August 17 2012
Taxation of corporations
Residence fiction in Dutch Corporate Income Tax Act
When is the Caribbean Netherlands regime applicable?
Tax Arrangement for the Netherlands
Dutch treaty network application
Caribbean Netherlands and other islands of the Dutch Caribbean
Real estate income
Tax planning opportunities
On October 10 2010 the dissolution of the Netherlands Antilles came into effect. The Caribbean Netherlands - the three smaller islands of Bonaire, Saba and St Eustatia - became special municipalities of the Netherlands, whereas Curacao and St Martin each became separate countries within the kingdom, with a status comparable to that which Aruba acquired in 1986.
The Netherlands has developed a separate tax regime for the Caribbean Netherlands, which was introduced as from January 1 2011.
This update discusses some elements of the Caribbean Netherlands tax regime, regarding corporations and the potential tax planning possibilities that it may offer.
The Caribbean Netherlands tax law consists of the following elements:
The Caribbean Netherlands levies no taxes on the profits of corporations. However, this does not mean that the profits of corporations are not taxed at all. Corporations may be subject to Dutch corporate income tax or the Caribbean Netherlands proceeds tax.
The applicable taxes for corporations in the Caribbean Netherlands are determined in part by the Dutch corporate income tax rules. The principal rule is that profits of corporations which are resident in the Caribbean Netherlands are subject to Dutch corporate income tax, just like those of any other corporation that is resident in the European part of Netherlands. The Dutch Corporate Income Tax act contains a residence fiction which has been amended whereby, for the application of proceeds tax, all legal entities established in the Caribbean Islands will be considered tax resident in the Netherlands.(1) The same residence fiction applies for Dutch dividend withholding tax.(2)
Furthermore, legal entities established in Curacao, Aruba or St Martin which conduct business through a permanent establishment in the Caribbean Netherlands are considered to be foreign taxpayers under the Dutch corporate income tax rules, and the profits of the permanent establishments are also subject to Dutch corporate income tax(3) insofar as these activities would not be subject to proceeds tax if they were conducted by a legal entity.
Therefore, the main rule is that all legal entities are subject to Dutch corporate income tax, which imposes a corporation tax of 25% on the profits of legal entities.
The applicability of Dutch corporate income tax implies that Dutch dividend withholding tax is also applicable.
The Caribbean Netherlands tax law contains no provisions that tax the profits of a legal entity, such as the former Netherlands Antilles profit tax. In its place, the Dutch government introduced the proceeds tax. The proceeds tax can best be compared to a dividend withholding tax and is levied, among other things, on those which (directly or through certificates) are entitled to the proceeds of shares or profit sharing notes of public limited liability companies, private limited liability companies, open partnerships and other entities with a capital divided in shares which are tax resident in the Caribbean Netherlands.
Taxation under the proceeds tax implies that the profits of the legal entity itself are not subject to tax, but on distribution of the profits to the shareholders, a 5% proceeds tax is levied. The proceeds tax is levied only on legal entities that are considered tax resident in the Caribbean Netherlands.
A legal entity in the Caribbean Netherlands may file a request with the Inspectorate of Taxes of the Dutch Caribbean to be considered a tax resident there and would therefore be subject to the proceeds tax instead of Dutch corporate income tax. A corporation in the Caribbean Netherlands that does not file such a request is automatically subject to Dutch corporate income tax.
Consistent with the residence fiction for Dutch corporate income tax, the proceeds tax regime takes as a starting point an assumption that all legal entities resident in the Caribbean Netherlands are considered to be resident in the Netherlands, with the exception of foundations and special purpose investment vehicles. On request, a legal entity in the Caribbean Netherlands will be considered tax resident there if one of the following conditions is met:
The trade and service areas mentioned above replace the former economic zone legislation - which is no longer applicable in the Caribbean Netherlands - and mainly focus on international services and trade.
If the legal entity succeeds in a request to be considered tax resident in the Caribbean Netherlands, then proceeds are subject to a tax rate of 5%.
'Proceeds' are defined as:
Profits of permanent establishments are not subject to the proceeds tax. The Dutch corporate income tax regime contains an anti-abuse measure for head offices established in Curacao, Aruba and St Martin which conduct their business through a permanent establishment in the Caribbean Netherlands. The principal rule is that these branch profits are subject to Dutch corporate income tax unless the branch can be considered a resident of the Caribbean Netherlands under the proceeds tax regime.
The following exemptions from proceeds tax are available:
The Tax Arrangement for the Netherlands is an arrangement to avoid double taxation between the part of the Netherlands located in Europe and the Caribbean Netherlands.
