Prof. Dr. Roland P.C.W.M. Brandsma
On 10 October 2010 (10/10/10), the constitutional structure changed significantly within the Kingdom of the Netherlands. Previously the Kingdom of the Netherlands consisted of three countries, namely Aruba, the Netherlands Antilles and the Netherlands. The fiscal relations between these three countries were (and partly still are) regulated by the Tax Regulations for the Kingdom (TRK).
The Kingdom of the Netherlands consists of four countries after the constitutional amendments, namely Aruba, Curaçao, St. Maarten and the Netherlands and three special municipalities, namely Bonaire, St. Eustatius and Saba. A separate arrangement was established between the latter municipalities, that have their own fiscal regime, and the European part of the Netherlands. This separate arrangement was mentioned as the Tax Regulation Netherlands.
Initially the fiscal relations between the countries of the Kingdom of the Netherlands were regulated by the TRK. However, it soon became clear that the intention was to replace the TRK by bilateral tax agreements.
As of 1 December 2015, the Bilateral Tax Agreement Netherlands Curaçao (TANC) has replaced the old TRK. Under the new agreement the taxation rights between both countries have been more aligned with the OECD Model Convention (OECD MC) compared to the TRK. Under the new agreement it is possible, under specific conditions, to reduce the Dutch dividend withholding tax rate on dividend distributions to Curaçao to 0%. In addition, the period in which the Netherlands has the taxation rights is extended in case of a substantial interest, pensions and inheritances or donations. The TANC includes a specific regulation for hybrid entities where the source country follows the (whether or not) hybrid qualification of that entity in another country. The TANC applies to fiscal years and fiscal periods starting on or after 1 January 2016. In case of taxes withheld at source, the new agreement is applicable to payments made on or after 1 January 2016.
As of 1 March 2016, the Tax Agreement Netherlands-St. Maarten (TANSM) has come into effect. This agreement differs only on a few points from the TANC. The TANSM will be discussed briefly in section 10. No new tax agreements have been concluded between the Netherlands and Aruba and between the Caribbean islands themselves. As a result, the TRK remains fully applicable in these situations.
The proposal for the new tax agreement, that gives form to the fiscal relations between the Netherlands and Curaçao, was published on 10 June 2014. This agreement replaces the Tax Regulation for the Kingdom (TRK).
The TRK was established in 1965 when the Kingdom of the Netherlands consisted of the Netherlands, Suriname and the Netherlands Antilles. As a result of the constitutional amendments, particularly the independence of Suriname in 1975, Aruba’s withdrawal from the Netherlands Antilles in 1986 and the dissolution of the Netherlands Antilles in 2010, five different tax systems are currently applicable in four countries. Consequently, the TRK was no longer readily applicable in the new relationships. Therefore, it has been decided to replace the TRK by bilateral tax agreements, at least between the Netherlands and other countries within the Kingdom of the Netherlands. Bilateral tax agreements provide the advantage that going forward no complete agreement needs to be reached between all countries of the Kingdom of the Netherlands.
Moreover, bilateral tax agreements make room for the individual position of the various countries. For example, Aruba and Curaçao have a larger financial sector than St. Maarten. Therefore, the interests of Aruba and Curaçao may be different compared to the interests of St. Maarten. A potential downside is that each country had to negotiate separately with the Netherlands, while the three Caribbean countries could have taken a stronger position in the negotiations with the Netherlands if they had negotiated together.
As a result of the choice for bilateral tax agreements during the Kingdom Conference on Fiscal Affairs in Aruba on 19 and 20 November 2009, the TRK will remain applicable in the fiscal relations between countries that have not agreed on bilateral tax agreements after the introduction of the Bilateral Tax Agreement Netherlands Curaçao (TANC), either temporarily or permanently. Meanwhile, the Netherlands has concluded a bilateral tax agreement with St. Maarten. Besides, the Netherlands intends to conclude a bilateral agreement with Aruba.
The three Caribbean countries can choose whether they want to maintain the TRK between themselves, or if they want to agree upon new bilateral or multilateral agreements.
The immediate cause for the new tax agreement was, as mentioned, the constitutional amendments of the Kingdom of the Netherlands as a result of the discontinuation of the Netherlands Antilles. Curaçao and St. Maarten became autonomous countries within the Kingdom of the Netherlands (and the other islands: Bonaire, St. Eustatius and Saba, also collectively referred to as the BES islands, became public entities or special municipalities within the Netherlands). Besides for a longer time it had already been a wish from both parties to amend the TRK on a number of points. The Netherlands, for example, included in its tax treaty policy the desire to have taxation rights on pensions and other payments which have been deducted from the Dutch taxable base during the accumulation phase. Curaçao also expressed the desire to amend the TRK. In particular the 8.3% dividend withholding tax rate resulted in a fiscal barrier for the financial sector. As a result of this dividend withholding tax rate it was difficult for Curaçao to compete with both offshore jurisdictions that do not levy taxes on income or profits as the Cayman Islands and Bermuda, as well as European countries that can receive dividend from Dutch residents companies exempted from dividend withholding tax under the Parent-Subsidiary Directive, such as Malta.
