A foreign investor can choose from a variety of structures to pursue an investment opportunity in Trinidad & Tobago. There are a number of factors to be weighed in making this choice, including tax.
In this Chapter, Angelique Bart, Partner in Hamel-Smith’s Tax Practice Group gives an overview of the available business structures, their formation requirements and regulations, as well as the advantages and disadvantages. Some of the contractual arrangements entered into between the different entities, and the limitations set by the law on these arrangements are also discussed.
Options for Business Entity/Structure
A foreign investor has various options available for carrying out its investment activity in Trinidad and Tobago. These include:
• forming a limited liability company;
• establishing a branch;
• establishing a partnership;
· establishing a joint venture; and
• by way of acquisitions and mergers.
Establishing an agency arrangement with a local partner is discussed in the section Agency, Distributorship and Franchise.
It is important for the investor to determine the most appropriate legal structure to achieve its goals. Frequently, taxation is one of the most important factors but other considerations affecting the choice of business structure include the size and complexity of the proposed operation, the security required by financiers, the cost of complying with statutory requirements, and whether limited liability is required or desirable.
Incorporation of a Company
Incorporating a company in Trinidad & Tobago is a relatively straightforward process. An incorporated company is a legal entity separate and distinct from its members. A company has perpetual succession, the ability to enter into contracts, the ability to sue and be sued, and both criminal and civil liability. In the case of a trading company, the most common form is that of a company limited by shares. Shareholders may elect to have either limited or unlimited liability.
Limited Liability Company
Where a company is limited by shares, the liability of each shareholder for debts or expenses (in the event of winding up) will be limited to the unpaid amount on his shares (since unpaid shares are not permitted for new companies, this is not significant). Former members who have not been members for more than one year are excluded from liability.
This is a common type of business structure with well developed statutory and case law support which provides a foreign investor with a level of certainty of the outcome of any disputes. For foreign investors seeking to strengthen their commercial presence and operations in Trinidad and Tobago, incorporating a local subsidiary may create the impression that the company is rooted locally. This, in turn, may lead to greater acceptance in the local business environment, especially when compared to a foreign company operating through an agent.
Other main advantages of incorporation of a company are:
• Option of limited liability to the shareholders
• Ease of transfer of control
• Perpetual existence
• Familiarity of business community and public sector with this business form
• No minimum capitalization requirements.
Disadvantages of Incorporation
The Companies Act imposes formal procedural rules in addition to corporate record keeping and reporting requirements. These requirements, e.g. Statutory Notices of Change of Directors, Secretary and Address, and maintaining of the requisite Statutory Registers can make the company relatively expensive to administer when compared with other structures.
Furthermore, there are statutory compliance duties with sanctions for non-compliance. Pursuant to the provisions of the Companies Act, it is an offence to file statutorily required corporate documents beyond the time prescribed by the Act. Although in the past the penalties stipulated for late filings had not been enforced, within the past year the penalties have been increased to and applied to all late filings. With respect to all late filings except the change of registered address, the fine imposed after 30 days from the due date of filing is $300.00 every 30 days. With respect to the change of registered address, it is $300.00 for every 15 days not filed.
Forming a Limited Liability Company
The name of a proposed company with limited liability must include the word ‘Limited’ or ‘Ltd.’ and be approved by the Registrar of Companies in advance. The Companies Act requires the preparation and registration of Articles of Incorporation which are the constitutional instruments of the company together with other statutory forms. Thereafter the Registrar of Companies issues a Certificate of Incorporation.
The Articles of Incorporation are required to set out:
• its proposed name
• whether the members’ liability is limited or unlimited
· the number of directors
• its classes of shares
• whether the right to transfer shares is restricted
• any restrictions on the business that the Company may carry on; and
• whether it is a non-profit company
The shareholders of a Company are permitted to enter into a Unanimous Shareholders’ Agreement which may not only govern the relationship between the shareholders, but also restrict in whole or in part the power of the directors to manage the affairs and business of the Company. The Shareholders’ Agreement can allocate these powers of the directors to the shareholders. In such cases, the shareholders will have all the rights and liabilities of directors to the extent of such restriction and to the same extent, the directors will be relieved. Where there is such an agreement, written notice of its existence or termination must be filed in the Companies Registry.
