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Newsletter | Articles   Focus on the BahamasFrom an article entitled “Strengthening The Bahamas' position” by Wendy Warren, CEO and Executive Director, Bahamas Financial Services Board, Nassau, The Bahamas International financial services have been a part of The Bahamas' landscape for more than 60 years. Anchored mainly by banking and trust services, and complemented by investment funds advisory, administration and management services, The Bahamas has a history of being a sophisticated and progressive, yet responsible jurisdiction. The Bahamas has been able to achieve this position as a result of successive Governments that continue to demonstrate a commitment to the sector that fosters close dialogue between industry and the public sector. This combination has allowed The Bahamas to move forward simultaneously on many fronts with respect to important jurisdiction developments, particularly in the area of market sensitive legislative initiatives. Recent legislative developments A Purpose Trust Act, a Segregated Accounts Company Act, enhancements to the International Business Companies Act and amendments to the Perpetuities Act have all been enacted in 2004 and represent the latest initiatives in what has become a busy period for legislative developments in The Bahamas. In addition, Bahamas Foundations will be available in September. This new legislation combined with recent Investment Funds and E-Commerce Acts embody a legislative direction that is market driven, but at the same time recognises international standards. In this article we examine Purpose trust legislation, The Investment funds environment in The Bahamas, Segregated Accounts Company legislation, Foundations, Amendments to IBC and Perpetuities legislation and The Bahamas TIEA with the US. Purpose Trust Legislation With the recently passed Purpose Trust Bill 2004, The Bahamas has added another dimension to the jurisdiction's trust business. The most interesting feature of purpose trusts is the fact that in trusts of this nature the benefit is for a purpose rather than persons or entities. There are many estate planning exercises and other commercial transactions that can legitimately and properly take advantage of this kind of structure.
With more than 700 funds representing in excess of USD 125 billion in assets under administration, the funds industry is one of the fastest growing areas of financial services in The Bahamas. The pace of growth is expected to be even faster with a new Investment Funds Act now in place that positions The Bahamas at the cutting edge of modern investment fund administration. The Act serves both to update the general legislative and supervisory environment and introduces an additional style of collective investment vehicle the Bahamas SMART Fund - officially known as the Specific Mandate Alternative Regulatory Test Fund. Where investment funds are essentially private arrangements, they will now enjoy a supervisory environment appropriate for the limited, specific nature of the project and will not suffer the "broad brush" regulatory approach, which is often unavoidable elsewhere. The key feature of SMART Funds is the ability of the sponsor to propose to the Securities Commission new structures for funds and, if deemed appropriate, the Securities Commission will assign a risk-based regulatory environment for the structures. In addition, like professional funds, the unrestricted fund administrator is able to license these funds allowing for a one stop shop for licensing and launching of these funds. "SAC" provides additional Bahamas advantage The Segregated Accounts Company (SAC) Act expands the legislative framework that strengthens The Bahamas comparative advantage in the securities and capital markets areas. An SAC may segregate each of its assets into separate accounts which are shielded from exposure to losses or claims of creditors of the SAC itself, or on other accounts within the SAC. Also known as a Protected Cell Company, an SAC allows the compartmentalisation of risks within a single corporate structure. As a result, the financial performance of an individual account does not affect any other accounts of the SAC itself. In effect the separate account of the SAC acts like a separate limited company - but all under common management reducing senior management time, capital, administration and costs. Designed originally for the international captive insurance market, assets held for clients could be segregated from the assets and liabilities of the insurance company. In the event of the liquidation of the insurance company, the clients' assets would not be available to the creditors of the insurance company. SACs are now being used by some to structure wealth management solutions for clients with highly diversified portfolios including investment funds and structured products. Bahamian SAC legislation has set the standard of providing the platform for segregation of assets and liabilities for its use in other areas of business such as a holding company for property or luxury items. The use of a SAC for these and all other purposes does require approval and the oversight of the relevant regulator. The Investment Funds Act with its regulations and SMART funds templates, and the new Segregated Accounts Companies Act, places The Bahamas in a strong position to grow its capital markets sector. Foundations Well established and acceptable in several civil law jurisdictions, especially in Europe and Latin America, foundations will be become part of The Bahamas' growing package of financial products and services, and a complement to trusts, following the introduction of new legislation in September. A foundation can be viewed as a hybrid between a trust and a company since it has many aspects that are in common with one or the other. It is anticipated that the holding and management of assets will be the most popular use for foundations established in The Bahamas. Other anticipated uses include estate and tax planning, preserving family wealth and confidentiality, segregation of assets and establishing charities. IBC Amendments Amendments to the International Business Companies Act 2000 have resulted in legislative enhancements that reinforce the IBC as an important part of the comprehensive range of products and services available from Bahamian service providers. One of the most innovative changes is the continuation of an IBC as a Bahamian company under the Companies Act, an arrangement that does not exist elsewhere. The ability of an IBC to register its mortgages and charges for shares with the Registrar of Companies is another important change. Since there have never been direct taxes in The