Barbados is already a major domicile, but a new law looks likely to boost its appeal.

In October 1998, the Government of Barbados passed the Insurance (Miscellaneous Provisions) Act (IMPA) 1998 to produce, at least in part, a convergence between international and domestic insurance and thus, assist further development of the island's captive business.

Barbados is already a major domicile and has about 360 registered insurance companies of which the majority are captives. Twenty-two new captives were added to the register in 1998, according to insurance supervisor Ian Carrington.

Barbados passed its captive enabling legislation, the Exempt Insurance Act (EIA) in 1983, and the industry developed steadily from 1986. Captives are known officially as exempt insurance companies (EIC) on the island to denote that they are exempt from local tax, foreign exchange controls and so on.Approximately two-thirds of existing captives have sponsors from the United States and one third from Canada. According to Chris Evans, chairman of the media sub-committee of the Barbados Exempt Insurance Management Association, Canada represents a comparatively high proportion of the total business in Barbados, partly as a result of historic trade links and more recently through tourism. Three of five major Canadian banks have an established retail presence in Barbados.

A double taxation treaty between the two countries enabled certain types of Canadian owned captives to achieve significant tax savings. However, when in 1995 Canada changed its federal tax law relating to income from foreign sources, including insurance, it affected the tax position of Canadian sponsors.Since then, there have been discussions about how to remove the potential disincentive to Canadian sponsors. Mr Evans, who works with the Towner Management Group, says: “Rather than wait for a perceived inevitable legal clash, Barbados decided to try to develop an alternative structure which would receive Revenue Canada's acceptance, whether directly or indirectly.”

• Chris Evans discusses the Insurance (Miscellaneous Provisions) Act 1998 in some detail in the November/December edition of Offshore Finance Canada from which these excerpts are taken.

The result is the new law, the principal effect of which is to confirm residence of Canadian owned captives who, under the Canada/Barbados tax treaty, can earn profits in the captive and repatriate dividends tax free to Canada in certain situations. In future, every licensee is deemed to be managed and controlled in Barbados and so resident in Barbados for tax purposes. The EIA deals exclusively with companies insuring risks and receiving premiums from outside Barbados.Kevin Walton of J&H Marsh & McLennan explains that licensees will, in future, be taxed at 0% during the first 15 years of the guarantee period and afterward at 2% on the first $250,000 of taxable income only. The present annual license fee of $5,000 will not be payable when the 2% tax becomes payable. “This technical amendment has been deemed necessary to give certainty to the Barbadian residency status of captives under the Barbados/Canada double taxation agreement,” he says.

Another major change effected by the new law is to expand explicitly the definition of general insurance to include additional categories for financial insurance, workers' compensation and public liability.

Some of the amendments in the new law have clearly also been made with wider objectives. Convergence of the domestic and exempt sectors providing similar services should help counter charges that the island's fiscal regime is discriminatory and artificial. The supervisor of insurance will have the authority to disclose certain information about licensees to another regulatory authority, provided there is reciprocity and that the disclosure relates to alleged violation of laws or regulations.

So far, according to Chris Evans, it is too early to judge what the effect of the new law will be on new captive formations, but insurance supervisor Mr Carrington says it is already having a positive impact in that existing companies are putting new business through their captives.

The Government of Barbados says it wishes to encourage the growth and development of this sector of its economy by providing greater certainty of treatment and introducing essential regulatory controls to safeguard the integrity of the jurisdiction. It will continue to respond to the views of the private sector by periodically reviewing the legislation and making amendments where appropriate.

There is an active association of captive managers, the Barbados Exempt Insurance Management Association, which may, of course, be thinking of a name change. It was set up in 1986 and acts as a liaison body between the industry, government and other service suppliers. It promotes awareness of the importance of the international business sector to the local economy and encourages educational programmes to expand the base of insurance related professional skills in Barbados.