Profit tax ordinance
Tax-transparent legal entity
Voluntary disclosure of non-declared income
Personal income tax
Customs duties on gasoline
Changes to the tax legislation were recently announced. A draft bill is expected to be presented to Parliament shortly. This update discusses the most important changes as they currently stand (the bill may be subject to further changes).
The following changes have been proposed to the National Ordinance on Profit Tax:
- a reduction of the profit tax rate from 34.5% to 27.5%;
- amendment of the participation exemption and the taxation of foreign profits through a permanent establishment; and
- the introduction of an option to choose for taxable private foundations.
Reduction of tax rate and amendment of participation exemption rules
The profit tax rate will be reduced from 34.5% (including the island surcharges) to 27.5%. The island surcharges will be abolished and the Island Ordinance on Surcharges will be withdrawn. This will also mean that the personal income tax rates will be amended as, under current law, these tax rates are also subject to island surcharges.
The anti-abuse measure in the participation exemption will also be amended as a result of the reduction of the profit tax rate. The present participation exemption rules contain an anti-abuse measure which grants not the normal 100% exemption, but only a 70% exemption on dividends derived from a participation if the following cumulative demands are met:
- The gross income of the subsidiary derived from investments comprises more than 50% of the dividends, royalties or interest received outside the framework of an enterprise it operates, has acquired or has alienated; and
- The subsidiary is not subject to a nominal tax rate of 10%.
As a result, dividends received from a participation that meet these cumulative conditions will be subject to an effective profit tax rate of 10.35%.
As a result of the proposed reduction of the profit tax rate to 27.5%, the effective tax rate under the anti-abuse measure would be less than 10%, which would be undesirable from an international tax point of view. Therefore, it is proposed to reduce the 70% exemption to 63%, which would make the effective tax rate on dividends received from participations that meet the cumulative conditions more than 10.175%.
Capital gains on the shares held in a participation that meet the demands under the cumulative conditions will be fully tax exempt, just as under the present participation exemption rules.
A further clarification will be added stating that the anti-abuse measure will not apply to dividends received from an offshore company qualifying for the transitional provisions for offshore companies. Such dividends are fully exempt.
Under the existing provisions of the profit tax ordinance, profits derived from a foreign permanent establishment are fully tax exempt. This provision will be amended with the same anti-abuse measure as the participation exemption rules. Therefore, profits derived from a foreign permanent establishment will qualify for a 63% exemption if the following cumulative demands are met:
- The gross income of the foreign permanent establishment derived from investments comprises more than 50% of dividends, royalties or interest received outside the framework of an enterprise it operates, has acquired or has alienated; and
- The profit of the permanent establisment is not subject to a nominal tax rate of 10%.
A full exemption of profits derived from a permanent establishment will therefore be available for active permanent establishments and permanent establishments that do not meet the cumulative demands.
Taxable private foundation
The bill introduces to the profit tax ordinance the possibility for a private foundation to choose to be taxed. A private foundation will then be qualified as an entity for specific purposes.(1)
A private foundation's profit will be be taken into account for 10/T part, where T stands for the profit tax rate that is applicable in the book year. As a result, the effective profit tax rate will be 10%.
The taxation of just part of a private foundation's profit seems more acceptable from the point of view of treaty protection. It is basically the system applied under the Dutch 'innovation box' rules to tax profits through corporate income tax. Furthermore, future amendment of the provision is not necessary should the profit tax rate undergo any changes in the future.
A private foundation will be subject to tax only on request; whether it will be taxed will be decided by the inspector of taxes within two months of submission of the request. The request will be considered granted if the inspector of taxes does not honour the request within this two-month period.
The request will be granted as of the date of incorporation of the private foundation if the request was filed within three months of the date of incorporation. In all other cases the request will be granted as of the first day of the year after that in which the request has been filed.
The request is valid only for three full book years, so a new request must be filed every three years. Such rules also apply if a private foundation transfers its effective management and control to Curacao.