At the time of shaping the Bilateral Tax Agreement Netherlands Curaçao (TANC) both the OECD MC and the Dutch tax treaty policy have been taken into consideration.10 In section 4 we discuss the scope of the agreement, definition of residency as well as the new regime on hybrid entities. Subsequently the main changes relevant to actual practises are discussed: the dividend withholding tax (section 5), the substantial interest regime (section 6), the taxation of pensions (section 7) and the provision for gift tax and inheritance tax (section 8). In section 9, we briefly discuss a number of other changes. This article concludes with a comparison of the Tax Agreement Netherlands-St. Maarten (section 10) and a conclusion (section 11).
The agreement covers only taxes on income since both the Netherlands and Curaçao (no longer) levy taxes on capital gains. In addition, a fictitious tax residency provision is included in respect of the Dutch inheritance tax and gif tax. Residents of both countries have access to the agreement. For purposes of the TANC the Netherlands also includes the BES islands.
A natural person who only has to pay taxes in one of the countries on income from that country will not qualify a resident of that country for purposes of the TANC. The usual tiebreaker rule of permanent home, centre of vital interests or habitual residence is applicable to individuals who are residents of both countries. Notwithstanding ordinary tax treaties, having the Dutch nationality has no distinctive meaning. Therefore, this condition is not included.
A legal entity is considered a resident of one of the countries in case the legal entity is established in the Netherlands for the purpose of corporate income tax and in Curaçao for the purpose of income tax. An exemption is made in article 1 for the ‘Stichting Particulier Fonds’ (SPF), the trust, the (Curaçao) Vrijgestelde Vennootschap and the (Dutch) vrijgestelde beleggingsinstelling (VBI). They are excluded from certain provisions relating to dividends, interest, royalties, capital gains and provisions regarding residual income. Besides, the SPF and the trust may be entitled to such provisions provided that they have a status of special purpose assets, resulting in being subject to a profit tax in Curaçao.
Furthermore, it is remarkable that the usual provision regarding the effective place of management is not included for legal entities. If a legal entity qualifies as resident of both countries, the countries will mutually agree on the deemed place of residence of this legal entity. Arbitrage is possible if the countries fail to agree. The explanatory notes indicate that the Netherlands aimed to raise a barrier with this provision against the movement of the effective place of management of a Dutch entity to Curaçao to avoid, for example, Dutch dividend withholding taxes. This place of residence provision is in line with the alternative provision of article 4, paragraph 3 OECD MC. The Netherlands included this alternative provision in, amongst others, the tax treaties with the United Kingdom and the United States of America. This place of residence provision creates more uncertainty about the effective place of residence of legal entities for tax purposes. Aspects such as substance and business considerations clearly have to be taken into consideration in case of a proposed cross border transfer. These aspects also need to be taken into account by entities that are already established in Curaçao.
The TANC contains specific rules for hybrid entities based on which the countries should enter into mutual consultation in order to avoid that these hybrid entities may be subject to double taxation or might not be subject to taxation at all. The applicability of the TANC has explicitly been stated for a number of situations. In these situations, mutual consultation between the countries will not take place. In principle these rules determine that the source country follows the transparent or non-transparent qualification of a hybrid entity by the country of residence for tax purposes. On condition that the income is treated as income of a resident in this country of residence. The explanatory notes mention certain examples. This can include, for example, dividends or profits obtained with a permanent establishment.
Income flows from the Netherlands to an entity in Curaçao. This entity is regarded as a transparent entity in the Netherlands, but in Curaçao as non-transparent. One of the members of the entity lives in Curaçao. A second member lives in a third country. The Netherlands would, based on national law, not consider this entity as a resident of Curaçao. However, this hybrid entity is a resident of Curaçao and can therefore make direct appeal to article 4 TANC.
Contrary to the first example, the entity is regarded as a non-transparent entity in the Netherlands, but in Curaçao as transparent. The entity is not subject to taxation in Curaçao. However the member is subject to taxation in Curaçao on the income attributable to this member. The Netherlands grants the member access to the TANC. From the explanatory notes it can be derived that the TANC is not applicable on income attributable to a resident of a third country. This is because a resident of a third party is not a resident of the Netherlands or Curaçao and the hybrid entity does not qualify as a resident for purposes of the TANC since it is not subject to taxation.
Contrary to the second example, the entity is established in a third country. Curaçao levies taxes on income that is attributable to the member that is a resident of Curaçao. Therefore, the Netherlands applies the TANC to the income attributable to this member. The TANC is not applicable to income attributed to a resident of a third country.
Different from the previous example, the entity is regarded transparent in the Netherlands, but non-transparent in Curaçao. In this case the TANC will not apply because, notwithstanding the fact that the Netherlands attributes the income to the resident of Curaçao based on its national laws, the entity is not subject to direct taxation and the entity is also not a resident of Curaçao. Obviously, these examples also apply in reversed situations in which Curaçao would be the source country and the Netherlands would be the country of residence.
