DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE 

SECOND PROTOCOL SIGNED ON JULY 14, 2004, AMENDING THE 

CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND 

BARBADOS FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE 

PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, 

SIGNED ON DECEMBER 31, 1984 

This is a technical explanation of the Second Protocol signed at Washington on 

July 14, 2004 (the “Protocol”), amending the Convention between the United States of 

America and Barbados for the avoidance of double taxation and the prevention of fiscal 

evasion with respect to taxes on income, signed at Bridgetown on December 31, 1984 

(the “1984 Convention”), as amended by a protocol signed at Washington, D.C. on 

December 18, 1991 (the “1991 Protocol”). The term “Convention” refers to the 1984 

Convention as modified by both the 1991 Protocol and the Protocol. 

Negotiations took into account the U.S. Treasury Department’s current tax treaty 

policy and the Treasury Department’s Model Income Tax Convention, published on 

September 20, 1996 (the “U.S. Model”). Negotiations also took into account the Model 

Tax Convention on Income and on Capital, published by the Organization for Economic 

Cooperation and Development, as updated in January 2003 (the “OECD Model”), and 

recent tax treaties concluded by both countries. 

The Protocol was accompanied by Understandings (the “Understandings”), 

implemented through an exchange of notes, indicating the views of the negotiators and of 

the States with respect to Article 22 (Limitation on Benefits) of the Convention. The 

Understandings also provided that the Understandings accompanying the 1991 Protocol 

(the “1991 Understandings”) continue to apply for purposes of applying Article 22 of the 

Convention, except to the extent that the 1991 Understandings are inconsistent with the 

provisions of Article 22 (as amended by the Protocol). The Understandings and the 1991 

Understandings are discussed in connection with the relevant portions of the Protocol. 

The Technical Explanation is an official guide to the Protocol. It reflects the 

policies behind particular Protocol provisions, as well as understandings reached with 

respect to the application and interpretation of the Protocol. This Technical Explanation 

should be read together with the Technical Explanations of the 1984 Convention and the 

1991 Protocol. 

References in the Technical Explanation to “he” or “his” should be read to mean 

“he or she” or “his or her.” 

Article I 

Article I of the Protocol modifies paragraph 3 of Article 1 of the Convention 

which permits the United States to continue to tax as U.S. citizens former citizens whose 

loss of citizenship had as one of its principal purposes the avoidance of tax. To reflect 

1996 amendments to U.S. tax law in this area, the Protocol extends this treatment to 

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former long-term residents whose loss of such status had as one of its principal purposes 

the avoidance of tax. 

Section 877 of the Internal Revenue Code of 1986 (the “Code”) applies to former 

citizens and long-term residents of the United States whose loss of citizenship or longterm resident status had as one of its principal purposes the avoidance of tax. Under 

section 877, the United States generally treats an individual as having a principal purpose 

to avoid tax if either of the following criteria exceed established thresholds: (a) the 

average annual net income tax of such individual for the period of 5 taxable years ending 

before the date of the loss of status, or (b) the net worth of such individual as of the date 

of the loss of status. The thresholds are adjusted annually for inflation. Section 877(c) 

provides certain exceptions to these presumptions of tax avoidance. The United States 

defines “long-term resident” as an individual (other than a U.S. citizen) who is a lawful 

permanent resident of the United States in at least 8 of the prior 15 taxable years. An 

individual is not treated as a lawful permanent resident for any taxable year if such 

individual is treated as a resident of a foreign country under the provisions of a tax treaty 

between the United States and the foreign country and the individual does not waive the 

benefits of such treaty applicable to residents of the foreign country. 

Article II 

Article II of the Protocol replaces Article 22 (Limitation on Benefits) of the 

Convention. 

Structure of the Article 

Article 22 follows the form used in other recent U.S. income tax treaties. 

Paragraph 1 states the general rule that a resident of a Contracting State is entitled to 

benefits otherwise accorded to residents only to the extent that the resident satisfies the 

requirements of the Article and any other specified conditions for the obtaining of such 

benefits and lists a series of attributes of a resident of a Contracting State, any one of 

which suffices to make such resident entitled to all the benefits of the Convention. 

