CURACAO TAX REFORM 2011-2014

As we have informed you in our newsletter of December 2010, as a consequence of a Constitutional Reform, the Netherlands Antilles, which had existed since 1954 as an autonomous Caribbean country within the Kingdom of the Netherlands, was dissolved on 10 October 2010. At the same time Curacao became a constituent state within the Kingdom of the Netherlands.

Effective from 1 January 2012
Partly as a result thereof, Curacao drafted a bill of amendment to the country’s tax regime, the Tax Provisions of 2011, which was approved by the Curacao Parliament on 15 September 2011, published in the Official Gazette on 29 December 2011 and is generally effective from 1 January 2012.

The Tax Provisions of 2011 is part of Curacao’s tax reform process for the period 2011-2014 and is focussed on enhancing the competitive edge of the Curacao jurisdiction, whilst broadening the tax base, shifting from a reliance on direct to indirect taxes and moderately increasing overall tax revenue. It is important to note that the overall tax regime broadly remains the same as that of the former Netherlands Antilles. The most important changes are summarized below.

Corporate income tax rate reduced to 27.5%
The corporate income tax rate of 34.5% was reduced to 27.5%. The aim is to further reduce the rate to 15% percent in the near future, though no draft legislation has been presented at this point.

Participation exemption
The Curacao participation exemption applies if:

  • A resident company owns at least 5% of the paid-in share capital, or 5% of the voting rights of another (resident or non-resident) company; or
  • A resident company holds a participation of less than 5%, but with a value of more than USD 500,000.
  • A resident company is a member of a Dutch co-operative (Coöperatie) or of a Dutch mutual insurance company (Onderlinge Waarborgmaatschappij).

Subject to the application of the participation exemption, dividends, stock dividends, bonus shares, hidden profit distributions and capital gains (including currency gains) realized on the disposal of (part of) a qualifying participation in a resident or non-resident company are fully exempt from corporate income tax.

Dividends from low-taxed passive investments – exemption reduced from 70% to 63%
However, until 1 January 2012, the participation exemption regarding dividends from so-called low-taxed passive investments is only 70% (in stead of 100%), resulting into an effective tax rate of (30% x 34.5% is) 10.35%, if:

  • The subsidiary is not subject to a nominal profit tax rate of at least 10% (“subject to tax” test); and
  • More than 50% of the subsidiary’s assets consists of passive investments (“asset” test).

Effective 1 January 2012, the participation exemption regarding dividends from low-taxed passive investments is reduced from 70% to 63%, resulting into an effective tax rate of (37% x 27.5% is) 10.175%, to ensure that the effective tax rate on dividends from-low taxed passive investments will at least be 10% (note that an exemption of 70% under the new corporate tax rate of 27.5% would have lead to an effective tax rate of 30% x 27.5% is 8.25%) and thus will not potentially trigger anti-avoidance legislation in other tax jurisdictions. The consequence of this amendment is an even lower tax burden on dividends received from “low taxed passive investments”.

The rules pertaining to dividends from low-taxed passive investments (did not and) do not apply to dividends from a participation that (almost) exclusively (directly or indirectly) holds immovable property, so that a 100% participation exemption applies to these dividends.

Turnover tax
To finance the reduction of the corporate income tax rate from 34.5% to 27.5%, the turnover tax rate has been increased from 5% to 6% and the tax base broadened. For example, services rendered by non-resident entrepreneurs to entrepreneurs resident in Curacao will be deemed to be performed in Curacao and thus subject to turnover tax, leading to a level playing field for foreign and domestic service providers.

Transparent limited liability company
Effective 1 January 2012, a public limited liability company (Naamloze Vennootschap or N.V.) or a private limited liability company (Besloten Vennootschap or B.V.) may apply becoming a “transparent limited liability company”, as a consequence whereof the company is disregarded for Curacao tax purposes and all of its income and assets will be allocated to its shareholders.

Consequently, the shareholders may be subject to profit tax or personal income tax in their country of residence. At that level the N.V. or the B.V. should in principle be considered as a normal limited liability company subject to profit tax. By making use of the potential difference in the qualification of the transparent company between jurisdictions, it should be possible to defer profit tax. If the transparent status is granted, the company will however not be eligible for benefits under a tax treaty.

A number of conditions have to be met, inter alia the company may not have bearer shares; the articles of association should contain a right of first refusal (or pre-emption rights clause); the board of directors should maintain a record in which the ultimate beneficial owners who hold an interest of at least 10% are registered. If these conditions are not fulfilled, the transparent status will cease to exist with retroactive effect from the 1st of January of the pertinent year.

The application must be submitted to the Inspector of Taxes by the company’s board of directors on behalf of the shareholders. If no decision is made within two months from the date of application the request will deemed to be granted.

A transparent entity is only subject to limited filing obligations. It should file annually:

  • A statement confirming that no bearer shares have been issued;
  • A list of shareholders who sold their interest; and
  • A balance sheet and a profit & loss account for that year.

Upon request from a foreign tax authority, this information may be exchanged under tax information exchange agreements.

Private foundations may opt for a taxable status at an effective tax rate of 10%
A private foundation is a commonly used entity for international asset protection, privacy, estate planning, passive portfolio and international holding structures. Until the end of December 2001, Curacao private foundations were not subject to tax on income unless they carried out active business operations. The disadvantage of this tax-exempt status was that it made foundations less attractive in international tax planning involving certain jurisdictions, i.e. jurisdictions that may impose a subject-to-tax requirement.

Although following the implementation of the Tax Provisions of 2011, a private foundation would generally still be fully tax exempt (unless it is conducting business activities), as per 1 January 2012, it may opt to be treated as a so-called allocated fund (“doelvermogen”) subject to corporate income tax at a rate of 10%. To that effect a request needs to be filed with the Curacao tax authorities. If it opts for this taxable status it also benefits from the Curacao participation exemption.

The effective tax rate of 10% has been introduced to meet international standards. Various jurisdictions have agreed not to apply local CFC legislation if an entity meets a minimum and reasonable effective tax rate. Within the EU, an effective tax rate of at least 10% is considered to be reasonable.

Tax reform enhances the competitive edge of Curacao
From the above it will be clear that the tax reform process is very much focussed on enhancing the competitive edge of the Curacao jurisdiction. The amendment of the participation exemption to international standards, the introduction of a transparent Curacao entity and of a private foundation without a tax exempt status, combined with a civil law system in an OECD compliant country, whereas the overall tax regime broadly remains the same as that of the former Netherlands Antilles, should list Curacao as the premier location for new funds, international asset protection, passive portfolio and international holding structures.

 


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