Removal of Preferential Exemptions Law in The Bahamas

NEW LEGISLATION (“removal of preferential exemptions law”) is now in force in The Bahamas to end preferential tax regimes previously given in Bahamian law to certain types of Bahamian entities when used by non-residents. The removal of preferential exemptions law took effect in 2019. It is one of several measures recently enacted with the aim of aligning The Bahamas with new and evolving international standards amongst financial centers.

The removal of preferential exemptions law was enacted at the close of 2018 by the Removal of Preferential Exemptions Act, 2018.

The removal of preferential exemptions law is responsive to the Base Erosion Profit Shifting (BEPS) project of the OECD and demonstrates The Bahamas’ commitment not to engage in so-called ‘harmful’ tax practices.

Which entities are affected?

The removal of preferential exemptions law applies to entities (collectively “Bahamian entities”) incorporated, registered or continued under one or other of the following Bahamian legislation:

a) International Business Companies Act (“IBC”);
b) Exempted Limited Partnership Act (“ELP”);
c) Investment Condominium Act (“ICON”); or
d) Executive Entities Act (“EE”).

What are ‘preferential exemptions’?

Up to the end of 2018, so long as one of the Bahamian entities was owned by a non-resident and operating exclusively outside of The Bahamas, the enabling law applicable to that entity exempted (“Preferential Exemptions”) it from the following range of taxes (albeit most of those taxes have never been introduced) in The Bahamas, namely:

business licence fees
income tax
corporation tax
capital gains tax
estate tax
inheritance tax
succession or gift tax
stamp tax

Importantly, income tax, capital gains tax, estate tax and inheritance tax do not exist and have never existed under the laws of The Bahamas for anyone. As such, insofar as those particular taxes are concerned, the removal of preferential exemptions law has no practical current application. However, business licence fees and stamp tax are existing in Bahamian law and the removal of preferential exemptions law is relevant in the context of those taxes.

Such exemptions are termed preferential exemptions because they only applied to the Bahamian entity if the entity did not operate within the domestic Bahamian economy. If such a Bahamian entity operated domestically, it would be ‘resident’ for Bahamian exchange control purposes and as such liable for any such tax (assuming the tax in question were then existing) in The Bahamas. So the effect of the preferential exemptions was that international persons utilising Bahamian entities for commercial activity outside of The Bahamas were accorded by Bahamian law a preference over resident persons when using such entities for commercial activity within The Bahamas.

Does it matter when the Bahamian entity was established?

The removal of preferential exemptions law applies differently to Bahamian entities depending on whether the Bahamian entity was incorporated before or after 31 December 2018, namely:

Bahamian entities existing prior to 31 December 2018 –
Such entities which already enjoyed the rights to preferential exemptions (i.e. owned by a person(s) non-resident and operating exclusively outside of The Bahamas) will continue to enjoy the preferential exemptions until 30 December 2021, at which time the preferential exemption will come to an end.

Bahamian entities established as of 2019 –
Such entities will not enjoy rights to preferential exemptions.

How to get further help?

For further information, please contact the commercial lawyers of Delaney Partners at info@delaneypartners.com or Delaney Corp at DelaneyCorp@delaneypartners.com.

Disclaimer: This publication is intended for information purposes only and does not constitute legal, accounting or tax advice.