Paragraph 2 sets forth the active trade or business test, under which a person not entitled 

to benefits under paragraph 1 may nonetheless be granted benefits with regard to certain 

types of income. Paragraph 3 provides that benefits also may be granted if the competent 

authority of the State from which the income arises determines that it is appropriate to 

grant benefits in that case. Paragraph 4 defines what constitutes a recognized stock 

exchange for purposes of paragraph 1. Paragraph 5 authorizes the competent authorities 

to develop agreed applications of the Article and to exchange information necessary for 

carrying out the provisions of the Article. Paragraph 6 excludes certain persons that are 

residents and that otherwise would qua lify for the benefits of the Convention under 

paragraphs 1 or 2 of this Article from the benefits of Articles 10 (Dividends), 11 

(Interest) and 12 (Royalties). 

Article 22 and the anti-abuse provisions of domestic law complement each other, 

as Article 22 effectively determines whether an entity has a sufficient nexus to the 

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Contracting State to be treated as a resident for treaty purposes, while domestic antiabuse provisions (e.g., business purpose, substance-over-form, step transaction or conduit 

principles) determine whether a particular transaction should be recast in accordance with 

its substance. Thus, internal law principles of the source Contracting State may be 

applied to identify the beneficial owner of an item of income, and Article 22 then will be 

applied to the beneficial owner to determine if that person is entitled to the benefits of the 

Convention with respect to such income. 

Paragraph 1 

Paragraph 1 provides that, except as otherwise provided, a resident of a 

Contracting State will be entitled to all the benefits of the Convention otherwise accorded 

to residents of a Contracting State only if the resident is described in one of the 

subparagraphs of that paragraph 1. 

The benefits otherwise accorded to residents under the Convention include all 

limitations on source-based taxation under Articles 6 through 21, the treaty-based relief 

from double taxation provided by Article 23 (Relief from Double Taxation), and the 

protection afforded to residents of a Contracting State under Article 24 (NonDiscrimination). Some provisions do not require that a person be a resident in order to 

enjoy the benefits of those provisions. Article 25 (Mutual Agreement Procedure) is not 

limited to residents of the Contracting States, and Article 27 (Diplomatic Agents and 

Consular Officers) applies to diplomatic agents or consular officials regardless of 

residence. Article 22 accordingly does not limit the availability of treaty benefits under 

these provisions. 

Paragraph 1 has six subparagraphs, each of which describes a category of 

residents that are entitled to all benefits of the Convention. It is intended that the 

provisions of paragraph 1 will be self-executing. Claiming benefits under paragraph 1 

does not require advance competent authority ruling or approval. The tax authorities 

may, of course, on review, determine that the taxpayer has improperly interpreted the 

paragraph and is not entitled to the benefits claimed. 

Individuals -- Subparagraph 1(a) 

Subparagraph (a) provides that individual residents of a Contracting State will be 

entitled to all the benefits of the Convention. If such an individual receives income as a 

nominee on behalf of a third country resident, benefits may be denied under the 

applicable articles of the Conve ntion by the requirement that the beneficial owner of the 

income be a resident of a Contracting State. 

Governments -- Subparagraph 1(b) 

Subparagraph (b) provides that the Contracting States and any political 

subdivision or local authority thereof will be entitled to all the benefits of the Convention. 

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Publicly-Traded Corporations -- Subparagraph 1(c) 

Subparagraph (c) applies to two categories of companies: publicly traded 

companies and subsidiaries of publicly traded companies. A company resident in a 

Contracting State is entitled to all the benefits of the Convention under clause (i) of 

subparagraph (c) if its principal class of shares is: (a) listed on a recognized stock 

exchange located in the Contracting State of which the company is a resident; (b) 

primarily traded on a recognized stock exchange located in the Contracting State of 

which the company is a resident; and (c) regularly traded on one or more recognized 

stock exchanges. In the case of a company that is resident in Barbados, the company 

alternatively may satisfy the second requirement if it is primarily traded on either the 

Jamaica Stock Exchange or the Trinidad Stock Exchange, each of which is a recognized 

stock exchange, as discussed below. 