On written request, a private foundation will no longer be subject to tax. Such request will be granted as of the first day of the year after that in which the request has been filed or after the three-year period has ended.
Private foundations that were incorporated before the proposed amendments come into force can file a request to be subject to profit tax within three months aof the provisions entering into force. Such private foundation will then become subject to tax retroactively from January 1 2011.
The participation exemption rules are not applicable on a private foundation that chooses to become subject to tax. However, this does not seem to mean that the taxable private foundation cannot possess tax free profits in a participation. Under the existing provisions of the profit tax ordinance, the repayment of capital, repurchase of shares or liquidation proceeds are not considered dividend payments.
The bill introduces an amendment to the General National Ordinance on Curacao Taxes under which a public limited liability company (naamloze vennoootschap (NV)) or a private limited liablility (besloten vennootschap (BV)) may choose to become tax transparent. The NV or BV will then be treated as a partnership and will not become subject to tax.
A NV or BV may choose tax transparency if the following demands are met:
- All shares are in its name (ie, no bearer shares);
- The articles of association contain a clause that in case of transfer of shares, the new shareholder acknowledges in writing to the board of directors of the NV or BV that it agrees that the NV or BV is treated as a partnership; and
- The board of directors of the NV or BV keeps a register containing the names and addresses of all shareholders possessing 10% or more of the shares.
Transparency will be granted only on request. The request must be submitted by or on behalf of the board of directors and must contain a written power from each of the shareholders. The inspector of taxes must decide within two months of submission of the request. The request for transparency will be considered granted if the inspector does not honour the request within the two-month period.
The following legal entities can file a request for transparency:
- NVs or BVs that have been incorporated in the year in which the request was filed;
- NVs or BVs that have been incorporated in the year before that in which the request for transparency was filed; and
- existing NVs or BVs, provided that they are not to be considered offshore companies under the transitional provisions for offshore companies.
In the year in which the request is made, the NV or BV mentioned above cannot hold a participation that is subject to the anti-abuse measure of the participation exemption if shares of the NV or BV that files the transparency request are held by non-Curaco residents.
For newly incorporated NVs or BVs, transparency takes effect from the date of incorporation, provided that the request was filed within three months of incorporation. For existing NVs or BVs, transparency takes effect from the first day of the book year, provided that the request is filed before or within three months of the beginning of the book year.
Transparency ends when the requirements are no longer met. The NV or BV cannot file a new request and the profit of an NV or a BV that no longer meets the requirements will be subject to a tax rate equal to 125% of the normal tax rate in the first book year after it is no longer considered to be tax transparent
Under the Civil Code, it is possible to convert a foreign legal entity into an NV or a BV provided that foreign law accepts such conversion and treats the conversion as a continuation under Curacao law rather than liquidation.
The foreign legal entity converted into a NV or a BV can opt for transparency as of the date of the conversion. The transparent legal entity does not qualify for treaty protection for protection under the Tax Arrangement of the Kingdom, as the transparent company is not subject to tax.
The transparent NV or BV need not file a tax return every year. However, every year the following information needs to be submitted to the tax authorities:
- financial statements; and
- information with respect to who are and have been shareholders in the past year.
The shareholder information to be submitted with the request for transparency will be announced by separate ministerial decree.
Based on the draft, the following parties must submit the following information:
- Resident individuals -
- date of birth;
- correspondence address; and
- identification number.
- Non-resident individuals -
- date and place of birth;
- identification number granted by country of residence;
- address; and
- copy of passport.
- Legal entities that are subject to tax in Curacao -
- statutory name;
- business name;
- date of incorporation;
- address; and
- tax identification number.
- Foreign legal entities not tax resident in Curacao -
- statutory name;
- date of incorporation;
- tax identification number issued by the state of resident;
- address of statutory seat; and
- excerpt chamber of commerce and statement of tax residency by the tax authorities.
