On June 10, 2014, the Tax Arrangement between the Netherlands and Curaçao (‘TANC’) has been published and submitted to the Dutch parliament. The TANC replaces the present Tax Arrangement of the Kingdom (‘TAK’). However, the TAK will still be applicable between Curaçao, Aruba, St. Maarten and between Aruba, St. Maarten and the Netherlands.
The key features:
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.
However, the source country may not levy any taxes provided certain conditions are met.
The TANC introduces a 0% (Dutch) dividend withholding tax rate on dividend payments to
c.Companies that hold at least 10% of the shares in the subsidiary and are held for at least 50% by individuals resident in Curaçao or the Netherlands.
Limitation of Benefits
Furthermore a 0% dividend withholding tax rate is introduced for dividends paid to legal entities which are “qualifying companies” and possess at least an interest of 10% of the shares in the subsidiary, provided that the conditions of the limitation of benefits (the LOB) are met:
Qualifying companies under the LOB are:
(i)Companies that pass the direct stock exchange test; or
(ii)Companies that pass the indirect stock exchange test. Two categories can be distinguished:
- at least 50% of the shares of the beneficiaries are traded at a stock exchange and are resident of Curaçao or the Netherlands. This category sees to the Curaçao NV or Dutch NV that is listed and holds shares in a Dutch or Curaçao subsidiary; or
- the second category sees to the foreign listed entity (not resident in Curaçao or the Netherlands) that holds 50% or more of the shares in a Curaçao NV and can best be explained with an example. For example a Swiss listed company holds 100% of the shares in a Curaçao NV which holds 100% of the shares in a Dutch BV and Dutch BV hold operational companies in Europe. The Netherlands may not levy any withholding tax under the TANC if the Swiss company would hold the Dutch BV directly and under the Swiss-Dutch treaty the same or better advantages can be realized as under the TANC.
(iii)Companies that pass the head quarter test and provide for a substantial part of the general supervision on the management and administration of the group or a substantial part of financing provided that the entity can independently make decisions with respect to aforementioned functions and the following cumulative demands are met:
- a group of companies consisting of enterprises in 5 different countries or regions generating at least 10% of the gross income of the group in each country or region; and - no more than 50% of the gross income is derived from the country of which the dividend paying subsidiary is resident; and
- the entity is in its country of residence subject to taxes on income and profits like any other entity resident of that country which conduct operational activities (excluding financial services, royalty payments, insurance and reinsurance activities).
(iv)Companies that in their country of residence have at least 3 full time qualified employees that can independently manage the affairs of the company and are authorized to do so.
Other situations under which the 0% rate applies
Entities that cannot be considered qualifying entities as mentioned under (i) through (iv) before may still qualify for the 0% dividend withholding tax rate provided that they meet an activity test or qualify for the safety net provision.
The activity test states that the dividend receiving entity is an active company and the dividend received is derived from active business activities that are related with the activities of the parent company.
Safety net test
Under the safety net provision a request to apply the 0% dividend withholding tax rate can be filed with the tax authorities in the source state who will determine whether the company in the dividend receiving state was not incorporated with the main purpose of obtaining the 0% dividend withholding tax. The interest in the dividend paying company must belong to the business assets of the parent company. According to the explanatory notes this is the case if the interest in the subsidiary forms part of the business assets of the shareholder and the shareholder meets certain substance requirements, the so-called Nexus demands, which In the Netherlands are incorporated in the ministerial decree International Assistance Taxation (Uitvoeringsbesluit Internationale Bijstandsverlening Belastingheffing).
The aforementioned nexus demands are the demands for Dutch conduit companies. For Curaçao they are not unknown either as reference is made to this demands in the explanatory notes on article 9 of the Profit Tax Ordinance, which has been introduced on January 1, 2014.
The nexus demands can be summarized as follows:
At least half of the total number of the statutory directors and the directors competent to make decisions reside in Curaçao (individuals) or have the place of effective management situated in Curaçao (non-individuals).
The directors resident in Curaçao have the professional knowledge required to properly perform their duties. The tasks of the (joint) directors include, at the very least, the decision making - based on the legal entity's own responsibility and within the framework of normal intra-group involvement – on transactions to be concluded by the legal entity as well as ensuring a proper execution of all of the concluded transactions.
The legal entity has qualified staff at its disposal (either its own staff or obtained from third parties) that can adequately perform and record the transactions to be conducted by the legal entity.
Key managerial decisions should be taken in Curaçao
The legal entity's (main) bank accounts must be kept and managed from Curaçao.
The legal entity's accounts must be kept in Curaçao.
The legal entity's registered office must be located in Curaçao.
The legal entity is, to the best knowledge of the entity, not (also) regarded as tax resident in another country.
The legal entity's equity must be adequate in relation to the functions performed (taking into account the assets used and the risks assumed). The adequate amount of equity is determined by the facts and circumstances
From a Curaçao point of view, the company’s amount of equity 'at risk' allocable to its finance, royalty, lease, rental activities etc. is the lower of (a) 1% of the loans outstanding or (b) Nafl. 2 million (approx. USD 1,123,595).
Dividend from Caribbean Netherlands
The Netherlands is allowed to levy 5% proceeds tax (opbrengstbelasting) from entities tax resident in the Caribbean Netherlands.
Definition of dividend
As expected, the dividend article contains a definition of dividend which includes amongst others the repurchase of shares and liquidation proceeds.