The term “recognized stock exchange” is defined in paragraph 4. It includes the 

NASDAQ System and any stock exchange registered with the Securities and Exchange 

Commission as a national securities exchange for purposes of the Securities Exchange 

Act of 1934, as well as the Barbados Stock Exchange, the Jamaica Stock Exchange and 

the Trinidad Stock Exchange. The term also includes any other stock exchange agreed 

upon by the competent authorities of the Contracting States. 

The term “principal class of shares” is not defined in the Convention. In 

accordance with paragraph 2 of Article 3 (General Definitions), this term will have the 

meaning it has under the laws of the State concerning the taxes to which the Convention 

applies, generally the source State. Generally, under U.S. tax law, the “principal class of 

shares” is defined as the common shares of the company representing the majority of the 

aggregate voting power and value of the company. If the company does not have a class 

of ordinary or common shares representing the majority of the aggregate voting power 

and value of the company, then the “principal class of shares” is that class or any 

combination of classes of shares that represents, in the aggregate, a majority of the voting 

power and value of the company. “Shares” include depository receipts for shares or trust 

certificates for shares. 

The term “primarily traded” is not defined in the Convention. In accordance with 

paragraph 2 of Article 3 (General Definitions), this term will have the meaning it has 

under the laws of the State concerning the taxes to which the Convention applies, 

generally the source State. In the case of the United States, this term is understood to 

have the meaning it has under Treas. Reg. section 1.884-5(d)(3), relating to the branch 

tax provisions of the Code. Accordingly, stock of a corporation is “primarily traded” on 

a recognized stock exchange in the Contracting State of which the company is a resident 

if the number of shares in the company’s principal class of shares that are traded during 

the taxable year on all recognized stock exchanges in that Contracting State exceeds the 

number of shares in the company’s principal class of shares that are traded during that 

year on established securities markets in any other single foreign country. 

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The term “regularly traded” is not defined in the Convention. In accordance with 

paragraph 2 of Article 3 (General Definitions), this term will have the meaning it has 

under the laws of the State concerning the taxes to which the Convention applies, 

generally the source State. In the case of the United States, this term is understood to 

have the meaning it has under Treas. Reg. section 1.884-5(d)(4)(i)(B), relating to the 

branch tax provisions of the Code. Under these regulations, a class of shares is 

considered to be “regularly traded” if two requirements are met: trades in the class of 

shares are made in more than de minimis quantities on at least 60 days during the taxable 

year, and the aggregate number of shares in the class traded during the year is at least 10 

percent of the average number of shares outstanding during the year. Treas. Reg. section 

1.884-5(d)(4)(i)(A), (ii) and (iii) will not be taken into account for purposes of defining 

the term "regularly traded" under the Convention. 

The regular trading requirement can be met by trading on any recognized 

exchange or exchanges. Trading on one or more recognized stock exchanges may be 

aggregated for purposes of this requirement. Authorized but unissued shares are not 

considered for purposes of this test. 

A company resident in a Contracting State is entitled to all the benefits of the 

Convention under clause (ii) of subparagraph (c) of paragraph 1 if: (a) at least 50 percent 

of the company’s principal class of shares is owned directly or indirectly by companies 

that are publicly traded as provided above ; and (b) the company satisfies the requirements 

of the base erosion clause of paragraph 1(d) of this Article. Furthermore, in the case of 

indirect ownership, each intermediate owner must be a person entitled to benefits of the 

Convention under this clause (ii). Thus, for example, a Barbados company, all the shares 

of which are owned by another Barbados company, would qualify for benefits under the 

Convention if the principal class of shares of the Barbados parent company were listed on 

the Barbados Stock Exchange, primarily traded on the Barbados Stock Exchange and 

regularly traded on the Barbados Stock Exchange and the New York Stock Exchange. 

