In 2019, Barbados passed a law called the Economic Substance Act (ESA) to ensure that companies operating in the country demonstrate real economic activities. This law targets specific types of businesses, known as “relevant activities,” and aims to prevent tax avoidance schemes. But what does this law mean for your business, and how do you know if it applies to you? Let’s break it down.
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What Is the Economic Substance Act?
The ESA was introduced to meet international standards set by organizations like the Organisation for Economic Cooperation and Development (OECD) and the European Union (EU). These organizations are working to prevent what is known as Base Erosion and Profit Shifting (BEPS), where companies move profits to low-tax countries without actually operating there.
To counteract this, the ESA requires Barbados-based companies involved in certain “relevant activities” to demonstrate that they have a real, physical presence and operational activities in the country—not just a legal address for tax purposes.
What Are “Relevant Activities”?
The ESA applies to companies engaged in specific types of business operations. Here are the relevant activities that fall under this law:
- Banking
- Insurance
- Fund Management
- Financing and Leasing
- Headquarters Business – Companies that provide services to their foreign affiliates or subsidiaries.
- Shipping
- Holding Companies – Companies that primarily hold equity interests in other businesses.
- Intellectual Property Business – Companies that manage, hold, or exploit intellectual property.
- Distribution and Service Centres – Companies involved in providing goods or services to entities located outside of Barbados.
If your business operates in any of these sectors, you must comply with the law by proving your company has real operations in Barbados.
Does This Law Apply to Your Business?
Here’s how to know if your company needs to comply:
- Is your company registered in Barbados? If yes, you need to check if you’re involved in any “relevant activities.”
- Are you making income from these activities? If your company falls into one of the relevant activity categories and earns income from those operations, you must meet the Economic Substance Test.
Even if your company was set up before this law was passed, you still need to comply if you are engaged in these relevant activities.
How to Prove You Have Economic Substance
If the ESA applies to your business, you’ll need to meet the Economic Substance Test (ES Test). This means proving your company has real economic activity in Barbados. You’ll need to show:
- Physical presence like offices or facilities in Barbados
- Qualified employees working in Barbados
- Income-generating activities that are actually based in Barbados
You can also outsource some of your operations to other businesses in Barbados, as long as the work remains within the country and meets the guidelines.
Filing and Compliance
If your company is subject to the ESA, you must file an Economic Substance Declaration each year. This is a report that includes information such as:
- Whether your company is carrying on a relevant activity
- The type and amount of income generated from these activities
- Details of your business operations in Barbados, including your number of employees and business expenses
- Whether any core activities have been outsourced
This declaration must be submitted annually within 12 months of the end of your company’s fiscal year.
The Bottom Line
If your company is engaged in any of the nine “relevant activities” and operates in Barbados, the Economic Substance Act likely applies to you. It’s essential to demonstrate that your company has real operations on the island to meet the legal requirements and avoid penalties.
By ensuring you meet the requirements of the ESA, you’ll not only stay compliant with local laws but also align with international standards on corporate transparency and tax fairness.
In 2019, Barbados passed a law called the Economic Substance Act (ESA) to ensure that companies operating in the country demonstrate real economic activities. This law targets specific types of businesses, known as “relevant activities,” and aims to prevent tax avoidance schemes. But what does this law mean for your business, and how do you know if it applies to you? Let’s break it down.
What Is the Economic Substance Act?
The ESA was introduced to meet international standards set by organizations like the Organisation for Economic Cooperation and Development (OECD) and the European Union (EU). These organizations are working to prevent what is known as Base Erosion and Profit Shifting (BEPS), where companies move profits to low-tax countries without actually operating there.
To counteract this, the ESA requires Barbados-based companies involved in certain “relevant activities” to demonstrate that they have a real, physical presence and operational activities in the country—not just a legal address for tax purposes.
What Are “Relevant Activities”?
The ESA applies to companies engaged in specific types of business operations. Here are the relevant activities that fall under this law:
- Banking
- Insurance
- Fund Management
- Financing and Leasing
- Headquarters Business – Companies that provide services to their foreign affiliates or subsidiaries.
- Shipping
- Holding Companies – Companies that primarily hold equity interests in other businesses.
- Intellectual Property Business – Companies that manage, hold, or exploit intellectual property.
- Distribution and Service Centres – Companies involved in providing goods or services to entities located outside of Barbados.
If your business operates in any of these sectors, you must comply with the law by proving your company has real operations in Barbados.
Does This Law Apply to Your Business?
Here’s how to know if your company needs to comply:
- Is your company registered in Barbados? If yes, you need to check if you’re involved in any “relevant activities.”
- Are you making income from these activities? If your company falls into one of the relevant activity categories and earns income from those operations, you must meet the Economic Substance Test.