Both the Netherlands and Curaçao could levy taxes based on their national law if income of an entity that is resident of the Netherlands is enjoyed by another entity that is also resident of the Netherlands and the members of the second entity are residents of Curaçao. If the Netherlands would qualify the second entity as non-transparent, then the income would be attributed to that entity. Curaçao may also allocate the income to the members of the entity that are residents of Curaçao, if the entity is qualified as a transparent from a Curaçao perspective. However, in case the Netherlands would also qualify the second entity as transparent and Curaçao would qualify this entity as non-transparent, the Netherlands would allocate the income to the members in Curaçao and the TANC would apply. Curaçao would not directly levy taxes on the income but would levy tax at the moment the second entity would make a distribution. The outcome would be the same in the reverted situation with two Curaçao resident entities and members which are residents of the Netherlands.
One the one hand the first case could lead to double taxation if, for example, the second entity receives an interest payment. The Netherlands will levy taxes on the interest income at the level of the second entity, whilst Curaçao would levy taxes at the level of the members, without elimination of double taxation based on article 11 TANC. This article allocates the right to levy taxes on interest income to the country of residence.
On the other hand, the second case could lead to a double non-taxation if the Netherlands would not levy taxes on the interest income at the level of the second entity. Curaçao will not levy taxes on the interest income at the level of the member. If the Curaçao participation exemption applies to a subsequent distribution of the second entity, the interest income would remain fully untaxed.
In short, the source country will follow the (non)-transparent qualification of an entity by the receiving country, provided that the entity is a resident of that country. However, if the entity is a resident of a third state, the source country will only follow the (non)-transparent qualification of the member resident of or established in that other country. The qualification of the third state will not be followed if the receiving entity is based in the source country. The starting point seems not to be if a cross-border payment occurs from a fiscal perspective, but if a cross-border payment occurs from a civil law perspective. In case a cross-border payments occurs from a civil law perspective, efforts have been made to prevent double taxation and double non-taxation. If this is not the case, the source country has the right to apply its national rules.
The new provisions with respect to the taxation of dividends is expected to be, in practice, of great importance. Based on the regulation that was in force from 2001 to 2015, 8,3% dividend withholding tax was withheld on dividends that were distributed from entities resident in the Netherlands to entities resident in Curaçao, provided that the Curaçao resident held an interest of at least 25%. In a few cases dividend distributions remain fully untaxed based on the text of article 10 TANC. If the conditions for the application of the 0% rate are not met, the dividend withholding tax rate amounts 15%. As a transitional provision applies for existing structures.
Until 2019, the year in which also the transitional provision of the old Curaçao offshore regime will end, a rate of 5% applies under the transitional provision. One comment which could be made is that this provision only applies to dividend distributions from a Dutch tax perspective, since there is no taxation on dividends in Curaçao.
In order to be able to apply the 0% rate, a few conditions need to be met. Article 10, paragraph 4 TANC defines the so called “Limitations on Benefits” (LOB). The LOB-provisions in the TANC seem in accordance with the concept LOB-provisions of BEPS Action 6, as a result of the Action Plan on Base Erosion and Profit Shifting of the OECD. What is striking is that the LOB-provision of the TANC does not contain a provision for algemeen nut beogende instellingen (charitable or public benefit organizations), unlike the concept LOB-provisions of Action 6.
The 0% rate applies to pension funds and state institutions. Besides, the 0% rate applies to an entity that holds an interest of at least 10% (a relaxation of the previous condition of 25%) in an entity resident in the other state that distributes dividends, provided that one or more of the following conditions are met:
- it is listed on a recognized stock exchange;
- the principal class of the shares is owned by listed entities;
- it functions as headquarter company for a multinational corporate group;
- it employs at least three qualified persons;
- it is engaged in the active conduct of a trade or business, but it employs less than three qualified persons and the dividend relates to the active conduct of a trade or business;
- has real activities, but it employs less than three qualified persons and on request the competent authority of the state in which the income arises determines that the main purpose of the incorporation and continuation of the company or ownership of a shareholding is not to qualify for the benefits of the TANC;
- more than 50% of the aggregate vote and value of all it shares is owned, directly or indirectly, by natural persons who are resident of either the Netherlands or Curaçao.
An exemption to this provision applies to the BES islands. If the entity that distributes the dividend is a resident of one of the BES islands, a tax rate of 5% applies in all cases. The explanatory notes mention that this is because the ‘opbrengstbelasting’, together with the taxation on real estate, have been introduced as a substitution of the profit tax. The opbrengstbelasting should function as a “robust fence of 5% taxation around the Caribbean part of the Netherlands” that could not be reduced with the use of an (international) participation. This argument would be understandable if also permanent establishment on the BES islands would be subject to the opbrengstbelasting. This is however not the case. The legislator made a conscious decision to not include profits of a permanent establishments of an entity that is not a resident of the BES islands in the taxable base at the time of adopting the Belastingwet BES. According to the lawmaker in such a case taxation on real estate would be sufficient. From that point of view the exclusion of the opbrengstbelasting in article 10 TANC can be questioned.