Ownership/Base Erosion -- Subparagraph 1(d) 

Subparagraph 1(d) provides an additional test that applies to any form of legal 

entity that is a resident of a Contracting State. The test provided in subparagraph (d), the 

so-called ownership and base erosion test, is a two-part test. Both prongs of the test must 

be satisfied for the resident to be entitled to benefits under subparagraph 1(d). 

The ownership prong of the test, under clause (i), requires that more than 50 

percent of the beneficial interest in that person (or in the case of a company, more than 50 

percent of the number of shares of each class of whose shares) is owned, directly or 

indirectly, on at least half the days of the taxable year by residents of that State that are 

entitled to the benefits of this Convention under subparagraphs (a), (b), (c)i), (e) or (f) 

(other than a person described in paragraph 6 of this Article). Furthermore, in the case of 

indirect ownership, each intermediate owner must be a resident of that Contracting State. 

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Trusts may be entitled to benefits under this provision if they are treated as 

residents under Article 4 (Resident) and they otherwise satisfy the requirements of this 

subparagraph. For purposes of this subparagraph, the beneficial interests in a trust will be 

considered to be owned by its beneficiaries in proportion to each beneficiary's actuarial 

interest in the trust. The interest of a remainder beneficiary will be equal to 100 percent 

less the aggregate percentages held by income beneficiaries. A beneficiary's interest in a 

trust will not be considered to be owned by a person entitled to benefits under the other 

provisions of paragraph 1 if it is not possible to determine the beneficiary's actuarial 

interest. Consequently, if it is not possible to determine the actuarial interest of any 

beneficiaries in a trust, the ownership test under clause (i) cannot be satisfied, unless all 

possible beneficiaries are persons entitled to benefits under the other subparagraphs of 

paragraph 1. 

The base erosion prong of clause (ii) of subparagraph (d) disqualifies a person if 

50 percent or more of the person’s gross income for the taxable year is paid or accrued, 

directly or indirectly, to persons who are not residents of that same Contracting State 

entitled to the benefits of this Convention under subparagraphs (a), (b), (c)i), (e) or (f) 

(other than a person described in paragraph 6 of this Article) in the form of payments that 

are deductible for the purposes of the taxes covered by this Convention in the State of 

which the person is a resident. The term “gross income” is not defined in the 

Convention. Thus, in accordance with paragraph (2) of Article 3 (General Definitions), 

in determining whether a person deriving income from United States sources is entitled to 

the benefits of the Convention, the United States will ascribe the meaning to the term that 

it has in the United States. In the case of the United States, the term "gross income" has 

the same meaning as such term in section 61 of the Code and the regulations thereunder. 

To the extent they are deductible from the taxable base, trust distributions are 

deductible payments. However, depreciation and amortization deductions, which do not 

represent payments or accruals to other persons, are disregarded for this purpose. 

Deductible payments also do not include arm’s length payments in the ordinary course of 

business for services or tangible property. 

Tax Exempt Organizations -- Subparagraph 1(e) 

A tax-exempt organization other than an exempt pension trust is entitled to all the 

benefits of the Convention, without regard to the residence of its beneficiaries or 

members. Entities qualifying under this subparagraph are those that are organized and 

operated exclusively for religious, charitable, scientific, literary or educational purposes 

and that, by virtue of that status, are generally exempt from income taxation in their 

Contracting State of residence. 

Exempt Employee Benefits Organizations – Subparagraph 1(f) 

A plan, scheme, fund, trust, company or other arrangement established in a 

Contracting State that is operated exclusively to administer or provide employee benefits 

and that, by reason of its nature as such, is generally exempt from income taxation in that 

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State is entitled to all the benefits of the Convention if more than half of the beneficiaries, 

members or participants, if any, in such organization are persons that are entitled, under 

this Article, to the benefits of this Convention. For purposes of this provision, the term 

“beneficiaries” should be understood to refer to the persons receiving benefits from the 

entity. 

Paragraph 2 

Paragraph 2 sets forth a test under which a resident of a Contracting State that is 

not entitled to all benefits of the Convention may receive treaty benefits with respect to 

certain items of income that are connected to an active trade or business conducted in its 

State of residence. 

