The Dutch Ministry of Finance and the Government of Aruba recently announced that agreement has been reached on the main features of new bilateral tax regulations between the Netherlands, including the Caribbean territory of the Netherlands (Bonaire, St Eustacius and Saba, “the BES islands”), on the one hand and Curaçao and Aruba on the other. The final texts of the new regulations are not expected before spring 2012.
The regulations are expected to take effect as at January 1, 2013, and will replace the current Tax Regulations for the Kingdom (Belastingregeling voor het Koninkrijk, “BRK”). In principle, the current BRK will continue to apply to the relationship with St Maarten, and between Curaçao and Aruba, unless new regulations are drawn up to govern those relationships. The following important changes are expected:
Residency
The ‘transparent company’ (“TC”) resident on Aruba is not subject to profit tax and therefore cannot, as resident of Aruba, invoke either the current BRK or the new BRK between the Netherlands and Aruba. Residents of Aruba, both private individuals and companies, can, however, invoke the new BRK with regard to their share in the profit of the Aruban TC. Curaçao will also shortly implement the TC. It is as yet unknown whether a clause similar to that regarding Aruba will be included in the new BRK between the Netherlands and Curaçao.
Permanent establishment
Construction work lasting twelve months or longer will constitute a permanent establishment in the new BRK between the Netherlands and Aruba, thereby allowing the country involved to tax profits. As this period is also mentioned in the OECD Model Convention, on which the regulation with Curaçao is based, this same period is expected to apply to the new regulation between the Netherlands and Curaçao.
Dividends
In principle, the countries subject to the new regulations may levy 15% dividend withholding tax if their national legislation provides for this (general rule). The national rate in the Netherlands is 15% (5% on the BES islands), as against a maximum rate of 10% on Aruba, whereas no dividend withholding tax is levied by Curaçao. The zero rate for dividends from participations held by active companies is an important exception to the general rule; a ‘limitation-on-benefits’ provision, which has yet to be formulated, will play a key part in the application of this exception. A participation may possibly be considered to exist if a company holds 25% or more of the share capital. There is as yet no information on what is meant by ‘active companies’.
What the specific requirements will be and whether they are comparable to requirements included in agreements between the Netherlands and other countries remains to be seen. The 5% revenue tax will continue to apply with regard to the BES islands. Transitional rules will be drawn up for existing situations where a non-active holding company resident on Curaçao holds a Dutch participation of at least 25%. In that case, the Netherlands is not permitted to levy dividend withholding tax higher than 5% for the period 2013 through 2019. It is as yet not known when the structure is to be in place.
Anti-abuse
It is unclear to what extent the anti-abuse rules in the current BRK will remain in place in the new regulations between the Netherlands and Aruba and Curaçao. The Netherlands has given Curaçao an undertaking that it will not apply the new Dutch corporate income tax provision enabling the levying of tax on dividends and profits achieved by the transfer of shares in situations where there is a substantial interest shareholding that does not form part of ‘business assets’, and one of the main objectives is the avoidance of income and dividend withholding tax for another party. This mainly concerns Curaçao passive holding companies with an interest of 5% or more in a Dutch subsidiary. The current BRK contains a complicated rule for situations where a company and/or shareholder emigrates; this rule will continue to apply, whether or not in amended form.
Pensions
The Netherlands and Aruba have agreed that private pensions that are subject to normal taxation in the beneficiary’s resident state will only be subject to tax in that state. The source state can fully tax pensions that have been surrendered, government pensions, and social security benefits. Curaçao and the Netherlands have agreed that the source state may levy a tax of 15% on non-government pensions which are, in principle, available for set-off in the state of residence. This will not apply to Dutch nationals already receiving pensions and resident on Curaçao (we assume on January 1, 2013): for those Dutch nationals, the tax levied by the state of residence will be the only tax applicable.
Gift and inheritance tax
The Netherlands and Aruba have agreed that each country may fully levy taxes, with exception of levies on residents of Aruban nationals who have lived in the Netherlands for less than ten years. The Netherlands and Curaçao have agreed that the former state of residence of the testator or giftor may levy taxes during the first five years after emigration, subject to set-off of the gift and inheritance tax levied by the state of residence. The exact details are not yet available.