Bahamas

Trust law framework

Bahamian trust law is governed by the Trustee Act 1998 (as amended), which modernized the earlier English-derived trust legislation. The Bahamas has no income tax, capital gains tax, estate tax, or inheritance tax. There is no U.S.–Bahamas income tax treaty.

For U.S. tax purposes, Bahamian trusts are foreign trusts under Treas. Reg. §301.7701-7. The absence of a tax treaty means there is no basis for deferral or reduction of the U.S. reporting obligations.

Purpose trusts and executive entities

The Purpose Trust Act 2004 allows the creation of non-charitable purpose trusts in the Bahamas. These trusts are established for specified purposes rather than for identifiable beneficiaries and are enforced by an "enforcer" appointed under the trust instrument.

As an alternative to purpose trusts, the Bahamas enacted the Executive Entity (BARTAD Act), which creates a hybrid vehicle—an incorporated entity with trust-like characteristics. An executive entity has the legal personality of a corporation but can hold assets for purposes or beneficiaries in a manner similar to a trust.

For U.S. tax purposes, an executive entity's classification depends on its structure. If it is treated as a trust under Treas. Reg. §301.7701-4 (which asks whether the entity has associates and a business purpose), it falls within the foreign trust reporting regime. If it is treated as a corporation or partnership, different reporting forms apply. Practitioners should analyze the specific characteristics of each executive entity rather than assuming a default classification.

SMART funds

Specific Mandate Alternative Regulatory Test (SMART) funds are a category of Bahamian investment fund that can be structured as trusts, companies, or limited partnerships. A SMART fund structured as a unit trust is a foreign trust for U.S. purposes.

U.S. investors in a SMART fund organized as a trust have Form 3520 reporting obligations. As with Cayman fund structures, the threshold question is the fund's U.S. tax classification: if it has elected to be treated as a corporation or partnership under the check-the-box regulations, the foreign trust reporting regime does not apply. If the fund is classified as a trust, the U.S. investor's obligations depend on whether they are treated as the owner (grantor trust rules) or as a beneficiary.

Reporting obligations and penalties

U.S. persons who create, transfer property to, own, or receive distributions from a Bahamian trust must file the applicable sections of Form 3520 and, for U.S. owners, Form 3520-A. The specific reporting requirements follow the standard framework under §6048: Part I for transfers (§6048(a)), Part II and Form 3520-A for U.S. owners (§6048(b)), and Part III for distributions (§6048(c)).

Penalties under §6677(a) are 35% of the gross reportable amount for Parts I and III. Under §6677(b), the penalty for Part II and Form 3520-A is the greater of $10,000 or 5% of the gross reportable amount. The Bahamas imposes no income tax, so no foreign tax credits are available to offset U.S. tax on trust income.