Subparagraph (a) sets forth the general rule that a resident of a Contracting State 

engaged in the active conduct of a trade or business in that State may obtain the benefits 

of the Convention with respect to an item of income derived in the other Contracting 

State. The item of income, however, must be derived in connection with or incidental to 

that trade or business. 

The term “active trade or business” is defined in clause (iii) of subparagraph 2(d). 

In general, a trade or business comprises activities that constitute (or could constitute) an 

independent economic enterprise carried on for profit. To constitute a trade or business, 

the activities conducted by the resident ordinarily must include every operation which 

forms a part of, or a step in, a process by which an enterprise may earn income or profit. 

The determination of whether the activities of a resident of a Contracting State constitute 

an active trade or business is determined under all the facts and circumstances. A 

resident of a Contracting State actively conducts a trade or business if it regularly 

performs active and substantial management and operational functions through its own 

officers or staff of employees. In this regard, one or more of such activities may be 

carried out by independent contractors under the direct control of the resident. However, 

in determining whether the corporation actively conducts a trade or business, the 

activities of independent contractors shall be disregarded. 

The business of making or managing investments for the resident’s own account 

will be considered to be a trade or business only when part of banking or insurance 

activities conducted by a bank or an insurance company. Such activities conducted by a 

person other than a bank or an insurance company will not be considered to be the 

conduct of an active trade or business, nor would they be considered to be the conduct of 

an active trade or business if conducted by a bank or insurance company but not as part 

of the company’s banking or insurance business. 

For this purpose, a resident will be treated as a bank only if: (a) it is licensed to 

accept deposits from residents of the Contracting State of which it is a resident and to 

conduct, in that State, lend ing or other banking activities; (b) it regularly accepts deposits 

from customers who are residents of the Contracting State of which it is a resident in the 

ordinary course of its business and the amount of deposits shown on the company’s 

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balance sheet is substantial; and (c) it regularly makes loans to customers in the ordinary 

course of its trade or business. Furthermore, a resident will be treated as an insurance 

company only if: (a) it is licensed to insure risks of residents of the Contracting State of 

which it is a resident; and (b) it regularly insures (not including reinsurance) risks of 

customers who are residents of the Contracting State of which it is a resident. 

Because a headquarters operation is in the business of managing investments, a 

company that functions solely as a headquarters company will not be considered to be 

engaged in an active trade or business for purposes of subparagraph (a). 

An item of income is derived in connection with a trade or business if the incomeproducing activity in the State of source is a line of business that “forms a part of” or is 

“complementary” to the trade or business conducted in the State of residence by the 

income recipient. A business activity generally will be considered to form part of a 

business activity conducted in the State of source if the two activities involve the design, 

manufacture or sale of the same products or type of products, or the provision of similar 

services. The notes clarify that the line of business in the State of residence may be 

upstream, downstream, or parallel to the activity conducted in the State of source. Thus, 

the line of business may provide inputs for a manufacturing process that occurs in the 

State of source, may sell the output of that manufacturing process, or simply may sell the 

same sorts of products that are being sold by the trade or business carried on in the State 

of source. 

For two activities to be considered to be “complementary,” the activities need not 

relate to the same types of products or services, but they should be part of the same 

overall industry and be related in the sense that the success or failure of one activity will 

tend to result in success or failure for the other. Where more than one trade or business is 

conducted in the State of source and only one of the trades or businesses forms a part of 

or is complementary to a trade or business conducted in the State of residence, it is 

necessary to identify the trade or business to which an item of income is attributable. 

Royalties generally will be considered to be derived in connection with the trade or 

business to which the underlying intangible property is attributable. Dividends will be 

deemed to be derived first out of earnings and profits of the treaty-benefited trade or 

business, and then out of other earnings and profits. Interest income may be allocated 

under any reasonable method consistently applied. A method that conforms to U.S. 

principles for expense allocation will be considered a reasonable method. 