The condition of being listed, as mentioned in article 10, paragraph 4, subparagraph a TANC, can be fulfilled either direct or indirect. The 0% rate will be applicable if the receiving entity is a resident of Curaçao, is listed on a recognized stock exchange and is regularly traded on one or more recognized stock exchanges.
The 0% rate is also applicable if more than 50% of the aggregate vote and value of all of the shares is directly owned by one or more listed entities, provided that one of the following conditions is met. The listed shareholder needs to be:
- resident of the Netherlands or Curaçao; or
- resident of another country that has concluded a bilateral tax treaty with the Netherlands on which basis the Netherlands should apply the 0% rate, or both countries are part of a multilateral agreement on which basis the Netherlands should apply the 0% rate. This is, for example, the case if the shareholder is a resident of one of the EU Member States and the conditions of the Parent-Subsidiary Directive are met. The term recognized stock exchange means any stock exchange registered in a EU member state, the Dutch Caribbean Securities Exchange (DCSX) established in Curaçao, the NASDAC and any stock exchange registered with the Securities Exchange Commission as a national securities exchange for purposes of the Securities Exchange Act of 1934, the stock exchange of Bolsa Mexicana de Valores in Mexico and the Toronto Stock Exchange, the Chilean Bolsa de Comercio, Bolsa Electrónica de Chile and Bolsa de Corredores. This list can be expanded by mutual agreement between the Netherlands and Curaçao.
The 0% rate can also be applied in case the entity that is based in Curaçao functions as headquarter company for a multinational corporate group. The following conditions need to be met in accordance with article 10, paragraph 4, subparagraph b TANC. The headquarter company based in Curaçao may not benefit from any special tax regimes for financial services, royalty payments or insurance activities. Besides, the headquarter company needs to have independent responsibility regarding the control or finance activities of the group. Also the group entities are engaged in an active business in at least five countries and the business activities carried in each of the five countries generate at least 10% of the gross income of the group. The business activities carried on in the country of the company that distributes the dividend should generate less than 50% of the gross income.
To meet the condition, the in entity established in Curaçao should have sufficient expertise, which implies that it needs to employ qualified persons sufficiently qualified to carry out their tasks properly.
The head office may not be subject to any special regime that exclusively applies to entities that perform financial services. The Curaçao participation exemption is not regarded as a special regime, even if it differs on certain point from the Dutch participation exemption. Besides, Curaçao maintains an export regime from 1 January 2014 onwards. This export regime is applicable on a broad range of activities, provided that they are 90% or more focused on foreign countries.  Unlike the earlier offshore regime, no limitation apply to the users of this regime.
The 0% rate can only be applied if, according to article 10, paragraph 4, subparagraph c TANC, the Curaçao entity employs at least three qualified persons. This condition is comparable with the fictitious place of establishment provision as mentioned in article 5.2 of the Belastingwet BES. The headquarter company criteria do not clarify the required qualifications. The “at least three qualified employees” condition is further explained with the requirement that the employees should be able to independently look after the activities of the entity. They should have tasks and responsibilities within the framework of the normal corporate involvement. The Explanatory Memorandum states that the employees should at least be able and have the responsibility to control the following assets: investments, participations, fluid assets, assets that are disposed and loans. It will not be sufficient to hire qualified employees from, for example, a trust office. However, it is not required that each employee has the same expertise. Together the employees should be qualified to look after the activities of the entity. Therefore, this requirement seems an interesting possibility to qualify for the exemption.
This possibility can, for example, apply if the entity established in Curaçao would not qualify as headquarter company because the group is not active in at least five countries or because the entity still uses the old offshore regime until 2019 or benefits from any special tax regimes for financial services, royalty payments or insurance activities.
If the Dutch participation runs an active business and this participation is attributable to the business activities of the shareholder in Curaçao, then the 0% rate is applicable based on article 10, paragraph 5, subparagraph a TANC. Investing in shares or managing such investments for one’s own account are excluded from the qualification under this provision, unless it concerns a bank, an insurance company or a stockbroker. This provision can be relevant if, for example, the headquarter group requirement is not met and there are neither three qualified employees. This provision contains a more relaxed substance requirement, which can be relevant for smaller companies. However, for such companies, the presence of qualified employees must be appropriate for the size of the company.
This provision can also be applied if the entity in Curaçao is an intermediate holding of a foreign parent company, the business activities of the participation are in line with the business activities of the parent, and the Curaçao intermediate holding fulfills a linking-function (i.e. schakelfunctie). The intermediate holding in Curaçao can also fulfill a linking-function if the parent company is a top holding that fulfills an essential function in the business activities of the group and the participation runs an active business. The comparison between the socalled linking-function for the application of the Dutch participation exemption and the foreign tax liability in case of a substantial interest is remarkable.
