Murty, Anthony: Barbados new Treaties with Luxembourg and Spain (May 2012)

Luxembourg: The treaty entered into force on 1st January 2012 but does not apply to Dividends, Interest and Royalties in respect amounts paid until after 1st January 2013. The Interest and Royalties articles provide for a zero rate of withholding tax if held beneficially.

The Dividend article provides for a zero rate of withholding tax if the shareholding represents at least 10% of the capital held beneficially by the resident of the other contracting state. In other cases the rate is 15%.

This dividend article provides a new tax efficient way for the ownership of Luxembourg holding companies. Shares can be held beneficially by a Barbados resident company and dividends received free of the withholding tax, by reason of Barbados Income Tax Act, section 9 (l) (iii), that exempts such dividends from Barbados corporation tax and can then be distributed as dividend to the shareholders free of withholding tax by reason of section 65 (4E). See the Income Tax Act in the Portfolio of Laws.

Spain: This new treaty entered into force on 14 October 2011. It provides a zero rate of withholding tax on Interest and Royalties, if held beneficially, paid or credited after the date of entry into force.

The Dividend article provides for a zero rate of withholding tax if the shareholding represents at least 25% of the capital held beneficially by the resident of the other contracting state. In other cases the rate is 5%.

This Dividend article could be useful for a Barbados resident company holding shares in a Spanish ETVE but, before taking the article on its face value the Memorandum of Understanding signed at the same time as the treaty should be read carefully. Part of this MOU reads:

“The provisions of Articles 10, 11 and 12 shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of shares or other rights in respect of which the dividends are paid, the creation or assignment of the debt-claim in respect of which the interest is paid and the creation or assignment of rights in respect of which the royalties are paid to take advantage of these Articles by means of creation or assignment.”
A side benefit of the treaty entering into force is that Barbados has been removed from the Spanish list of Tax Havens.