With respect to non-public companies (whose shares/debentures are or were not part of a distribution to the public), the following characteristics also apply:
· Minimum of one (1) shareholder; no maximum number of members
· Shares may be allotted once the certificate of incorporation is received
· Minimum of two (2) directors
· A shareholder’s right to transfer shares can be restricted.
This may be contrasted with a public company which must have no fewer than three directors, at least two of whom are not to be officers or employees of the company or any of its affiliates. A director may be an individual or a body corporate, and there are no specific requirements regarding the nationality of directors appointed.
Further, under the Foreign Investment Act, (FIA), a foreign investor is effectively any corporation incorporated outside of Caricom (members of the Caribbean Community States) or, even if so incorporated, owned and controlled by a person(s) who are not citizens of Caricom. Prior to the acquisition of the Shares in a non-public company incorporated in Trinidad and Tobago, it is required to supply a notice of such proposed acquisition to the Minister of Finance and setting out certain statutorily prescribed particulars.
Capitalisation Requirements and Liability of Members
There are no minimum share capital requirements or debt/equity ratio for a company, and a single shareholder company will be permitted. A company affords a convenient facility for securing the requisite capital as well as providing creative ways for profit-sharing among shareholders
A company is required to maintain a ‘stated capital account’ for each class and series of shares it issues to which it is required to add the full amount of the consideration for its shares.
In the event of a winding-up, every present or past member is liable to contribute to the assets of the Company to an amount sufficient to pay its debts and expenses, and to adjust rights as between past and present members except that:
• a past member who has ceased to be a member for over one year is not so liable; and
• no contribution is required of a past or present member exceeding the amount unpaid, if any, on his shares or the amount undertaken to be contributed in the event of winding-up.
If a locally incorporated company creates a charge on a property situate in Trinidad and Tobago, or if it acquires such property already subject to a charge, the charge must be registered with the Registrar of Companies and a register of such charges must be kept at the company’s registered office. The consequence of failure to register such charges is that any security on such property conferred by the charge is void against the liquidator and any creditor of the company. However, the charge is valid against the company even if it is not registered and consequently a person who acquires property from a chargee before the company is wound up acquires a good title against the liquidator and the company’s other creditors.
Establishment of a Branch
An external company is one where the incorporated body is formed other than under the laws of Trinidad and Tobago. In other words, a branch of the foreign company will be registered at the local Companies Registry. Registering a branch will increase and strengthen a foreign investor’s commercial presence in Trinidad and Tobago.
Within fourteen days after an “external” company has established a place of business, it is required to register at the local Companies Registry. In order to effect registration, a company is required to file with the Registrar of Companies the following documents:
• The Charter, memorandum and articles or other corporate instruments defining the constitution of the Company;
· An affidavit or solemn declaration verifying the accuracy of the corporate instruments;
• A Power of Attorney in favour of a locally incorporated company, or two or more persons resident in Trinidad & Tobago empowering them to accept service in Trinidad & Tobago of legal process and notices; and
• Particulars in relation to its incorporation, its share capital, address and directors.
A branch office of an external company is required to file with the Registrar of Companies an annual return within thirty (30) days of the anniversary date of its registration. Any changes of directors or alteration in its constitutional documents or objects or restriction of its business must be filed within 30 days of such change.
While it may be relatively simple to set up a foreign branch office, there is a cost attached. Additionally, there may be tax disadvantages for trading branches. The branch and the local subsidiary both pay corporation tax at the same rate. A non-resident company is liable for corporation tax on income arising or derived from any trade or business carried on by it in Trinidad and Tobago.
Previously, the local subsidiary had a distinct advantage over a branch in relation to the ability to obtain the fiscal benefit of a tax holiday under the Fiscal Incentives Act, but this Act is no longer operational, except in favour of entities which received an Order in their favour prior to January 2008.
