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The Netherlands Antilles
New Tax Agreement Netherlands Curacao (TANC)
Despite some recent changes to its relationship with the Netherlands, Curaçao is still an attractive financial centre in the Caribbean, with an appealing corporate tax system which is based on the Dutch Corporate Income Tax Act and a similar corporate law system to the Dutch one.
Since the abolition of the offshore regime in 2001, tax development in Curaçao has been slow. However, with the separation of the Netherlands Antilles in 2010 after which Curaçao and St Maarten each became separate countries within the Kingdom of the Netherlands and the Islands of Bonaire, Saba and St Eustatia became special municipalities of the Netherlands, things slowly started to move.
Tax Arrangement Netherlands
The most recent developments consist of the introduction of the international trade and service provision, the amendment of the captive insurance regime and finally on June 10 2014 the text of the new Tax Arrangement Netherlands Curaçao (TANC) was published. The TANC will replace the present Tax Arrangement of the Kingdom (TAK), and serves as a tax treaty between the Netherlands, including the Caribbean Netherlands (Bonaire, Saba, St. Eustatia), and Curaçao only. The TAK will keep its significance for the tax relations between Curaçao, St. Maarten and Aruba. The TANC is expected to come into force on January 1 2015. On July 9 2014 it was announced that The Netherlands and St. Maarten also have agreed on the text of the Tax Arrangement between the Netherlands and St. Maarten (TANSX). The TANSX has not yet been published. Aruba and the Netherlands are still negotiating.
Tax Information Exchange Agreements (TIEA)
Curaçao has entered into 25 tax information exchange agreements with key jurisdictions such as the US, the UK, Sweden, Denmark, Finland, France, Spain, Australia, New Zealand, the British Virgin Islands (BVI), Colombia and Argentine.
A double tax agreement is in force with Norway and there is, of course, the TAK with the Netherlands, shortly to be replaced by the TANC.
Tax agreements to avoid double taxation were agreed upon with Malta and the Seychelles.
Curaçao reached an agreement with the US on April 30 2014 to sign a Model 1 intergovernmental agreement for the implementation of the Foreign Account Tax Compliance Act.
The participation exemption was modernised in 2009 and now contains a 100% exemption for dividend income and capital gains provided that:
The Curaçao parent company holds at least an interest of 5% or more in the nominal paid in capital in the subsidiary; or
The Curaçao parent company is a member of a cooperative association;
The 5% threshold is not applicable to cooperatives. Mere membership is sufficient.
The participation exemption includes a corresponding holding of profit sharing certificates.
Interest less than 5% of the nominal paid in capital may qualify for the participation exemption if the interest has a cost-price of at least NAFl890,000 ($500,000).
Anti-abuse measures were introduced for passive entities. Entities that do not meet the cumulative activity test and subject to tax test are qualified as passive entities as a result of which dividend income is only 63% exempt.
The activity test and subject to tax test are not applicable on dividend income of a participation of which the assets consist, directly or indirectly, of 90% or more of real estate.
Capital gains are always exempt, regardless whether the subsidiary is an active or passive company.
Also introduced was a dividend definition. As a result it will be possible to obtain income free from taxes from a participation that does not qualify for the full Curaçao participation exemption by way of repayment of capital, (partial) liquidation and repurchase of shares.
The profit tax rate was reduced from 34.5% to 27.5% in 2012. These instruments were introduced:
Tax amnesty rules;
The tax transparent legal entity;
The option for trusts and private foundations to become special purpose investment vehicles (doelvermogens) and become subject to an effective tax rate of 10%.
Captive insurance regime
The captive insurance regime was amended in 2014 and the amendments came into force retroactively from January 1 2013 and are intended to make the captive insurance regime more attractive.
Companies that insure non-domestic risks may calculate their profit on the basis of 5% of the annual premiums and capital. This profit is taxed against the normal tax rate of 27.5% (2014) resulting in an effective tax rate of 1.375%.
Life insurance companies that insure non-domestic risks may calculate their profit on the basis of 10% of the annual profit. Taxed against the normal tax rate of 27.5% this results in an effective tax rate of 2.75%.