The arrangement is based on the Organisation for Economic Cooperation and Development (OECD) model treaty, though some of the provisions are different due to the different tax systems in Caribbean Netherlands and the Netherlands.
The tax arrangement, like the OECD model treaty, allocates the right to levy taxes on dividend income to the country in which the recipient of the dividend is resident. However, the country in which the payer of the dividend is resident may also tax this dividend according to its local rules. Nonetheless, no Dutch dividend withholding tax will be levied in the following circumstances:
A 'pension fund' is defined as a fund that is recognised as a pension fund under the applicable laws of the country in which the fund is resident. Individual pension funds do not qualify for this exemption.
The exceptions mentioned above apply only when a Dutch legal entity with capital divided into shares pays a dividend to a shareholder which is tax resident in the Caribbean Netherlands.
No reduction of or exemption from the proceeds tax can be obtained when dividends are paid by a legal entity resident in the Caribbean Netherlands to a shareholder resident in the European part of the Netherlands. The reason is that the proceeds tax and real estate tax are the successors of the profit tax of the former Netherlands Antilles. A reduction of or exemption from the proceeds tax paid to a corporate shareholder in the European part of the Netherlands could imply that no taxes at all would be levied, as the actual profits are not subject to tax. This could be the case in the following example.
Cyprus Holding holds 100% of the shares in a Dutch BV. Dutch BV holds 100% of the shares in a BV that is tax resident in the Caribbean Netherlands. Under the EU Parent-Subsidiary Directive, the Dutch BV does not have to withhold the Dutch dividend withholding tax. Cyprus does not levy any dividend withholding tax. If a reduction of the proceeds tax would have been possible under the Tax Arrangement for the Netherlands, then no taxes would be levied at all. Provided that the Caribbean Netherlands entity is an active entity, dividend income earned by the Dutch BV would be exempt under the Dutch participation exemption rules. The same goes for the dividends earned by Cyprus.
Therefore, no reduction of the proceeds tax is granted when paid to a shareholder in the Netherlands (or any other country), guaranteeing that a minimum of 5% proceed tax is levied.
The term 'resident of the Netherlands' also covers legal entities that are established in the Caribbean Netherlands, but do not qualify for the Caribbean Netherlands regime. Such entities are subject to Dutch corporate income tax and Dutch dividend withholding tax. This implies that the exception where a tax resident of the Caribbean Netherlands possesses at least 10% of the capital of a Dutch legal entity with the capital divided into shares is also applicable in the case of a Caribbean Netherlands company that qualifies for the Caribbean Netherlands regime with a participation of 10% or more in an operational company resident in the Caribbean Netherlands, but qualifying for the Dutch corporate income tax and Dutch dividend withholding tax.
The question arises as to whether the Dutch treaty network may be applicable to legal entities established in the Caribbean Netherlands.
The existing Dutch tax treaties are not applicable, as the Caribbean Netherlands has a tax system that is different from the tax system in the European part of the Netherlands.
So can a treaty application be denied in a case where a legal entity in the Caribbean Netherlands is considered tax resident in the Netherlands under the residence fiction in the Dutch corporate income tax regime and proceeds tax? The question is whether a treaty application can or will be refused in the situation where a legal entity resident in the Caribbean Netherlands is subject to Dutch corporate income tax and Dutch dividend withholding tax, as in such case the company seems to be considered a tax resident of the Netherlands.
The Dutch Ministry of Finance confirmed that access to the Dutch tax treaty network will be available for a Dutch BV resident of the Caribbean Netherlands, but under the residence fiction of the Dutch corporate income tax regime and subject to the Dutch corporate income tax and Dutch dividend withholding tax.(4) It remains to be seen how treaty partners would react to this, as all tax treaties state that the application of the tax treaty is limited to that part of the kingdom located in Europe. For a treaty partner, there does not seem to be much objection to a treaty application where the tax authorities issue a statement that the company is resident of the Netherlands for tax purposes and is therefore subject to Dutch corporate income tax and Dutch dividend withholding tax. This should not be a problem, as the tax authorities of the Caribbean Netherlands issue a resident statement only if the company meets one of the conditions required for a legal entity in the Caribbean Netherlands to be considered tax resident there. Only in these circumstances will a company be subject to Caribbean Netherlands tax.
The Tax Arrangement of the Kingdom is the tax treaty between the Netherlands and the other islands in the Dutch Caribbean (Curacao, St Martin and Aruba), as well as between the Dutch Caribbean Islands mutually. The tax arrangement is applicable between Curacao and the Caribbean Netherlands, Aruba and the Caribbean Netherlands and St Martin and the Caribbean Netherlands.