Bahamas, an IBC and its shareholders are exempt from business license fees, income tax, corporation tax, capital gains tax or any other tax on income or distributions accruing to or derived from the IBC or in connection with any transaction to which the IBC or shareholders are party. An IBC and its shareholders are also exempt from estate, inheritance, succession or gift tax and any other tax, duty, levy or other charge payable in The Bahamas with respect to any shares, debt obligations or other securities of the IBC or shareholder. An IBC is exempt from stamp duties in The Bahamas except in respect of real property. While no changes to the IBC tax status is contemplated, tax holidays have been reintroduced through these amendments for a period of 20 years from the date of incorporation of the IBC. In addition The Bill now makes it possible for an IBC to be licensed as an external insurance company, making the jurisdiction more competitive in the captive and offshore insurance market. There are provisions for the protection of the assets of the Company for the benefit of the company, and its creditors and shareholders. Protection is also provided for minority shareholders. There are a number of refinements in filing procedures with the Registrar General's department. Perpetuities Act Amendments to The Perpetuities Act 1995 enables families to plan for five generations by instituting a perpetuity period determined by a life or lives in being plus 21 or ISO years. Bahamas TIEA with the US The Tax information Exchange Agreement (TIEA) signed between the governments of The Bahamas and the United States of America in 2002 demonstrated a recognition by both countries that self-interests can be satisfied in an even-handed fashion. The Bahamas wished to continue offering its institutions and their clients unrestricted, confidential and seamless access to the United States' capital markets, consequently the Bahamas negotiated terms that provide the United States the greatest confidence in the self regulation of the Bahamas' financial services sector. The agreement with the USA transpired in the midst of OECD initiatives seeking compliance from The Bahamas and many other countries on tax information exchange. It was also a period in which there was an international push for greater transparency and regulatory supervision under the auspices of FATF's anti-money laundering and FSF initiatives. With the signing of the TIEA, the USA accepted several conditions that were crucial to The Bahamas and its position on tax information issues. Specifically, that The Bahamas only negotiates in its best interests, the TIEA reflects the unique relationship that exists between the US and The Bahamas, the TIEA culminated long discussions on a mechanism that would enable it to assess tax liability on worldwide income which is the basis of the US tax system, and it facilitated Qualified Intermediary/Qualified Jurisdiction (QI/QJ) status. Under the TIEA, The Bahamas has made a commitment to provide, as of 2005 (ie, for taxable years which begin in January 1,2004), only specific information that may be available in The Bahamas that is relevant to a particular case, where the US Government has exhausted all measures within the United States, and where the Ministry of Finance in The Bahamas is of the opinion that sufficient evidence exists to support criminal tax evasion of US federal tax. Similar arrangements are slated to begin in 2007 with respect to civil tax offences of United States federal tax laws. Most importantly, The Bahamas has secured a level playing field through the introduction of a most favoured nation clause to ensure that the sector remains competitive. This is important in minimising the impact on business in The Bahamas. While many institutions do not conduct business with US clients, The Bahamas TIEA ensures that The Bahamas maintains a competitive position with all other jurisdictions in this respect. It is also important to note that any subsequent changes to the agreement must be approved by the Parliament of The Bahamas. It should be noted that the TIEA relates only to US federal income taxes. It is not retroactive but applies to information regarding criminal tax offences for taxable years beginning January 1, 2004 and for information regarding civil tax offences for taxable years beginning January 1, 2006. The TIEA allows no fishing expeditions or automatic exchange of information. Any request for information must be in writing and contain specified details that include the name of the person; the type of information requested; the period of time to which the information is requested; the likely location of the information; the applicable US federal tax law; whether the matter is criminal or civil in nature; and the reasons for believing that the requested information is foreseeably relevant or material to the US federal tax administration. On the latter, however, the request will not be allowed if the requested information relates to a matter under US federal tax law that is barred by the applicable statute of limitations, or constitutes or would reveal a privileged communication. Requests for information can only be made if, after reasonable efforts, the IRS is unable to obtain the information by other means. In other words, information can only be sought from The Bahamas as a last resort. The TIEA can be reviewed after January 2004 if other more favourable US TIEAs or OECD model emerge. Other features of the TIEA are that US taxpayers can claim Convention tax benefits for attendance at seminars and conventions in The Bahamas after January 2006. It prohibits the sharing of information with other countries. Information can only be disclosed to persons within the US government concerned with tax administration and in any court proceedings concerned with the specific request and attorney - client privilege is preserved. The Bahamas: Determined to remain a leader New products and legislation underscore the resolve of The Bahamas and its industry to remain a leader in financial services. They continue a tradition of a jurisdiction which is determined to retain its well-deserved image as a responsible jurisdiction and its leadership position in wealth management. With the passage of new legislation, a continued focus on the requirements of the international marketplace, a sound regulatory environment and the presence of some of the most well-regarded financial institutions in the world, The Bahamas is not only a viable choice for these institutions and their clients, but is a leader in the global financial services marketplace. More about the Bahamas and downloads of the new laws are on our website. 
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