The International Trade and Service Facility
The international trade & service facility, or popularly called the ‘export’ facility, facilitates not only trading activities, but also international banking, finance, licence and other financial service activities if certain substance conditions are met. The participation exemption rules are applicable on income derived from interest in subsidiaries held by a company that applies the export facility.
Income under the international trade & service facility is effectively taxed against a tax rate of 3.99%.
To qualify for the export facility, the company or the group of companies in Curaçao, must have substance in Curaçao that is in agreement with the companies’ activities. In this respect, the explanatory notes refer to the Dutch nexus requirements as mentioned in the Dutch ministerial decree: International Assistance Taxation (Uitvoeringsbesluit Internationale Bijstandsverlening Belastingheffing).
Tax Arrangement Netherlands
The Tax Arrangement Netherlands Curaçao (TANC) was published on June 10 2014 and is expected to come into force on January 1 2015 and serves as a treaty to avoid double taxation between the Netherlands (including the Caribbean Netherlands) and Curaçao. The TANC is based on the OECD model treaty, but there are some differences due to the special relationship between countries within the same kingdom and because of the wishes of both countries for taxation of certain sources of income in the source country.
First, Curaçao does not levy dividend withholding tax (or withholding tax on interest or royalties), therefore the reduction of dividend withholding tax under the dividend article of the TANC is at this moment only important for dividend payments from the Netherlands to Curaçao.
The main rule is that dividends may be taxed in the country of residence of the receiver of the dividends but that the source country may levy 15% dividend withholding tax.
Reduction to 0%
The TANC introduces a 0% dividend withholding tax rate on dividend payments to
Companies that hold at least 10% of the shares in the subsidiary and in turn at least 50% of which are held by individuals resident in Curaçao or the Netherlands
Companies that hold at least 10% of the shares in the subsidiary and are considered qualifying companies under the limitation of benefits clauses.
The TANC introduces a 5% dividend withholding tax rate as a transitional provision until December 31 2019 for existing structures that are excluded from treaty benefits under the limitation of benefits.
The 5% dividend withholding tax is applicable for existing structures if the Curaçao parent company has at least an interest of 25% of the nominal paid-in capital of the subsidiary; and
is the beneficial owner of the dividends.
Definition of Dividend
The TANC contains a definition of dividends which includes, among others, the repurchase of shares and liquidation proceeds.
The TANC contains provisions to avoid double taxation which may result from the fact that an entity is considered tax transparent by one country, but not by the other. This may be the case if one country taxes the entity whereas the other country taxes the participating persons.
Exchange of Information
The exchange of information provision states that the tax authorities of Curaçao and the Netherlands will exchange information that may be considered relevant for the application of the TANC or relevant to the applied domestic tax. A privacy clause is embedded in the exchange of information provision stating that the obtained information should be treated in the same manner as information through domestic provisions.
Interest and Royalty Payments
Under the TANC, generally no withholding taxes are levied on interest and royalties where the recipient is the beneficial owner.
Note that both countries generally do not levy withholding taxes on interest and royalties.
The New Tax Arrangement appears to be a sign of the times. It clearly aims to curb perceived abuse, both known (e.g. Coop-N.V. structures) and unknown. To that end it contains a general anti-abuse provision, a LOB-like provision and certain specific anti-abuse provisions. The drafting may well have been influenced by the international discussion regarding base erosion and profit shifting (BEPS). On the other hand, the New Tax Arrangement has a very modern feel as it follows the OECD Model and dispenses with all withholding taxes in many situations.
With its many opportunities for mutual agreements, it opens the door to bespoke solutions for specific situations. One could wonder whether there is a risk that the competent authorities could be overwhelmed by the sheer number of competent authority request now that many – also relatively common (hybrid entities, dual residents) – situations require competent authority approval. That said, the Dutch tax authorities are accustomed to an active and open dialogue with taxpayers.
Finally, according to the explanatory memorandum, the Netherlands will also conclude new tax arrangements with Aruba and Sint Maarten respectively. Until these tax arrangements will become effective the 1964 Tax Arrangement remains applicable (and will be terminated thereafter). We will update you accordingly when these two tax arrangements are published.
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