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New tax agreement between the Netherlands and Curacao
On 10 June 2014 the proposed new tax agreement between the Netherlands and Curacao was sent to Dutch Parliament and is expected to become effective on 1 January 2015. Taxand Netherlands summarises the new agreement and it’s likely impact.
Until 2010 Curacao used to be part of the Netherlands Antilles and was frequently used for tax planning purposes (Dutch sandwich structures). However due to the introduction of an 8.3% withholding tax on dividends from the Netherlands to the Antilles in 1985 these structures have become less attractive. In more recent times holding companies in Curacao were used to own Dutch Co-op entities with the aim of eliminating dividend withholding tax. Under the new agreement a 0% withholding tax rate on dividends will apply under strict conditions. The dividend withholding tax rate on dividends paid to parent companies on Curacao that do not qualify for the 0% rate will be 15%. A transitional rule will apply where this rate will be reduced to 5% up to and including 2019 provided that the parent companies owns at least 25% of the shares in their subsidiary. Please note that Curacao does not (yet) levy a dividend withholding tax.
The 0% rate will apply under one of the following conditions:
- Parent companies which are “qualifying entities” and own at least 10% of the shares in their subsidiary
- Parent companies carrying out an active enterprise in their state of residence and holding at least 10% of the shares in their subsidiary
- If the competent authority of the source state determines that obtaining the 0% rate on dividends was not one of the main purposes of incorporating, acquiring or maintaining the parent company. This is considered to be the case if (a) the shareholding forms part of the business assets of the parent company and (b) the parent company meets certain minimum substance requirements which are similar to the minimum substance requirements used in the Dutch ruling practice
- Parent companies that hold at least 10% of the shares in their subsidiary and are held for at least 50% by individuals, who are resident in one of the two countries
Companies which currently would be liable to 8.3% dividend withholding tax can consider to postpone any dividends until the implementation of the treaty or to transfer their residency to Curacao (or another beneficial country) before the implementation of the treaty in order to eliminate the dividend withholding tax. Such a change of residency should however be carefully planned and executed.
The agreement allows both countries to levy tax under their domestic anti-avoidance rules (treaty override). The Netherlands is however not allowed to levy non-residents tax if the parent company qualifies for the 0% rate on dividends. Under the transition rule, the Netherlands is also not allowed to levy non-residents tax if the parent company qualifies for the 5% rate. Court cases are pending whether the current dividend withholding tax between the Netherlands and Curacao is acceptable under EU law. Should it be decided that the Netherlands is not allowed to levy the dividend withholding tax, the transition rule allows that the Netherlands can levy non-residents taxation. In that case, the non-residents taxation will be capped at 5% of the dividends distributed. The agreement also includes a number of rules which are relevant for individuals who have migrated or intend to migrate from the Netherlands to Curacao. These include rules on the right of taxation on pensions and gift and inheritance tax. The agreement also provides for an automatic exchange of information between the Netherlands and Curacao in line with the international standards for exchange of information.
The new agreement will probably not result in a major resurgence of Curacao as a tax planning location but may offer new opportunities. Companies with sufficient substance/activities on Curacao can however benefit from the 0% withholding tax rate on dividends if they meet the conditions. Considering the proximity of Curacao to Latin America this may be especially attractive for multinationals in that region who are willing to invest in sufficient substance on Curacao and want to invest in or through the Netherlands. The new agreement may also make Curacao attractive as a hub for investments into especially Latin America through the use of specific tax structures such as the hybrid entity rules on Curacao.