An item of income derived from the State of source is “incidental to” the trade or 

business carried on in the State of residence if production of the item facilitates the 

conduct of the trade or business in the State of residence. An example of incidental 

income is the temporary investment of working capital of a person in the State of 

residence in securities issued by persons in the State of source. 

Subparagraph (b) of paragraph 2 states a further condition to the general rule in 

subparagraph (a) in cases where the trade or business generating the item of income in 

question is carried on either by the person deriving the income or by any associated 

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enterprises. Subparagraph (b) states that the trade or business carried on in the State of 

residence, under these circumstances, must be substantial in relation to the activity in the 

State of source. The requirement is intended to prevent a narrow case of treaty-shopping 

abuses in which a company attempts to qualify for benefits by engaging in de minimis 

connected business activities in the treaty country in which it is resident (i.e., activities 

that have little economic cost or effect with respect to the company business as a whole). 

The determination of substantiality is made based upon all the facts and 

circumstances and takes into account the comparative sizes of the trades or businesses in 

each Contracting State (measured by reference to asset values, income and payroll 

expenses), the nature of the activities performed in each Contracting State, and the 

relative contributions made to tha t trade or business in each Contracting State. In any 

case, in making each determination or comparison, due regard will be given to the 

relative sizes of the U.S. and Barbados economies. 

In addition to this subjective rule, subparagraph (b) provides a safe harbor under 

which the trade or business of the income recipient may be deemed to be substantial 

based on three ratios that compare the size of the recipient's activities to those conducted 

in the other State with respect to the preceding taxable year, or the average of the 

preceding three years. The three ratios compare: (i) the value of the assets in the 

recipient's State to the assets used in the other State; (ii) the gross income derived in the 

recipient's State to the gross income derived in the other State; and (iii) the payroll 

expense in the recipient's State to the payroll expense in the other State. The average of 

the three ratios must exceed 10 percent, and each individual ratio must equal at least 7.5 

percent. For purposes of this test, if the income recipient owns, directly or indirectly, less 

than 100 percent of the activity conducted in either State, only its proportionate share of 

the activity will be taken into account. 

The determination in subparagraph (b) also is made separately for each item of 

income derived from the State of source. It therefore is possible that a person would be 

entitled to the benefits of the Convention with respect to one item of income but not with 

respect to another. 

If a resident of a Contracting State is entitled to treaty benefits with respect to a 

particular item of income under paragraph 2, the resident is entitled to all benefits of the 

Convention insofar as they affect the taxation of that item of income in the State of 

source. 

The application of the substantiality test only to income from related parties 

focuses only on potential abuse cases, and does not hamper certain other kinds of nonabusive activities, even though the income recipient resident in a Contracting State may 

be very small in relation to the entity generating income in the other Contracting State. 

For example, a small Barbados bank that makes a loan to a very large unrelated U.S. 

business would not have to pass a substantiality test to receive treaty benefits under 

Paragraph 2. 

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As discussed above, paragraph 1 of the Understandings provides that the 1991 

Understandings continue to apply for purposes of applying Article 22 of the Convention, 

except to the extent that the 1991 Understandings are inconsistent with the provision of 

Article 22 (as amended by the Protocol). In this regard, the 1991 Understandings make 

clear that this provision is self executing; unlike the provisions of paragraph 3, discussed 

below, it does not require advance competent authority ruling or approval. The 1991 

Understandings contain a number of examples illustrating the intention of the negotiators 

with respect to the interpretation of the active trade or business provisions in the 1991 

Protocol. 

Subparagraph (c) of paragraph 2 provides special rules for determining whether a 

resident of a Contracting State is engaged in the active conduct of a trade or business 

within the meaning of subparagraph (a). Subparagraph (c) attributes the activities of a 

partnership to each of its partners. Subparagraph (c) also attributes to a person activities 

conducted by persons “connected” to such person. A person (“X”) is connected to 

another person (“Y”) if X possesses 50 percent or more of the beneficial interest in Y (or 

if Y possesses 50 percent or more of the beneficial interest in X). For this purpose, X is 

connected to a company if X owns shares representing 50 percent or more of the 

aggregate voting power and value of the company or fifty percent or more of the 

beneficial equity interest in the company. X also is connected to Y if a third person 

possesses 50 percent or more of the beneficial interest in both X and Y. For this purpose, 

if X or Y is a company, the threshold relationship with respect to such company or 

companies is 50 percent or more of the aggregate voting power and value or 50 percent or 

more of the beneficial equity interest. Finally, X is connected to Y if, based upon all the 

facts and circumstances, X controls Y, Y controls X, or X and Y are controlled by the 

same person or persons. 