Lastly, a safety net clause has been included in article 10, paragraph 5, subparagraph b TANC. If the previous requirements are not met, the 0% rate could still be applicable based on the safety net clause. The safety net clause might apply if the government of the source country (i.e. the Netherlands) determines that both the entity in Curaçao the Dutch participation are not established, maintained or acquired with the main purpose or one of the main purposes to become eligible to the 0% rate. The parliamentary proceedings indicate that the Netherlands requires that certain substance requirements are met next to the requirement that the shares belong to the business capital of a Curaçao resident entity. The Netherlands takes into account the substance requirements that are applied in assessing an advance tax ruling request of a Dutch entity. In the annex of the so-called Advanced Tax Ruling (ATR) Decree, various minimum requirements are mentioned. Based on these requirements at least half of the statutory members of the board of directors in Curaçao, with a right to take decisions, should be residents of or established in Curaçao. In addition, they should be sufficiently qualified to carry out their tasks properly. Their tasks should at least concern decision-making, under the responsibility of the entity and within the framework of the normal corporate involvement, on transactions concluded by the entity, including the proper completion of concluded transactions. Furthermore, amongst others, the most important bank account of the entity must be held in Curaçao, the bookkeeping should take place in Curaçao and the entity is, by its best knowledge, not (also) a tax residents of any other state.
In order to apply the safety net clause, a request must be filed with the APA-/ATR-team of the Dutch tax authorities/Large Businesses (office Rotterdam). Clearly, there should be sufficient substance in Curaçao. If, for example, (part) of the board decisions are taken in the Netherlands, then the request for the application of article 10, paragraph 6 TANC can be denied. Besides, during bilateral consultations the Netherlands could claim that the entity is a fiscal resident of the Netherlands on the basis of article 4, paragraph 5 TANC. It remains to be seen if fulfilling the minimum requirements in the ATR-Decree will be enough to qualify for the safety net clause. Experience has shown that the ATR-team does not takes for granted that the shares belong to the business capital of the shareholder.
The last possibility to qualify for the 0% rate arises if the shares of the Curaçao resident entity are for at least 50% held by natural persons who are residents of the Netherlands or Curaçao. The explanatory notes mention that article 17, paragraph 3, subparagraph a Dutch Corporate Income Tax Act 1969 (DCITA) can be applicable in abusive situations from a Dutch tax perspective. In such case, the Curaçao resident entity shall be subjected to Dutch corporate income tax as a foreign taxpayer on the basis of the substantial interest rules (i.e. aanmerkelijkbelangregeling), or the so-called ‘technical AB’. According to the explanatory memorandum, this might occur if the existing structure is modified by placing a Curaçao holding entity between the Dutch entity and the Curaçao natural person. However, this might not occur if a resident of Curaçao acquires a participation in a Dutch company (a newly established structure) with the use of the Curaçao holding entity.
In the explanatory memorandum of this provision, the following remark is made: “For completeness sake, it is noted that, as a consequence of the first paragraph of article 22 of the provision for abuse situations, from a Dutch perspective article 17, paragraph 3, subparagraph b DCITA could apply. One can think of the situation in which one or more natural persons interpose an entity that meets the ownership requirement to be entitled to the exemption of source taxation.”
From 1 January 2016, the Netherlands has amended article 17, paragraph 3, subparagraph b DCITA. The Curaçao entity can be included in the Dutch corporate tax base if it holds an interest in the Dutch entity with the main purpose or one of the main purposes to avoid the levy of Dutch personal income tax or Dutch dividend withholding tax at the level of another taxpayer and there is an arrangement or series of arrangements which are considered wholly artificial (i.e. not put into place for valid commercial reasons which reflect economic reality). Valid commercial reasons may exist if, for example, the Curaçao entity is an intermediate holding company linking between the ultimate holding company and the business and in addition meets certain minimum substance requirements in Curaçao as mentioned in section 5.
Interposing an entity is also relevant for the applicability of article 1, paragraph 7 Dutch Dividend Withholding Tax Act 1966 (DDWTA). Article 10, paragraph 8 TANC would result in a dead letter as a consequence of the applicability of article 1, paragraph 7 DDWTA. It would do the legislator well if he would further elaborate on the scope of article 10, paragraph 8 TANC.
There seem to be no abuse in the case a resident of the Netherlands migrates to Curaçao taking along his or her Dutch holding entity. In that case, the migration of the Dutch holding entity is not motivated by, for example, Dutch dividend withholding tax avoidance purposes, but motivated by the wish of the shareholder to execute the effective management from Curaçao. However, this provision is not completely clear. Article 22, paragraph 2 TANC excludes the application of the anti-abuse provision in case the Curaçao entity is entitled to the 0% rate on the basis of article 10, paragraph 3 or 5 TANC. However, article 22, paragraph 2 TANC does not exclude the application of the anti-abuse provision in case article 10, paragraph 8 TANC would be applicable. This is remarkable because if the entity is entitled to the 0% rate on the basis of the third or fifth paragraph, the eight paragraph would be unnecessary. If the 0% rate would apply based on the eight paragraph, the Netherlands would be able to apply its foreign substantial interest rules of article 17, paragraph three, subparagraph b DCITA on the basis of article 22, paragraph 2 TANC. The NOB asked in its commentary, sent to the Finance Committee of the House of Representatives, an explanation why article 10, paragraph 8 TANC is not also included in the exclusion of the anti-abuse provision as mentioned in article 22, paragraph 2 TANC. According to the legislator, article 10, paragraph 8 TANC was included at the request of Curaçao. It has been recognized that article 10, paragraph 8 TANC could lead to the avoidance of dividend withholding tax. Article 17, paragraph 3, subparagraph b DCITA remains, according to the legislator, intentionally applicable to dividends. Therefore, article 10 paragraph 8 BNC has limited meaning in practice.
