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Executive summary

The international tax environment is moving towards the elimination of base erosion and profit shifting (BEPS): tax planning strategies utilized by corporate entities to move profits from higher tax jurisdictions to lower tax jurisdictions.

Within this context, the European Code of Conduct Group (EUCoCG) and the Organisation for Economic Co-operation and Development (OECD) Forum for Potentially Harmful Tax Practices (FHTP) have developed initiatives to place scrutiny on preferential tax regimes that offer zero or near-zero tax rates as a means of attracting foreign direct investment. The harmful preferential tax regimes, which have been targeted by the EUCoCG and FHTP, typically:

• Isolate the benefits of the preferential tax regimes from the domestic market of the jurisdiction (known as "ring- fencing")
• Are not transparent
• Lack "substance" requirements in the sense that no substantial income generating activities are carried out in the jurisdiction where the regime is offered

During late 2017, Saint Lucia was identified by the EUCoCG as having potentially harmful preferential tax regimes and not applying the BEPS minimum standards.

The EUCoCG sought a commitment from the Government of Saint Lucia to abolish or amend the various regimes deemed harmful by the end of 2018 and for Saint Lucia to become a member of the BEPS Inclusive Framework (IF).

Having provided the commitment to the above actions, Saint Lucia was removed from the EUCoCG's list of non-compliant jurisdictions in March of 2018, pending definitive action on the above-mentioned commitments.

In response to the evolving tax environment, the Government of Saint Lucia took the strategic decision to reform its tax and incentives systems in such a way as to be consistent with the intent of the EUCoCG (while maintaining its attractiveness for investments) and thereby to create a tax system that will be more robust to future challenge by the EUCoCG, the FHTP and others.

Such a robust regime has meant moving away from ring-fencing, requiring a minimum level of substance and introducing higher levels of transparency.

To fulfil its international commitments and to ensure that Saint Lucia remains an attractive jurisdiction for investment, the Government of Saint Lucia recently proposed various amendments to its existing suite of tax and incentive legislation.

This Alert summarizes the key tax-related changes.

Detailed discussion

Highlights

The key changes to the Saint Lucia tax and incentives legislation proposed by the Government of Saint Lucia are:

• Introduction of a "territorial" tax system for all companies, effective 1 January 2019.
• New International Business Companies (IBCs) will not be permitted to be registered between 1 December 2018 and 31 December 2018.
• The tax benefits for IBCs registered prior to 1 December 2018 will be grandfathered until 30 June 2021.
• IBCs registered after 31 December 2018 will be subject to the new territorial tax system.
• Removal of ring-fencing (prohibition on IBCs doing domestic business).
• Clarification of the Free Zones Act to emphasize that entities licensed as Free Zone businesses are permitted to carry on domestic business.
• From 1 December 2018, new entities under the International Trust Act and the International Partnership Act will not be permitted to be registered.

Income Tax Regime

The Government of Saint Lucia has proposed to change Saint Lucia's general tax regime from a worldwide tax system to a territorial tax system for corporate taxpayers. Effective 1 January 2019, all companies will be subject to tax at the rate of 30% on income that is sourced within Saint Lucia. Income sourced outside of Saint Lucia will fall outside of the scope of taxation in Saint Lucia. This change will not have an impact on individuals, who will continue to be taxed on a worldwide basis.

The proposed changes, once passed, will be brought about through the following non-exhaustive amendments to the Income Tax Act:

• Introduction of a new definition of a Permanent Establishment (PE), which shall conform with recognized international standards
• Adoption of a definition of foreign-sourced income, which shall include the following items of income:
  • Profits derived from a PE outside of Saint Lucia
  • Profits derived from immovable property situated outside of Saint Lucia
  • Interest not borne by a Saint Lucia PE or charged against property situated in Saint Lucia
  • Income derived from the investment in securities, such as mutual funds, stocks, and interest-bearing instruments, issued by a person outside of Saint Lucia
  • Management charges paid by a nonresident from a source outside of Saint Lucia where the costs are not attributable to a PE in Saint Lucia
  • Royalty payments received from a nonresident PE and paid to a resident PE
  • A source of income which is deemed to accrue from a source outside of Saint Lucia pursuant to a Double Taxation Agreement