The after-tax profits of a branch, whether or not remitted abroad, are deemed to be distributed and repatriated and subject to withholding tax to the extent that they are not re-invested to the satisfaction of the Board of Inland Revenue (BIR) other than in replacement of fixed assets. Profits of a locally incorporated or resident company, on the other hand, are subject to withholding tax only to the extent of actual remittances abroad as dividends. Residence for tax purposes is where the central management and control takes place. In other words, by deferring the time of declaring dividends the local subsidiary can defer the withholding tax to be paid by its parent shareholder, which can be advantageous to companies that do not want immediate use of the dividends.
Overseas Head Office charges for payments which are directly related to the branch are deductible for tax purposes, subject to some limitations.
Subject to the above, the taxable profits of a branch of a foreign company in Trinidad and Tobago are calculated similarly to those of a locally incorporated company.
As with locally incorporated companies, if a foreign branch office creates a charge on a property situate in Trinidad & Tobago, or if it acquires such property already subject to a charge, the charge must be registered with the Registrar of Companies and a register of such charges must be kept by the branch office. Failure to so register the charges has similar consequences.
The Partnership Act provides for the creation of partnerships, where the parties carry on business with a common view to making a profit without incorporation. In the absence of an agreement to the contrary between the parties, the Partnership Act will govern many aspects of the business of the partnership and the relationship between the members. The parties will often enter into a partnership agreement, which is designed to avoid some of the implications of the Partnership Act and specifically exclude or vary the interests, rights and duties of the partners. A partnership agreement may be oral, written (best practice), or implied from the parties’ conduct.
In Trinidad and Tobago, a partnership is not a separate legal entity in law, and partners have joint and several unlimited liability for all debts and obligations of the partnership. Even the unauthorised action of one partner may bind other partners to third parties as the law regards each partner as agent of the others. On winding up of the partnership, each partner must pay his respective share of the partnerships’ debts.
There can be a partnership between individuals, or between individuals and companies, and between two or more companies. There are no accounting, auditing or disclosure rules regarding partnerships. Limited liability Partnerships are not an available vehicle for effecting business in Trinidad & Tobago. It is possible for a local company to be formed and incorporated, the articles of which would qualify for US partnership (pass-through) treatment for US tax purposes. This involves varying the restrictions on transfers of shares, centralised management, unlimited liability and possible continuity of life through a deemed resolution resulting in automatic dissolution.
Partnerships have fewer formal requirements than a company. They are relatively easy to dissolve and wind up, unlike a company which is more complex to liquidate. However, there are certain characteristics of a partnership that can be inconvenient compared to a company. For instance, the partners have a fiduciary duty to act in good faith vis-à-vis the other partners and the partnership. Also, subject to provisions in the partnership agreement (if one exists), the addition of a new partner may require dissolution and liquidation of the partnership.
The parties to a joint venture may wish to structure the arrangement as a joint venture Company, a Partnership Agreement or a purely contractual arrangement in the form of a Joint Venture Agreement. In order to do so, the participants should contemplate the options and depending on the circumstances select the option that will create the most appropriate vehicle. Factors that govern this determination include that parties want to:
· select the option that affords them the most effective taxation and financial structure;
· minimise the joint venture parties’ risk or exposure.
Where a Partnership Agreement or a purely contractual arrangement is selected by the parties to a joint venture, this is usually in respect of an isolated short-term operation. Where an ongoing operation is envisaged, it is normal to form a joint venture company.
In a joint venture conducted through the vehicle of a separate legal entity, the form of articles or by-laws will depend on the arrangements made between the parties. The form of articles or by-laws may be a combination of the following:
· Majority shareholders with no provision being made for minority protection;
· Deadlock arrangements where the company’s actions require unanimous agreement between the parties. In the event of disagreement the parties may make arrangements for one party to buy out the other or for the Company to be dissolved;
· Minority shareholders who insist on some minority protection, usually a veto on certain key topics. Often this is achieved by creating different classes of shares. A minority shareholder may also include a ‘piggy-back’ option to be bought out in the event that the majority shareholder elects to sell his shares to a third party.
Alternatively, a joint venture company may use standard articles which are then subject to the terms of a joint venture/shareholder agreement setting out in detail the arrangements between the parties. In using this method, a greater amount of privacy is retained between the parties.
