 million;
  • No thin capitalization rules;
  • No minimum capital requirements;
  • No withholding tax on dividends, royalties, interest, fees or management fees paid to nonresidents of Barbados;
  • Multiple classes of shares may be issued;
  • Availability of tax credit in respect of taxes paid abroad.
The Licensed Trustee Trust
A licensed trustee trust is created when the trustee is licensed under the Barbados International Financial Services Act (IFSA). The IFSA regulates the powers and duties of the licensee as trustee.
 
What is required to qualify as a licensed trustee trust?
 
(a) The settlor and beneficiaries both must be resident outside of Barbados.

(b) The trustee must be an entity licensed under the IFSA to carry on international financial services (for example, international banking services. This can easily be accomplished through the use of Amicorp Bank and Trust Limited).

(c) The trust assets must consist solely of foreign currency or securities.
 
Why establish a licensed trustee trust?

i. Confidentiality is easily maintained, as there are no registration or filing requirements.

ii. A licensed trustee trust is exempt from all Barbados taxes, duties and exchange control requirements.

iii. If the trust wholly owns an IBC, then the IBC will not be not subject to tax on its profits and gains, provided it is managed by a Barbados-licensed bank and its activities are restricted to engaging exclusively in the business of buying, selling, holding or managing securities.

iv. If the trust wholly owns a Barbados segregated cell company (BSCC) that has been incorporated as an IBC, the BSCC will not be subject to tax on its profits and gains.

 
Briefly then, the use of a Barbados licensed trustee trust in conjunction with a Barbados IBC offers not only a completely tax exempt structure, but also retains the confidentiality that many clients seek.
 
Example of a Structure Combining a Licensed Trustee Trust with the Barbados IBC:
 
 
The Mexico–Sweden–Barbados Route
 
As the country usually ranked second in Latin America after Brazil in terms of its GDP and economy, Mexico is the recipient of a substantial amount of foreign direct investment (FDI). Also, internally there is a greater need for asset protection. Either could effectively take the form of corporate takeovers.
 
The Mexico-Sweden-Barbados route is an excellent structure for clients who wish to implement mergers and acquisitions in Mexico.
  • The primary purpose of the Barbados IBC in this structure is to facilitate loans to four Swedish companies in order to execute the takeover of the Mexican company.
  • Each Swedish company will in turn, purchase a maximum of 25% of the equity in the Mexican company (in compliance with the limitations of the Mexico-Sweden DTA). In accordance with Article 13 (Capital Gains) of the above-mentioned DTA, there will be no tax on the capital gains as result of the alienation of the shares.
  • Once the takeover is implemented, the loan will be transferred to the Mexican company, constituting a leveraged buyout (LBO), which occurs when an investor acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing).
Why use this structure?
 
The Mexican-Sweden DTA provides excellent opportunities to facilitate the merger and acquisition of Mexican companies using Sweden as an efficient tax platform. Benefits include:
  • Zero tax on capital gains in Mexico
  • All interest payments from Mexico to Sweden effectively reduced to 15%
  • All interest payments from Sweden to Barbados are free of withholding tax
  • Zero withholding tax in Barbados on interest and dividends paid to nonresidents of Barbados
  • Low corporate income tax rate of 2.5% to 1% on the profits and gains of the IBC
Example of a Mexico-Barbados-Sweden Merger and Acquisition Structure
 
 
Amicorp can assist with establishing all structures illustrated above and also provide the management and administration for the entities and structures in each respective jurisdiction at a competitive cost.
 
Careen Byfield-Leyshon
Managing Director

Amicorp Barbados Ltd.
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