It is therefore contemplated that where a corporate taxpayer derives income from any of the sources listed above, that income will fall outside of the scope of taxation in Saint Lucia. As a result, where a company incurs expenditure in the production of foreign-source income, the expenditure will not be permitted to be claimed as a tax deduction. In addition to this system change, Saint Lucia will continue to exempt dividends and capital gains from taxation.

In light of these fundamental changes to the functioning of the corporate income tax system, the Government of Saint Lucia has for symmetry and consistency made the following additional changes:

• Expenses paid to nonresidents in the production of foreign source income will not be subject to withholding tax in Saint Lucia
• For the purposes of monitoring and transparency, all companies will be required to disclose their foreign source income when filing tax returns annually

It should be noted that under existing tax laws, dividends paid from Saint Lucia to a nonresident are not subject to withholding tax.

International Business Companies

The Government of Saint Lucia has proposed to implement changes to the IBC regime, through amendments to the International Business Companies Act. The principal changes proposed include:

• New IBCs will not be permitted to be registered between 1 December 2018 and 31 December 2018. Registration resumes from 1 January 2019.
• IBCs registered prior to 1 December 2018, shall continue to enjoy the tax benefits under the current IBC regime until 30 June 2021.
• IBCs registered from 1 January 2019 shall be taxable under the new territorial tax system, created under the Income Tax Act. To the extent that a Saint Lucian company registered on or after 1 January 2019, generates income from foreign sources, as identified above, or earns dividend income or derives capital gains, such income should not be taxed in Saint Lucia.
• IBCs registered from 1 January 2019 are not subject to any prohibitions on conducting domestic business.
• IBCs registered from 1 January 2019 are explicitly made a tax resident of Saint Lucia and will be liable to tax under the general territorial tax system.
• While the CARICOM Double Tax Agreement (CARICOM DTA) is subject to interpretation by multiple Member States, Article 4 specifies that a company will be deemed to be a tax resident of a Member State where under the law of that Member State it is liable to tax by reason of its residence. Consequently, the insertion that deems an IBC registered from 1 January 2019 to be tax resident in Saint Lucia, coupled with the company being liable to comprehensive taxation at the rate of 30% on its Saint Lucian source income, ought to be sufficient to satisfy Saint Lucian residence for the purposes of the CARICOM DTA.
• Any new headquarter company incorporated prior to 1 December 2018 shall enjoy the benefits of the election to pay 0% or 1% tax until 30 June 2021.
• A headquarter company incorporated after 31 December shall become subject to the general territorial tax system but other tax and related benefits attached to a company designated as a headquarter company such as exemption from taxation on employment income, work permits and Customs Duty exemptions would continue to apply.
• The existing stamp duty exemption afforded to a company registered under the IBC Act shall come to an end, except in the case of grandfathered IBCs, which shall continue to obtain the tax benefits of the IBC regime until 30 June 2021.
• For companies incorporated from 1 January 2019, the following instruments are exempt from stamp duty:
  • An instrument relating to transfers of any property to or by an IBC
  • An instrument relating to transactions in respect of the shares, debt obligations or other securities of an IBC
  • An instrument relating in any way to the assets or activities of an IBC

As such, the transfer of any property which has the effect of changing the beneficial or legal ownership of immovable property in Saint Lucia shall pay stamp duty in the same manner as any other company.