Paragraph 3 

Paragraph 3 provides that a person that is not entitled to the benefits of this 

Convention pursuant to the provisions of paragraph 1 may, nevertheless, be granted the 

benefits of the Convention at the discretion of the competent authority of the State in 

which the income in question arises. The paragraph itself provides no guidance to 

competent authorities or taxpayers as to how the discretionary authority is to be 

exercised. The 1991 Understandings, which generally continue to apply, as discussed 

above, provide that, for purposes of implementing paragraph 3, taxpayers will be 

permitted to present their cases to the competent authority for an advance determination 

based on the facts, and will not be required to wait until the tax authorities of one of the 

Contracting States have determined that benefits are denied. In these circumstances, it is 

also expected that if the competent authority determines that benefits are to be allowed, 

they will be allowed retroactively to the time of entry into force of the relevant treaty 

provision or the establishment of the structure in question, whichever is later. 

The 1991 Understandings further provide that, in making determinations under 

paragraph 3, the competent authorities will take into account all relevant facts and 

circumstances. The factual criteria that the competent authorities are expected to take 

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into account include the existence of a clear business purpose for the structure and 

location of the income-earning entity in question; the conduct of an active trade or 

business (as opposed to a mere investment activity) by such entity; and a valid business 

nexus between that entity and the activity giving rise to the income. 

The 1991 Understandings also note that the discretionary authority granted to the 

competent authorities is particularly important in view of, and should be exercised with 

particular cognizance of, the developments in, and objectives of, international economic 

integration, such as that among the member countries of the CARICOM and under the 

North American Free Trade Agreement. 

In this regard, the Understandings provide specific guidance in the case of an 

employee benefits organization that fails to satisfy the requirements of subparagraph (f) 

of paragraph 2 solely because 50 percent or less of its beneficiaries, members or 

participants are persons entitled to the benefits of the Convention. In such case, the U.S. 

Competent Authority will favorably consider the following factors: (a) the organization 

is established in Barbados; (b) the sponsoring employer of the organization is a resident 

of Barbados entitled to the benefits of the Convention (other than a person described in 

paragraph 6 of Article 22); (c) more than 30 percent of the beneficiaries, members or 

participants of the organization are persons entitled to the benefits of this Convention; 

and (d) more than 70 percent of the beneficiaries, members or participants of the 

organization are individuals resident in a member of the Caribbean Community. 

The competent authority may determine to grant all benefits of the Convention, or 

it may determine to grant only certain benefits. For instance, it may determine to grant 

benefits only with respect to a particular item of income in a manner similar to paragraph 

2. Further, the competent authority may set time limits on the duration of any relief 

granted. 

Paragraph 4 

Paragraph 4 defines the term “recognized stock exchange.” See the paragraph 1 

discussion above. 

Paragraph 5 

Paragraph 5 of Article 22 authorizes the competent authorities both to develop 

procedures for the application of the Article, and to exchange information necessary to 

carry out its provisions. Thus, for example, if a Barbadian resident corporation claims 

benefits on the basis of having satisfied the ownership/base erosion tests of subparagraph 

1(d), the U.S. competent authority may request information from the Barbados competent 

authority to confirm that these tests have, in fact, been satisfied. 