Under the dividend article, no reduction in the proceeds tax is available. Currently, Curacao and St Martin do not levy dividend withholding tax.
Aruba levies a 10% dividend withholding tax. The dividend withholding tax rate is reduced to 5% if the company is listed (directly or indirectly). Based on the dividend provision of the tax arrangement, it could be argued that the Aruban dividend withholding tax should be reduced to 7.5% if the Caribbean Netherlands entity possesses at least 25% of the paid in capital of the Aruban company.
At present, the Tax Arrangement of the Kingdom is subject to renegotiation.
The Caribbean Netherlandshas a special real estate tax, which is applicable to individuals as well as to legal entities that own and exploit real estate there.
However, real estate tax is not applicable to legal entities that:
The real estate tax taxes a fictitious income of 4% of the value of the real estate. This fictitious income is taxed against a flat rate of 25%. The value of the real estate is established for a period of five years.
One non-tax advantage of having a holding subject to Dutch corporate income tax in the Caribbean Netherlands is that the holding can conveniently be located in the same time zone as the US and Latin American region. In addition, the expenses of maintaining the holding should be less than in the European Netherlands, due to lower labour expenses.
Dutch value added tax (VAT) rules are not applicable to legal entities in the Caribbean Netherlands that are subject to Dutch corporate income tax.
The sales tax rates for services vary: 6% in Bonaire and 4% in Saba or St Eustatius. Unlike in Europe, the sales tax is not deductible from the sales tax to be paid.
Certain services provided by non-resident entrepreneurs to residents are considered by law to be provided in the Caribbean Netherlands. In such case the place of performance by the non-Caribbean Netherlands entrepreneur is considered to be the Caribbean Netherlands. Services not mentioned are considered to be provided at the place where the service provide is situated. In order to prevent that, services provided by non- Caribbean Netherlands entrepreneurs are not taxed at all and the sales tax is shifted to the client in the Caribbean Netherlands.
Business-to-business services provided by Caribbean Netherlands entrepreneurs to non-Caribbean Netherlands entrepreneurs are considered to be provided at the place where the customer is located. These services are therefore free from Caribbean Netherlands sales tax. The same goes for certain services performed to non-resident customers who are not entrepreneurs.
This implies that services provided by foreign entrepreneurs to Caribbean Netherlands entrepreneurs will be subject to sales tax of between 4% and 6%, which is non-deductible.
Financial services companies - for example, royalty and finance conduit companies and reinsurers - are not in a worse position, as these services are considered to be provided abroad. However, the inbound royalty may be subject to Caribbean Netherlands sales tax.
The Caribbean Netherlands islands are special municipalities of the Netherlands. The Caribbean Netherlands has its own tax system, but corporations established or having their effective management and control there are in principle subject to Dutch corporate income tax and are considered tax resident in the Netherlands.
This also means that Dutch dividend withholding tax is applicable, while other Dutch taxes are not. Caribbean Netherlands companies that are tax resident in the Netherlands are not subject to Caribbean Netherlands real estate tax.
On request, Caribbean Netherlands companies can become subject to taxation under the proceeds tax regime and become tax resident in the Caribbean Netherlands. This means that actual profits are not subject to tax, but on distribution of the profits to the shareholders, a 5% proceeds tax is levied.
The Tax Arrangement of the Netherlands is a tax treaty between the Caribbean Netherlands and the European part of the Netherlands to ensure that double taxation is avoided. The Caribbean Netherlands also has unilateral relief provisions.
The Tax Arrangement of the Kingdom is also applicable between the Caribbean islands mutually.
From a Dutch tax viewpoint, there seems to be no objection to applying the Dutch treaty network in situations where a company in the Caribbean Netherlands is subject to Dutch corporate income tax and Dutch dividend withholding tax. For tax purposes, such a company is considered tax resident in the Netherlands. The Ministry of Finance has confirmed this; however, it remains to be seen whether treaty partners have the same opinion.
Advantages may be realised by locating Dutch holdings in the Caribbean Netherlands. Non-tax advantages are that the holding may be located in a US and Latin American time zone and expenses may be reduced. A point of attention is the sales tax.
(1) Article 2, Paragraph 8, Corporate Income Tax Act.
(2) Article 1, Paragraph 6, Dutch Dividend Withholding Tax Act.
(3) Article 3, Letter d Corporate Income Tax Act and Article 17, Paragraph 3,Letter c, Corporate Income Tax Act, Article 17, Paragraph 4, Corporate Income Tax Act.
(4) Letter of March 4 2011 from the Dutch Ministry of Finance in reply to a letter of January 18 2011 from the Amsterdam office of Certa Legal Tax.
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