It is expected that part of the existing Curaçao-Dutch structures would not qualify for the 0% rate. In those cases, a transitional provision is included in article 30 TANC. The application of this provision requires that the entity was already a resident of Curaçao before 5 June 2014 (the date when the legislation proposal was sent to the House of Representatives). In addition, the entity needs to hold an interest of at least 25% in an entity established in the Netherlands. On the basis of the transitional provision, a reduced rate of 5% instead of the old rate of 8,3% applies up to and including 2019. Thereafter, the general rate of 15% will be applicable to these entities. Besides dividends, article 30 BNC is also applicable to capital gains. Article 30 paragraph, 2 TANC states that article 17 paragraph, 3 subparagraph b DCITA does not apply in cases that are covered by the transitional provision. The transitional provision ends on the same date as the transitional provision of the Curaçao offshore regime, which also expires in 2019.
Next to the changes regarding the dividend withholding tax article, there are also important changes for direct shareholdings of natural persons in entities in the other state. One can think of residents of the Netherlands that moved to Curaçao, whether or not taking along their company.
The TANC limits the taxation of dividends and profit distributions to 15%. Only benefits from the disposal of shares or profit participations certificates that belong to a substantial interest could be subject to taxation in the Netherlands at a maximum rate of 25% for a period of five years after the emigration. Besides, a protective tax assessment can be issued by the Dutch tax authorities as a result of an emigration from the Netherlands which also can be recovered by the Dutch tax authorities after a period of five years after the emigration.
The TANC extends the possibilities of the Netherlands to effectuate a substantial interest tax claim compared to the TRK. The Netherlands might apply the Dutch tax rate on both profit distributions and capital gains until ten years after emigration, as long as it concerns an increase in value that was already present at the time of emigration. In this way, the Netherlands has secured its national tax rate of a maximum of 25% on both capital gains and dividend distributions.
Curaçao levies taxes on income from substantial interest against a tax rate of 19,5%. The TRK allowed Curaçao to levy additional taxes from 15% to 19,5%. Under the TANC, Curaçao has no room for their own additional taxation after the tax credit for the Dutch taxation. In the reversed situation (i.e. a resident of Curaçao migrates to the Netherlands) Curaçao has the right to levy taxation against a tax rate of 19,5% in that same period of ten years. However, the Netherlands would be able to levy additional taxes which shall not exceed its national rate of a maximum of 25%.
Also in this case a transitional provision applies. Whoever migrated to Curaçao respectively the Netherlands before 5 June 2014 can only be followed by the previous country of resident state a maximum of five years.
During this period, the higher income tax rate is applicable to dividends instead of the withholding tax rate of 15%. Nevertheless, the previous mentioned time period of 10 years is applicable to a disposal in case a protective tax assessment has been issued.
Internationally it is standard practice to allocate the right to levy taxes on pensions to the country of residence with the exception of state pensions and commuted pensions. The Netherlands included in its tax treaty policy39 the desire to have taxation rights on pensions and other payments which have been deducted from the Dutch taxable base during the accumulation phase. By way of a fiscal compromise it can be agreed that states will share the right to levy taxes. This Dutch tax treaty policy has been expressed in article 17 TANC, although this tax treaty policy differs from article 18 OECD MC. Under this new provision the Netherlands and Curaçao are entitled to levy taxes which shall not exceed 15 per cent on private pension installments paid from the source country. The country of residence also has the right to levy taxes, however the country of residence should allow a deduction on the income taxes of that resident levied in the source country. The scope of this provision has been extended to tax facilitated annuity installments. The source state maintains the right to levy taxes on commuted pension.
Also the allocation of taxation rights on state pension (article 18, paragraph 3 TANC) remains unchanged. The right to levy taxes on social security benefits changes. Contrary to the BRK the TANC contains a social security provision. Based on this social security provision the taxing right on the Dutch WAO-uitkering are also allocated to the source country. A Transitional provision applies. Article 29 TANC provides that article 17 TANC does not apply to payments of periodic installments that have already started on 5 June 2014 to a person who was a resident of Curaçao or the Netherlands on that date.
The inheritance tax and gift tax have been one of the provisions of the BRK that the Netherlands preferred to change. Under the TANC the Netherlands is entitled to levy taxes on donations until one year after emigration. In the event of death the right to levy a taxes expires the day after emigration. The TANC extends the right to levy taxes to 5 years both in the case of inheritance taxes and gift taxes. A transactional provision applies, just like the previously mentioned transactional provisions related to the extension of Dutch taxation rights. Based on this transitional provision the term of one year in case of gift taxes and one day in case of inheritance taxes would remain in place for those who were a resident of Curaçao on 5 June 2014. This transactional provision only applies to natural persons who migrated from the Netherlands to Curaçao, in alignment with the transactional provisions applicable to pensions and annuities. This restriction raised no objection because Curaçao tax legislation does not include the possibility to follow someone for purposes of levying gift taxes and inheritance taxes after emigration.
