Purpose of the Act
The Removal of Preferential Exemptions Act, 2018 (the “Act”) came into force on 31 December, 2018. The Act was enacted, along with other pieces of legislation, in response to the European Union’s inter-governmental Code of Conduct Group (Business Taxation) guidance for determining substance when considering whether a tax measure is harmful or ‘fair’ and the Organization for Economic Co-Operation and Development’s Base Erosion Profit Shifting (BEPS) Project.
The Act seeks to address the harmful tax practice known as “ring-fencing”. Ring-fencing refers to the situation where a taxing jurisdiction maintains a preferential tax regime that is unavailable to certain groups of taxpayer, often domestic taxpayers or taxpayers that operate in the domestic economy (see Organization for Economic Co-operation and Development, Harmful Tax Competition (OECD, 19 May 1998) page 26).
Removal of Certain Preferential Exemptions
Prior to the enactment of the Act, companies and entities incorporated, registered or continued in accordance with (a) the International Business Companies Act (Ch.309); (b) the Exempted Limited Partnership Act (Ch.312); (c) the Investment Condominium Act, 2014 (No.38 of 2014); and (d) the Executive Entities Act, 2011 (the “Preferential Exemption Acts”) were entitled to preferential exemptions from taxes such as business licence fees, stamp tax, income tax, corporation tax, capital gains tax, estate tax, inheritance tax, succession tax or gift tax (the “Taxes”) if they operated exclusively outside of The Bahamas, but not if they operated within The Bahamas.
As a result of the Act, the companies and entities incorporated, registered or continued under the Preferential Exemption Acts are now subject to the payment of any tax which is non-nominal, meaning that it is not equal to zero or almost zero. Notably, the Act amends the Preferential Exemption Acts by repealing and deleting the sections which once granted preferential exemptions from the Taxes to companies and entities incorporated, registered or continued under the Preferential Exemption Acts where they operated exclusively outside of The Bahamas.
The Act is immediately effective for companies and entities incorporated, registered or continued under the Preferential Exemption Acts after 31 December, 2018. However, companies and entities incorporated, registered or continued under the Preferential Exemption Acts prior to 31 December, 2018 will continue to benefit from the preferential exemptions for a period of three (3) years from the date of commencement of the Act (i.e. 31 December, 2021), save for entities incorporated under the Executive Entities Act, 2011 (in respect of which no savings provision applies).
It is important to note that The Bahamas does not have taxes such as income tax, corporation tax, capital gains tax, or estate, inheritance, succession or gift tax. There was therefore no preferential exemption granted to entities incorporated, registered or continued under the Preferential Exemption Acts from these types of taxes prior to the Act. Accordingly, the main immediate practical effect that the Act will have is in relation to liability for stamp duty and business licence fees.
It is also important to note that, prior to the enactment of the Act, the Preferential Exemption Acts each contained provisions to the effect that the preferential exemptions from the Taxes did not apply to a company or entity incorporated, registered or continued under the Preferential Exemption Acts where such company or entity was “resident” in The Bahamas for the purposes of the Exchange Control Regulations Act (Ch.360). For example, where a company or entity was designated or deemed resident for exchange control purposes because it owned real property in The Bahamas or conducted business within The Bahamas, the preferential exemptions were no longer applicable. For such companies or entities, the Act does not materially alter their legal position.
Limited Duration Companies
Beyond removing preferential exemptions, the Act also repeals Part X of the International Business Companies Act (Ch.309). That Part provided for the incorporation of limited duration companies. It is therefore no longer possible to incorporate a limited duration company. However, a limited duration company incorporated, registered or continued under the International Business Companies Act (Ch.309) prior to 31 December, 2019 will continue to exist until the expiry of the relevant period of duration stipulated in its Memorandum of Association.
For further information, please contact any Partner in the Commercial Transactions practice group.
The information contained in this bulletin is provided for the general interest of our readers, but is not intended to constitute legal advice. Clients and the general public are encouraged to seek specific advice on matters of concern. This bulletin can in no way serve as a substitute in such cases.