Dividend and holders of substantial interest
A special provision is included for dividend payments to holders of a substantial interest who have emigrated to one of the countries. Dividends may be taxed according to the rules of the country of which the dividend paying entity is resident. This may result in higher taxes as the Netherlands levies 25% income tax on dividend income derived from a substantial interest and Curaçao 19.5%. However, the period is limited to 10 years.
5% dividend withholding tax under transitional provision
As mentioned the applicable dividend withholding tax rate is 15% in case no reduction to 0% can be obtained.
Under a transitional rule, the 15% withholding tax rate is reduced to 5% until and including December 31, 2019 provided that the parent company possesses at least 25% of the shares in the subsidiary.
Under the anti-avoidance rules both countries may levy taxes under their respective anti-avoidance provisions. However, the Netherlands is not allowed to apply its anti-avoidance rule if the parent company in Curaçao qualifies for the 0% dividend withholding tax rate. The Dutch are also not allowed to apply the anti-avoidance rule of the TANC with respect to dividends that qualify for the 5% rate, unless the Netherlands cannot levy 5%. In that case, the Netherlands is not allowed levy more than 5%.
The TANC is applicable between the Netherlands, Curaçao and the Islands of the Caribbean Netherlands (Bonaire, St Eustatia and Saba).
Corporate tie breaker
The corporate tie breaker differs from the OECD model. If an entity is considered to be resident in both states, the authorities will determine in a mutual procedure the state of residence. Treaty benefits will be withheld if the authorities of both states cannot determine the residency. However, the provisions regarding the avoidance of double taxation and the non-discrimination remain applicable.
For existing cases the criteria of the place of effective management and control of the present provision of the TAK will be applied.
The TANC contains provisions to avoid double taxation which may result from the fact that an entity is considered tax transparent by one country and not tax transparent by the other country. This may be the case if one country taxes the entity whereas the other country taxes the participating persons.
The explanatory notes mention a number of examples, which we summarize briefly.
Of course the situations described apply the other way around too.
Hybrid entity in Curacao, participants resident in Curacao. Hybrid entity holds Dutch BV. Dutch BV pays income to Curaçao
The TANC is applicable provided that the Curacao participants are subject to tax for the income earned by the hybrid entity even if the source state qualifies the hybrid as non-tax transparent.
Entity in Curacao, not qualifying as tax transparent for Curacao tax purposes, but tax transparent for source country.
Entity can appeal to treaty benefits as it taxes the income received from source country itself.
Hybrid entity in third country, participants resident of Curacao. Curacao qualifies hybrid in third country as tax transparent. Source country (the Netherlands) applies treaty as if source country pays directly to participants provided that the participants are subject to tax in country of residence for the income.
Entity in third country not qualified as tax transparent by Curacao. Source country (the Netherlands) qualifies the entity in the third country as tax transparent. If source country pays dividend to hybrid, than this income is not taxed in Curacao.
No treaty benefits in this case.
The source country may levy taxes in case income is paid by an entity in the source country to another entity in the source country that is not tax transparent for the source country, but tax transparent for the other country.
In the situation that income is paid by an entity in the source country to another entity in the source country that is tax transparent for the source country, but not tax transparent for the other country, the authorities may apply treaty benefits to the participants in the other country under the condition that if the participant would have participated directly in the entity in the source country would be exempt from taxes.
In short, an individual who possesses 5% or more of the shares in a company is considered to have a substantial interest. The personal income tax of both the Netherlands and Curaçao contain substantial interest rules.
In case of a substantial interest, the TANC allows levying tax on the capital gain, which capital gain is determined at the moment of emigration, in case the shares are sold within a period of 10 years after emigration. Upon emigration, the shares are valued and the capital gain is taxed. However, the tax assessment is not collected for a period of 10 years, unless the shares are sold within this period.
The countries are also allowed to tax dividends paid within a period of 10 years after emigration provided that a payment is due on the income tax assessment upon emigration.
Under the present TAK, the period is 5 years. Under the transitional provision, the 5 year period is still applicable for individuals with a substantial interest who are resident in one of the countries before June 10, 2014.
No withholding tax is levied on royalties by both countries
New is that technical services are considered as royalty income. The article of the business profits is applicable in case royalties are paid as remuneration for the use of assets belonging to the assets of a permanent establishment of the beneficiary in the country of which the payments are derived.
No withholding tax is levied on interest by both countries. Note that Curaçao levies withholding tax on interest under the Savings directive.
The source state is allowed to levy a maximum of 15% on pension payments. This rule does not apply on pension payments to residents of Curaçao started before June 10, 2014.
Gift and inheritance tax
The Dutch gift and inheritance tax contains a provision under which the Netherlands is allowed to levy gift and inheritance tax for a period of 10 years after a person emigrates. Under the present provisions of the TAK, this 10 year period is reduced to 1 year.
Under the new provisions of the TANC, the 1 year period is increased to 5 years. A transitional provision is introduced for persons who are already resident of Curaçao before June 10, 2014. For these persons the period of 1 year will still be applicable.
Exchange of information
The exchange of information provision is in agreement with the OECD guidelines.
The exchange of information provision contains a special provision for Dutch related income, of which enforcement is entrusted to the Dutch tax authorities. This provision sees to the surcharges (inkomsentoeslagen) which are dependent on the taxable income.
The new Tax Arrangement for the Netherlands and Curaçao offers tax efficient structuring possibilities for active companies.