Paragraph 6 

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Paragraph 6 excludes certain persons that are residents and that otherwise would 

qualify for the benefits of the Convention under paragraphs 1 or 2 of this Article from the 

benefits of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties). Paragraph 6 denies 

these benefits in the case of a person that is entitled to income tax benefits under the 

provisions of a special tax regime. Paragraph 6 also treats a partnership, estate or trust as 

a person that is entitled to income tax benefits under the provisions of a special tax 

regime to the extent that such partnership, estate or trust is treated as a resident of a 

Contracting State under paragraph 1 of Article 4 (Residence) by reason of income of such 

partnership, estate or trust being subject to tax in the hands of one or more persons 

described in paragraph 6. 

The Understandings identify several regimes in Barbados that are special tax 

regimes. These regimes are as follows: (1) the Exempt Insurance Act, Cap. 308; (2) the 

International Financial Services Act, 2002; (3) the International Business Companies Act, 

Cap. 77; (4) the Societies with Restricted Liability Act, Cap. 318B; or (5) the Insurance 

(Miscellaneous Provisions) Act, 1998. The Understandings further provide that any 

legislation or administrative practice enacted or adopted after the signing of this Protocol 

pursuant to which the income of a person is entitled to the same or substantially similar 

tax benefits to those granted under the legislation referred to in the previous sentence will 

constitute a special regime. In determining whether a person in entitled to the same or 

substantially similar benefits to those tax regimes identified in the understandings, 

consideration will be given to all facts and circumstances, including, for example, 

whether a tax regime imposes tax based on an artificially low taxable base. 

Article III 

Article III of the Protocol amends Article 26 (Exchange of Information) of the 

Convention to add a new paragraph 4. Paragraph 4 makes clear that information 

exchanged under Article 26 of the Convention includes information held by financial 

institutions, nominees, or persons acting in an agency or fiduciary capacity (but does not 

include information that would reveal confidential communications between a client and 

an attorney, solicitor or other legal representative, where the client seeks legal advice). In 

the case of the United States, the scope of the privilege for such confidential 

communications is coextensive with the attorney-client privilege under U.S. law. 

Paragraph 4 also makes clear that the Contracting States may obtain and exchange 

information relating to the ownership of legal persons. 

Article IV 

Article IV relates to entry into force of the modifications made by the Protocol. 

Paragraph 1 

Paragraph 1 provides that the Protocol shall be subject to ratification by both 

Contracting States according to their constitutional and statutory requirements. 

Instruments of ratification shall be exchanged as soon as possible. 

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In the United States, the process leading to ratification and entry into force is as 

follows: once a protocol or treaty has been signed by authorized representatives of the 

two Contracting States, the Department of State sends the protocol or treaty to the 

President who formally transmits it to the Senate for its advice and consent to 

ratification, which requires approval by two-thirds of the Senators present and voting. 

Prior to this vote, however, it generally has been the practice of the Senate Committee 

on Foreign Relations to hold hearings on the protocol or treaty and make a 

recommendation regarding its approval to the full Senate. Both Government and 

private sector witnesses may testify at these hearings. After receiving the Senate's 

advice and consent to ratification, the protocol or treaty is returned to the President for 

his signature on the ratification document. The President's signature on the document 

completes the process in the United States. 

Paragraph 2 

Paragraph 2 provides that the Protocol will enter into force upon the exchange of 

instruments of ratification. The date on which a treaty or protocol enters into force is not 

necessarily the date on which its provisions take effect. Paragraph 2, therefore, also 

contains rules that determine when the provisions of the Protocol will have effect. 

Under paragraph 2(a), the Protocol will have effect with respect to taxes withheld 

at source (principally dividends, interest and royalties) for amounts paid or credited on or 

after the first day of the second month following the date on which the Protocol enters 

into force. For example, if instruments of ratification are exchanged on April 25 of a 

given year, the availability of benefits under Article 10 (Dividends) of the Convention 

will be limited under Article 22, as amended by the Protocol, for any dividends paid or 

credited on or after June 1 of that year. The delay of one to two months is required to 

allow sufficient time for withholding agents to be informed about the change in 

withholding rates. 

For all other taxes, subparagraph (b) specifies that the Protocol will have effect 

for any taxable year beginning on or after January 1 of the year following entry into 

force. 

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