We will mention certain other changes which are included in the TANC hereafter.
Based on the TRK a permanent establishment exists in case activities are carried out for at least 183 days. The TANC extends the scope of the provision with services. A permanent establishment is assumed to exist if activities are carried out or services are provided during more than 183 days within a timeframe of twelve months. In such a case the right to levy taxes is allocated to source country. It is irrelevant if one person is present in a country for more than 183 days or multiple persons are one by one present in a country for more than 183 days within a period of twelve months. The activities, however, should be carried out or services should be provided with respect to one project. If an employee, for example, carries out activities for two different project and therefore the employee is present in that country two period of four months within a timeframe of twelve months, a permanent establishment will not exist.
Entertainers and sportspersons earn business income through a permanent establishment in the source country by fiction based on article 9 TANC. Article 15 TANC should be applied in case of an employment relationship. However, article 16 TANC provides a general provision for entertainers and sportspersons. The source country has the right to levy taxes regardless if the income is earned by an independent entertainer/sportsperson or an employed entertainer/sportsperson.
This provision (that does not exist in the Dutch tax treaty policy) is adopted at the request of Curaçao. Although the Netherlands does not levy taxes on entertainers and sportspersons who perform their activities in an employment relationship this will not result in double non-taxation, because Curaçao only allows a deduction.
Article 12 TANC contains a provision in conformity with the OECD MC. In case a remuneration is considered too high compared to the at arm’s length remuneration, article 12 TANC only applies to the at arm’s length remuneration. The excess may be taxed by both countries based on their national legislation.
Both countries will exchange information according to international standards. Given recent developments in the OECD this is expected to mean that information will not only be shared upon request but also spontaneously and even automatically.
Article 22 TANC, the anti-abuse provision, entitles countries the right to apply their national anti-abuse provisions in case of fraud, abuse and improper use. An exception is made for article 17, paragraph 3, subparagraph b DCITA in case a resident of Curaçao is entitled to the dividend withholding tax rate of 0% on the basis of article 10 TANC. Also an anti-abuse rule applies in the context of the so called safety net clause of article 10, paragraph 5 TANC (as discussed in section 5.5). Based on the safety net clause the government of the source state could determine that the main purpose or one of the main purposes of the Curaçao entity is to become eligible to the 0% rate.
The non-discrimination provision of article 23 TANC largely corresponds to article 24 of the OECD MC. Article 23 TANC differs to a considerable degree from the TRK with respect to natural persons. Article 39 TRK includes a provision which stipulates that a natural person should be entitled to the same benefits in the source country which apply to residents of that source country. Based on that provision a resident of the Netherlands, for example, was entitles to the same tax free threshold for income tax purposes as a resident of Curaçao. Therefore, the tax burden on income from the Netherlands increases under the TANC. The Netherlands does not grant a tax credit to foreign taxpayers in both the European part as the BES islands. Consequently, under the TANC the tax burden increases for residents of Curaçao who lived in the Netherlands for several years and as such receive a Dutch state pension. Previously these state pensions were largely untaxed in the Netherlands while Curaçao allowed a proportional deduction. The latter remains the same, however taxes should be paid in the Netherlands due to the introduction of article 23 TANC. A transitional provision applies to persons who already received state pension and lived in Curaçao on 5 June 2015.
The provision of article 40 TRK which provides a reduction in taxation for charitable or public benefit organizations is maintained and can now be found in article 23, paragraph 7 TANC.
As from January 2014 the negotiations between the Netherlands and St. Maarten intensified after completion of the discussions between the Netherlands and Curaçao in December 2013. The TANC served as starting point for the Tax Agreement between the Netherlands and St. Maarten (TANSM). Therefore, the content of the TANSM almost entirely corresponds to the TANC. Also the transitional provisions of the TANSM correspond to the TANC. Existing structures which do not qualify for the 0% rate have been granted a delay which includes a tax rate of 5% until 2019.
As of 1 March 2016 the TANSM has come into effect. The TANSM applies to fiscal years and fiscal periods starting on or after 1 January 2017. In case of taxes withheld at source, the new agreement is applicable to payments made on or after 1 January 2017.
The new Tax Agreement between the Netherlands and Curaçao (TANC) has finally entered into force. After years of amendments of the TRK the agreement between the two countries is now completely revised. The agreement finally contains the long-awaited introduction of a 0% rate applicable to qualifying cross-border dividend distributions. Fifteen years after the introduction of the Nieuw Fiscaal Raamwerk (NFR) the anticipated objective is achieved with the application of a Limitations on Benefits provision.
