BAHAMAS: An introduction
More Resilient Than Expected: How Financial Services in The Bahamas Survived Both the Transparency Wave and Base Erosion and Profit Shifting
The Bahamas has, since the 1990s, been considered an offshore financial centre. Through innovations in trust, banking, insurance and company law, the jurisdiction adopted a flexible legislative framework that caters to and is often reserved for non-resident investors. Like other offshore financial centres, The Bahamas also offers a combination of confidentiality and low-tax benefits. Until the recent enactment of the Commercial Entities (Substance Requirements) Act (CERSA) and subsequently CESRA 2023, offshore trusts and other offshore products were even more attractive due to the absence of any requirements for substantial and real economic presence in the jurisdiction.
Trusts are not unique to The Bahamas. However, trust structures in The Bahamas provide confidentiality for persons interested in using the trust for that purpose. Identities of beneficiaries and the settlor may be kept private. Furthermore, the settlor and potentially beneficiaries may be relieved of exchange controls and/or tax liabilities of their home jurisdiction.
Automatic exchange of information was introduced for the purpose of combating tax evasion. The United States first introduced Foreign Account Tax Compliance Act (FATCA) followed by the development of the Common Reporting Standard (CRS) by the Organisation for Economic Co-operation and Development required the enactment of Bahamian legislation to comply with FATCA and CRS such as the requirement to report the identity of controlling persons of offshore accounts to onshore jurisdictions. Under the Register of Beneficial Ownership Act (“the RBO Act”), registered agents are now required to report beneficial owners for the maintenance of a register by the Registrar General. The list is not, however, public. Accordingly, the automatic exchange of tax information and the register of beneficial owners has little to no effect on confidentiality, as the identities of persons are not contained in any public list. Accordingly, confidentiality remains a hallmark of offshore jurisdictions.
There is no income or corporate tax in The Bahamas. Ring-fencing provisions offer preferential tax treatment for offshore products through reduced rates or full exemptions while local Bahamian companies that may form a part of a trust structure are taxed.
In order to comply with the OECD’s initiative on base erosion and profit shifting, The Bahamas enacted CESRA. The implications of the substance requirements are that many so called brass-plate companies which were part of trust structures failed substance requirements under CESRA and previous trusts required restructuring to satisfy CESRA substance requirements. Prior to the enactment of legislation to give effect to base erosion and profit shifting, many believed that such legislation would be a major threat to the sustainability of offshore financial centres. Despite the requirement for entities to demonstrate a substantial economic presence in the jurisdiction, investors have found ways to overcome the threshold. Holding companies now rent and staff offices in order to maintain tax benefits. Further and in any event, the novelty of the effects of CESRA has been minimal as financial services in The Bahamas have been highly regulated for years due to anti-money laundering initiatives and so-called brass-plate institutions have in large part disappeared from the jurisdiction before the enactment of CESRA. Accordingly, the effects on offshore products have been minimal and The Bahamas remains a desirable offshore financial centre.