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Tax Planning Opportunities in Curaçao
A "Tax Information Exchange Agreement" (TIEA) between Spain and Curacao has come into force allowing the Spanish ETVE to act as the perfect exit vehicle out of Europe to take advantage of tax treatment in Cura?ao.
Until recently, The Kingdom of the Netherlands consisted of three countries; The Netherlands (in Europe), Aruba and the Netherlands Antilles. The Netherlands Antilles were dissolved on 10 October 2010 and now consists of:
(1) The Netherlands
(4) St. Maarten
(5) three islands which are now named Caribbean Netherlands (Bonaire, Saba and St. Eustatius)
The Netherlands Antilles became an offshore jurisdiction in the 1950s and has played a major role in international tax planning for many decades. Cura?ao in particular, the largest island in the Dutch Caribbean, has been at the centre of progression in this arena over this period. Though the offshore system has now been shredded, Cura?ao still boasts a modern tax system that has a lot to offer multinationals across the globe. Taxand Curacao outlines three possible tax planning initiatives that multinationals could take advantage of.
Cura?ao can be seen as the hot spot in the Caribbean for financial expertise. We have outlined three tax planning opportunities below:
(1) the tax exempt company
(2) the e-zone company
(3) exit out of Europe through Spain
1 The Netherlands Antilles tax exempt company
The Netherlands Antilles limited liability company (also known as the Netherlands Antilles Besloten Vennootschap "NABV") is a legal entity established in Cura?ao. The NABV can be structured as a tax exempt company for profit tax and dividend withholding tax purposes and we therefore see the below mentioned activities being performed by an NABV:
- Mutual fund
- Group financing activities
- Portfolio investments
- Licensing activities
The NABV is very easy to incorporate as, among other items, a declaration of no objection is not required.
The articles of association can be drafted to resemble a company under civil law or common law.
The NABV should engage almost exclusively in investing in debt instruments, securities and deposits. Licensing of intellectual and industrial property rights and comparable property or usage rights has recently also become possible. If the company pursues other activities it will lose its tax exempt status.
In order to operate in a tax-exempt manner the board of directors must consist of one or more Cura?ao residents.
Rule of law will always be guaranteed through the Supreme Court in the Hague, the Netherlands.
There are no minimum capital requirements with respect to the formation of a NABV. Only registered shares, with or without par value, can be issued and the liability of the shareholder is limited to the respective capital contribution. The shares can be denominated in any valid currency.
The NABV is incorporated by notarial deed before a civil law notary and the name of the NABV must be approved by the Government. The incorporation can be executed in about three days.
Unless the articles of incorporation state differently, decisions are made by a simple majority of votes and annual accounts should be audited by an independent expert.
2 E-zone companies
In Cura?ao many so-called Economic Zones ('E-Zones') provide interesting opportunities for international trade, services or e-commerce activities.
An E-Zone is a designated area in Cura?ao in which international trade, services or e-commerce activities and services supportive to the foregoing, may be executed whether or not supported by electronic means.
An E-Zone has a manager who coordinates admittance to the E-Zone with the Cura?ao authorities.
E-Zone companies are met with a very favourable profit tax rate of 2%. Further advantages are obtained with regard to custom duties, turnover tax and expatriate tax facilities.
Only legal entities with a capital divided into shares may perform activities in an E-Zone. The entity can either be a local company or a foreign entity. The focus of such companies must primarily be on trading goods or providing services to non-domestic clients.
Business generated on the local market may not exceed 25% to 30% of the total turnover. The profit generated from local activities is subject to the normal profit tax rate of 34.5%. Special conditions must be met however. The taxable profit of an E-Zone company is calculated on the same principles as that of non E-Zone company.
Requests should be filed with the Cura?ao authorities. Through the E-Zone legislation, the local authorities are entitled to impose certain conditions. The Manager of the specific the E-Zone area in general plays a supportive role an acquiring the license to operate within an E-Zone.
An E-Zone company that does not meet the conditions can face penalties and/or the withdrawal of their license to operate as an E-Zone company.
E-Zone companies will be taxed at 2% until 1 January 2026 with respect to income that falls under the scope of E-Zone activities as described above. Local income will be taxed at the normal profit tax rate.
No import duties and turnover tax are due on goods entering the E-Zone or on services rendered by local companies to an E-Zone company. Moreover, import duties and turnover taxes are not due on products delivered to or services rendered to other companies located in the E-Zone.
Under certain circumstances, employees of E-Zone companies can qualify for the expatriate status which allows for a smaller gap between the gross and net salary and also opens possibilities for net benefits for the employee. The total package allows for lower salary costs for the employer while on the other hand providing for a higher net salary for the employee.
3 Exiting out of Europe through Spain
Here we connect a Spanish company, falling under the scope of the ETVE regime, with a Cura?ao Holding company and a Netherlands Antilles tax exempt company.
It is important to note that, as a consequence of the TEIA (Tax Exchange Information Agreement) between Spain and Cura?ao, a country which has come into existence recently, Cura?ao is no longer blacklisted in Spain.
With the above in mind we will outline the impact of combining the ETVE status for a Spanish
Sociedad de responsabilidad limitada (S.L.) with the Cura?ao tax exempt BV (BV status is comparable to a Sociedad de responsabilidad limitada). A "normal" Curacao NV or BV can act as a holding company for both entities.
The idea is that, for example, a company falling under the scope of the ETVE regime holds (a) qualifying participation(s) in non Spanish resident subsidiaries. As we understand, the ETVE can, in such a situation, distribute the dividends that are obtained from these subsidiaries to her parent company without having to withhold tax on these dividends. However, this parent company cannot be resident in a tax haven. Cura?ao has shed its tax haven status with the Spanish tax authorities and therefore, it is possible for the parent company to be a Cura?ao taxable resident company.
However, the dividends from the ETVE may be exempt from taxation in Cura?ao using the participation exemption rules. The Cura?ao participation exemption has undergone changes which have come into force as of 1 January 2009:
- The 95% participation exemption for qualifying interests has been replaced by a 100% participation exemption, subject to certain conditions.
- For the 100% participation exemption to apply, the qualifying participation must be either "subject to tax" or have "enterprise activity / non-portfolio investment".
- If neither condition is met, the participation exemption on dividends will be limited to 70%.
Furthermore, a new, restricted, definition of dividends has been introduced. The new participation exemption allows for consolidation of the ETVE results with the results of its subsidiaries before applying for the 100% participation exemption. Additionally, the limitation to 70% participation exemption is not applicable on situations where dividends are distributed from subsidiaries of which the assets consist of 95%or more of real estate.
In order to reinvest the funds received by the Cura?ao parent company, the next step is that the Cura?ao parent company establishes a tax exempt BV. This BV is capitalised with the dividends which originate from the non-Spanish subsidiaries. (For obvious reasons it is important that the Cura?ao parent company does not lend the dividends received to the tax exempt subsidiary as there is no fiscal deduction from interest payments whereas the interest income received by the parent would be taxed).
The tax exempt Cura?ao BV could then, for example, lend the capital to third parties or to group companies. Because of the tax exempt status of the BV, the interest paying companies may not be able to deduct the interest paid from their respective taxable income, as local anti-abuse legislation may be in place, but as the Cura?ao tax exempt BV receives the interest tax free, this will make the transaction fiscally neutral. A withholding tax may, however, be due on the outgoing interest payments.
The opportunities detailed above demonstrate the developed nature of Cura?ao's tax systems and how they can become useful, innovative tools for multinational companies operating in the region. The island is likely to remain as the central hub for international tax planning in the Caribbean for the foreseeable future.
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