Existing structures that do not qualify for the 0% tax rate have been granted a delay based on transitional provisions which include a tax rate of 5% until 2019. It is expected that structures that cannot make the adjustments will look for alternatives outside Curaçao. By means of this new tax agreement Curaçao finally moves away from the old offshore regime. The question is now if the TANC is sufficient to further strengthen the ties between the Netherlands and Curaçao. This will not entirely depend on the TANC. Curaçao has concluded multiple tax information exchange agreements. Furthermore, from 1 September 2013 on Curaçao participates in the Convention on Mutual Administrative Assistance in Tax Matters. This makes clear that Curaçao fully endorses the current trend towards transparency. Good cooperation between the Netherlands and Curaçao on the bases of the TANC should be beneficial for both countries. It has to be seen if this would compensate losses with respect to old structures in place until 2019. These considerations are of lesser importance to St. Maarten which did not have an extensive off-shore industry like Curaçao.
- This article is an actualized and more comprehensive version of a published article co-authored with A. Kattouw and S.R. Vanenburg. The initial article, written in Dutch, has been published in the Weekblad voor Fiscaal Recht 2014, p. 1437 and further. Mr. A. Kattouw and Mr. S.R. Vanenburg work for PwC Curacao.↵
- Professor Roland P.C.W.M. Brandsma works for PwC Nederland. In addition, Prod. Roland P.C.W.M. Brandsma works for the University of Amsterdam and Nyenrode Business University.↵
- Parliamentary Papers II 2013/14, 33 955-(R2032), no. 2. ↵
- As of 1986 Aruba has its own fiscal system and Curaçao and St. Maarten have copied the fiscal system from the Netherlands Antilles and subsequently adjusted this system at their own discretion. In this context it is relevant to mention that also within the Netherlands Antilles important differences existed between both islands.↵
- Despite the fact that the new agreement, as well as the TRK, is a Dutch Kingdom Act, the agreement shows comparisons with a tax treaty.↵
- Roland Brandsma, Suniel Pancham, Hans Ruiter, Steve Vanenburg and Paul van Vliet, ‘Caribische landen, werk samen’, Het Financieele Dagblad of 1 December 2011.↵
- Parliamentary Papers II 2013/14, 33 955-(R2032), no. 3, p. 1.↵
- Dutch Government Gazette 2016, 21.↵
- The OECD-Model Convention is published by the Organisation for Economic Co-operation and Development. The last full version has been published on 22 July 2010. The last amendments have been published on 17 July 2012.↵
- Memorandum (policy note) on Dutch Tax Treaty Policy.↵
- Parliamentary Papers II 2013/14, 33 955-(R2032), no. 3, p. 2.↵
- Article 1, paragraph 1 TANC.↵
- Article 4, paragraph 2 TANC.↵
- Paragraph 24.1 of the OECD commentary (2010) on article 4.↵
- Article 4, paragraph 6 TANC.↵
- Article 4, paragraph 7, subparagraph a TANC.↵
- Article 4, paragraph 2, subparagraph b in conjunction with article 1, paragraph 1 TANC.↵
- Article 4, paragraph 7, subparagraph b TANC.↵
- Action 6, www.oecd.org/ctp/beps–2015–final–reports.htm.↵
- OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing, www.oecd.org/ctp/BEPSActionPlan.pdf.↵
- Discussion Draft Action 6, p. 6.↵
- Article 10, paragraph 10 TANC.↵
- (R2032), no. 3, p. 23.↵
- Parliamentary Papers II 2009/10, 32 189, no. 7, p. 17.↵
- Parliamentary Papers II 2013/14, 33 955-(R2032), no. 3, p. 37.↵
- Article 9 Landsverordening op de winstbelasting 1940, applicable from 1 January 2014. Based on this regime an effective profit tax rate of 4% applies to qualifying entities.↵
- (R2032), no. 3, p. 38.↵
- Parliamentary Papers II 2013/14, 33 955-(R2032), no. 3, p. 38.↵
- Decree of 3 June 2014, no. DGB 2014/3099, Stcrt. 2014, 15956.↵
- (R2032), no. 3, p. 39.↵
- Commentary of the Commissie Wetsvoorstellen of the Nederlandse Orde van Belastingadviseurs, 1 July 2014.↵
- Parliamentary Papers II 2014/15, 33 955-(R2032), no. 6, p. 20.↵
- Parliamentary Papers II 2013/14, 33 955-(R2032), no. 7, p. 7-8.↵
- Article VI, P.B. 1999, nr. 244, after the amendments mentioned in P.B. 2001, nr. 145.↵
- Article 2.12 Dutch Income Tax Act 2001.↵
- Article 10, paragraph 14 TANC.↵
- Article 13, paragraph 5 TANC.↵
- Article 24, paragraph 3, Landsverordening op de inkomstenbelasting 1943.↵
- Memorandum (policy note) on Dutch Tax Treaty Policy, p. 54.↵
- Article 29 TANC.↵
- Article 28 TANC includes a fictitious place of residence.↵
- Article 31 TANC.↵
- Parliamentary Papers II 2013/14, 33 955-(R2032), no. 3, p. 43.↵
- Article 7.2, paragraph 2 Dutch Income Tax Act 2001.↵
- Parliamentary Papers II 2014/15, 34 263-(R2055), no. 3, p. 2-3.↵