Voluntary disclosure of non-declared income
A further amendment to the General National Ordinance on Curacao Taxes is the introduction of the voluntary disclosure of non-declared income or a tax amnesty for persons who are still willing to file a correct or complete personal income tax return.
Taxpayers who have not accounted for all of their income in their personal income tax returns run the risk that an additional tax assessment will be imposed. Such additional income tax assessment may contain penalties as high as 100% of the amount of the additional personal income tax to be paid. These penalties can be avoided by filing a voluntary supplementary income tax return in which the income or non-declared income is accounted for. In addition, potential criminal charges can be avoided by filing a voluntary supplementary income tax return.
The voluntary disclosure of non-declared income must be done within one year of the provisions for voluntary disclosure entering into force.
The income accounted for under the voluntary disclosure rules for non-declared income will be taxed not against the normal income tax rates (maximum of 49%), but against the following tax rates:
- 10% if income is declared in the third and fourth quarter of 2011;
- 20% if income is declared in the first quarter of 2012; and
- 25% if income is declared in the second quarter of 2012.
Income not declared under the voluntary disclosure rules will be subject to normal rules and provisions, meaning that penalties of up to 100% of the taxes can be imposed and the individual may become subject to criminal charges.
The changes to the Personal Income Tax Act are limited to the changes in the tax rates resulting from the abolition of the island surcharges.
The sales tax rate will be increased from 5% to 6%.
Services performed by non-resident entrepreneurs for entrepreneurs resident in Curacao will be considered to be performed in Curacao. As a result, services performed by non-resident entrepreneurs will also be subject to sales tax in Curacao, thus avoiding unfair competition with local entrepreneurs.
The sales tax will be levied from the local entrepreneur for whom the services are performed.
A new definition of 'entrepreneur' will be introduced into the Sales Tax Ordinance. Once the amendments have come into force, an 'entrepreneur' will be considered to be anybody "who conducts a business or a profession, as well as [any]body who exploits an asset in order to gain income from that asset".
This new definition will imply that individuals and private foundations that exploit real estate will become subject to sales tax unless it relates to the rental of residential housing suitable for permanent housing.
The amendment to the definition has been introduced as an anti-abuse measure in order to levy sales on real estate income. Under the existing Sales Tax Ordinance, no sales tax is due on rental income of real estate or any other assets in as far as the exploitation can be qualified as a passive investment. Generally, under existing case law, the passive holding of real estate often lacks entrepreneurship and therefore no sales tax is due on the rent.
The amendment to the definition of 'entrepreneur' will ensure that the exploitation of an asset will be qualified as a business and therefore will become subject to sales tax.
The renting of residential housing suitable for permanent housing is explicitly exempt from sales tax. However, residential houses that are rented as holiday homes are not exempt from sales tax.
Individuals who conduct a business and have realised a turnover of less than NAG30,000 in the previous year can obtain an exemption from sales tax. This so-called 'small business exemption' is not applicable to an individual who exploits an asset.
The amendments propose a reduction in the custom duties on gasoline of NAG15.75 a hectolitre to NAG47.25 a hectolitre.
In order to guarantee that the changes in the tax provisions will not affect those on lower incomes, the amount of the maximum premium will be increased and a premium discount will be introduced.
The reduction of the profit tax rate is long overdue. A profit tax rate of 27.5% is more in line with the profit tax rates in Europe. Further, the introduction of a tax-transparent legal entity opens up alternatives for holding and investment structures, as well as non-Curacao trading. Finally, allowing private foundation to choose taxation will result in alternative tax and estate planning possibilities in those jurisdictions where a private foundation or trust might not be suitable.
For further information on this topic please contact Emile Steevensz at Certa Legal Tax Dutch Caribbean by telephone (+599 9 461 8899), fax (+599 9 461 2345) or email ([email protected]).
(1) A private foundation may not conduct a business, although it may act as a general partner in a partnership.