Regardless of the specific form selected, certain considerations are vital to the success of a joint venture, including:
· The nature and duration of the transaction, and the goals of the parties to the joint venture;
· Selecting a suitable joint venture partner in terms of having compatible goals and complementary characteristics. It is often advisable to conduct due diligence investigations and be familiar with the operations of the proposed partner
· Financing and financial management - the amount and type of financing, respective financial contributions of the parties, limits to the financial commitment of the parties, and the recourse of the other participants where one participant fails to join in future financing;
· The proportions of respective parties’ interest;
· Organizing and preparing for the eventualities which may affect the joint venture
· Whether there is to be any restraint on competition;
· Confidentiality amongst the joint venture parties;
· A dispute resolution process for disputes arising among the parties, particularly at the management or directorship level
· Exit from the joint venture - address the various types of events of default and how these are to be dealt with.
Acquisition and Mergers
The acquisition of an existing business is most commonly achieved by the purchase of shares in an existing local company. As the change of ownership in the shares does not generally affect the target company’s assets and liabilities, it is important that the investor conducts in-depth due diligence inquiries and incorporates in the share purchase agreement extensive warranties and indemnities so that it can recover an appropriate part of the purchase price if the company proves to have liabilities or other deficiencies which were not anticipated.
As the employees constitute one of the most important elements in a take-over, an investor will want to ensure that any pension scheme operated by the existing business is properly funded. An acquirer must also consider whether the company's employees are unionised and whether there are pending claims by employees for severance, wrongful dismissal or other employment-related matters. Additionally, the investor will generally wish to restrain the vendor from carrying on a competing business in the immediate future following a sale. It should be borne in mind that the ability to carry forward losses for tax purposes may not be available after the acquisition of the shares in the target company as the BIR has a discretion to disallow such claims in certain circumstances.
Other key considerations include whether there are pending legal claims and ensuring that the company is in compliance with the local regulatory regime, especially environmental and occupational health and safety laws. Such claims and non-compliance can significantly impact a target company’s finances and operations.
Where shares are listed on the Stock Exchange, specific requirements under the Securities Industry Act, the Companies Act, the Foreign Investment Act and the Stock Exchange Take-Over By-laws 2005 will apply and will have to be taken into consideration in a take-over. The Securities Industry Act prohibits a listed company under foreign control from issuing capital in Trinidad and Tobago unless it has applied for and obtained the written approval of the Minister. No capital gains taxes or stamp duties are imposed on the transfer of stock listed on the Stock Exchange in accordance with its rules. Where the transfer is not in accordance with the rules of the Stock Exchange stamp duty is charged at 5% of the market value of the transaction.
There are no anti-trust laws limiting acquisitions, but the Government has expressed an intention to introduce anti-monopolisation legislation. Under the Securities Industry Act, a person who acquires l0% or more of the nominal share capital of a listed company must notify such company of the fact within 5 days of the event. Under the Companies Act, a substantial shareholder of a public company is required to notify the company of such acquisition.
Alternatively the acquisition of a business may be achieved by the purchase of the assets including the goodwill of the business. The assets purchase agreement will incorporate warranties relating to the business and the assets, though less extensive than in a share purchase, as the investor will only be liable for those liabilities expressly assumed by it and need not warrant against unexpected liabilities of the business. Where after the sale the business is conducted primarily with the same employees and conducting the same business, it will be treated as a successor organisation and therefore will be liable for termination benefits which accrue to employees prior to the take-over, unless this is settled by the vendor at time of the sale.
It is important to bear in mind that as from the date of the asset purchase agreement, risk in the assets being purchased passes to the investor and accordingly arrangements must be made to transfer the benefit of insurance cover. The allocation of the purchase price between trading stock and fixed assets can be an issue of primary concern as the vendor will generally wish to ensure that as much of the purchase price as possible is treated as a capital gain while the preference of the purchaser tends towards allocating the expenditure to trading stock.
The Value Added Tax (VAT) Act provides that on the transfer of assets of a business as a going concern only the sale of stock-in-trade gives rise to VAT, the transfer of other assets being VAT exempt. On the closure of a business, the disposal of assets other than real property attracts VAT.
As indicated, taxation may be one of the more important factors determining the final structure of the enterprise. The relevant tax issues are covered in the section on Taxation.■