Even if your company was set up before this law was passed, you still need to comply if you are engaged in these relevant activities.
How to Prove You Have Economic Substance
If the ESA applies to your business, you’ll need to meet the Economic Substance Test (ES Test). This means proving your company has real economic activity in Barbados. You’ll need to show:
- Physical presence like offices or facilities in Barbados
- Qualified employees working in Barbados
- Income-generating activities that are actually based in Barbados
You can also outsource some of your operations to other businesses in Barbados, as long as the work remains within the country and meets the guidelines.
Filing and Compliance
If your company is subject to the ESA, you must file an Economic Substance Declaration each year. This is a report that includes information such as:
- Whether your company is carrying on a relevant activity
- The type and amount of income generated from these activities
- Details of your business operations in Barbados, including your number of employees and business expenses
- Whether any core activities have been outsourced
This declaration must be submitted annually within 12 months of the end of your company’s fiscal year.
The Bottom Line
If your company is engaged in any of the nine “relevant activities” and operates in Barbados, the Economic Substance Act likely applies to you. It’s essential to demonstrate that your company has real operations on the island to meet the legal requirements and avoid penalties.
By ensuring you meet the requirements of the ESA, you’ll not only stay compliant with local laws but also align with international standards on corporate transparency and tax fairness.
In 2019, Barbados passed a law called the Economic Substance Act (ESA) to ensure that companies operating in the country demonstrate real economic activities. This law targets specific types of businesses, known as “relevant activities,” and aims to prevent tax avoidance schemes. But what does this law mean for your business, and how do you know if it applies to you? Let’s break it down.
What Is the Economic Substance Act?
The ESA was introduced to meet international standards set by organizations like the Organisation for Economic Cooperation and Development (OECD) and the European Union (EU). These organizations are working to prevent what is known as Base Erosion and Profit Shifting (BEPS), where companies move profits to low-tax countries without actually operating there.
To counteract this, the ESA requires Barbados-based companies involved in certain “relevant activities” to demonstrate that they have a real, physical presence and operational activities in the country—not just a legal address for tax purposes.
What Are “Relevant Activities”?
The ESA applies to companies engaged in specific types of business operations. Here are the relevant activities that fall under this law:
- Banking
- Insurance
- Fund Management
- Financing and Leasing
- Headquarters Business – Companies that provide services to their foreign affiliates or subsidiaries.
- Shipping
- Holding Companies – Companies that primarily hold equity interests in other businesses.
- Intellectual Property Business – Companies that manage, hold, or exploit intellectual property.
- Distribution and Service Centres – Companies involved in providing goods or services to entities located outside of Barbados.
If your business operates in any of these sectors, you must comply with the law by proving your company has real operations in Barbados.
Does This Law Apply to Your Business?
Here’s how to know if your company needs to comply:
- Is your company registered in Barbados? If yes, you need to check if you’re involved in any “relevant activities.”
- Are you making income from these activities? If your company falls into one of the relevant activity categories and earns income from those operations, you must meet the Economic Substance Test.
Even if your company was set up before this law was passed, you still need to comply if you are engaged in these relevant activities.
How to Prove You Have Economic Substance
If the ESA applies to your business, you’ll need to meet the Economic Substance Test (ES Test). This means proving your company has real economic activity in Barbados. You’ll need to show:
- Physical presence like offices or facilities in Barbados
- Qualified employees working in Barbados
- Income-generating activities that are actually based in Barbados
You can also outsource some of your operations to other businesses in Barbados, as long as the work remains within the country and meets the guidelines.
Filing and Compliance
If your company is subject to the ESA, you must file an Economic Substance Declaration each year. This is a report that includes information such as:
- Whether your company is carrying on a relevant activity
- The type and amount of income generated from these activities
- Details of your business operations in Barbados, including your number of employees and business expenses
- Whether any core activities have been outsourced
This declaration must be submitted annually within 12 months of the end of your company’s fiscal year.
The Bottom Line
If your company is engaged in any of the nine “relevant activities” and operates in Barbados, the Economic Substance Act likely applies to you. It’s essential to demonstrate that your company has real operations on the island to meet the legal requirements and avoid penalties.
By ensuring you meet the requirements of the ESA, you’ll not only stay compliant with local laws but also align with international standards on corporate transparency and tax fairness.
Please note that the information provided in this blog post is for informational purposes only and should not be considered as legal or financial advice. The information provided may be subject to change or may not apply to your specific circumstances. We strongly encourage you to seek advice from a qualified professional, such as a tax advisor or financial planner, before making any decisions based on the information provided. BIBS is not responsible for any actions taken or decisions made based on the information provided in this blog post. It is the sole responsibility of the reader to ensure that the information is appropriate for their specific situation and to consult with a professional as needed.
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