• Companies registered from 1 January 2019 and licensed as Registered Agents and Trustees are required to submit to the registrar a statutory declaration stating that they have complied with the Income Tax Act Cap.15.02, the Money Laundering (Prevention) Act, Cap.12.20 and the Anti-Terrorism Act, Cap.3.16.
• Companies registered from 1 January 2019 are mandated to adhere to the following legislative requirements:
  • IBCs will have to fulfill certain substance requirements, based upon their core economic activity, inclusive of the following:
    • Employ an adequate number of employees with the necessary level of qualifications and experience
    • Demonstrate an adequate amount of operating expenditure
    • Undertake adequate investment and capital commensurate with the type and level of activity
  • File annual tax returns based upon its annual unaudited financial statements
  • Comply with the monitoring requirements as prescribed by the guidelines and Regulations made by the competent authority
  • Provide any other documents required by the competent authority
• Additional information on beneficial ownership is required to be held at the registered offices of the company and made accessible to the competent authority.

International Partnerships Act

The Government of Saint Lucia, through its International Partnership (Amendment) Act, has sought to amend its International Partnership regime.

The amendments will repeal numerous registration provisions of the International Partnership Act, which will prevent the future registration of new international general partnerships and international limited partnerships. Additional information on beneficial ownership should be submitted to the Registrar.

More expansively, where a partnership was registered prior to 1 December 2018, the registration appears to remain valid until 30 June 2021 and thereafter it is expected to be terminated. Furthermore, a partnership registered prior to 1 December 2018 will not be permitted to carry out any business activity other than what it was established for.

International Trusts Act

In light of the EUCoCG's/FHTPs review of the International Trusts regime, the Government of Saint Lucia, through its International Trust (Amendment) Act has sought to amend the regime.

The amendments will repeal numerous key registration provisions of the International Trust Act, which will preclude the future registration of an international trust. Additionally, international trusts registered prior to 1 December 2018 will not be permitted to acquire any new assets or engage in a purpose other than what it was established for. Particulars on beneficial ownership is required to be kept by the Registered Trustee and made available to the competent authority.

While the tax benefits under the Act have not been expressly repealed, one of the amendments proposed is that provided an international trust was registered prior to 1 December 2018, the provisions of the International Trust Act (inclusive of the tax benefits) will continue to apply to such entities until 30 June 2021. It is presumed that after this date, the Act will no longer apply to any international trust that has been registered under the Act.

Free Zones Act

In light of the EUCoCG's review of Saint Lucia's Free Zones regime, the Government of Saint Lucia, through its Free Zone (Amendment) Bill, has sought to make a number of changes to the operation and taxation of the Free Zones regime.

The amendments seek to clarify that a free zone business is permitted to carry on domestic business. However, a free zone business will also no longer be permitted to carry on banking, financial, insurance and other professional services (mobile activities) within the free zone.

The 20-year tax exemption on dividends paid by a free zone business will be removed, which is intended to reflect the status quo that all taxpayers, irrespective of the Free Zone Act, are exempt from tax on dividends. Consequently, a free zone business shall be exempt from corporate income tax and capital gains taxes levied for the first five years, after which the free zone business will be subject to tax at the maximum rate of 8%. Saint Lucia does not currently tax capital gains.

Furthermore, tax credits granted to free zone businesses from the employment of Saint Lucia nationals will be amended as follows:

The amendments place greater emphasis on substance obligations by requiring a free zone business applicant to furnish the Free Zone Management Authority, in its application for a free zone license, with details in relation to the following:

• Activity that will be carried on
• Quantum and type of expenses and assets of the free zone business
• Information on physical plant, premises or office space
• Information on the number of employees and the required skills and qualifications of full-time employees of the free zone business

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Services Ltd, Regional Tax Leader, Trinidad and Tobago

• Wade George
  wade.george@tt.ey.com

Ernst & Young Services Ltd, Tax Services, Barbados

• Maria Robinson
  maria.robinson@bb.ey.com

Ernst & Young LLP, Caribbean Tax Desk, New York

• La-Tanya Edwards
  la-tanya.n.edwards1@ey.com

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ATTACHMENT

PDF version of Tax Alert 2018-2462