Jeroen Adeler details the main features of the Netherlands Antilles corporate tax and legal system and outlines the jurisdiction’s most used incentives.
As a respected member of the international community, the Netherlands Antilles has had a strong reputation as a solid financial centre as part of the Kingdom of the Netherlands. Since the end of World War II the country (including the island of Aruba until its separation in 1986) has increased its capacity to become a professional provider of management services for international operating businesses. This favourable jurisdiction also includes flexible business and labour laws, bank and financial regulations and various incentives to mitigate taxation on profits and revenues that the Netherlands Antilles has fully adapted. Below, the main characteristics of the current Netherlands Antilles corporate tax and legal system and the country’s most used incentives are outlined and discussed.
The Netherlands Antilles has a civil law system with some Anglo-Saxon common law characteristics. The statutory regulations relating to legal entities under these civil law regulations, such as the (private) limited liability companies, are contained in the civil code. The most common legal entities explicitly regulated are comparable with Dutch corporate entities:
All corporate entities must be incorporated by a notary’s deed in the Netherlands Antilles. Joint stock companies and partnerships can be incorporated without a public notary. The Articles of Incorporation include the final regulations governing the company and conduct of its overall day-to-day affairs. The incorporation is swift and without many formalities. In addition, there is a free choice of language and currency for the capital. The requirement for a certificate of ’no objection’ from governmental authorities has been abolished. There is quite a lot of freedom with respect to shareholders’ rights, the structure and powers of the board of managing directors, and share capital. Private limited liability companies can even be incorporated without appointing a board of directors. The company must be registered with the Commercial Registry of the local Chamber of Commerce and Industry. Finally, a company needs to apply for a foreign exchange licence in case transactions in foreign currency such as US dollars or euro will be carried out. In addition, a licence for non-Netherlands Antilles managing directors is currently required.
The annual financial statements are drafted in international accounting standards such as IAS and IFRS and do not defer from accounting standards used in the US or in Europe. The local regulations do not determine which rules of financial reporting are considered generally acceptable. The general meeting is authorised to appoint an external auditor to review the financial statements regularly and to report to the general meeting of shareholders on the financial statements.
The low tax regulations for international operating companies are actually the foundation of the success of the Netherlands Antilles as an international financial centre. These ‘offshore rules’, which meant that corporate tax could significantly be reduced and mitigated, were abolished in 2001. However, favourable grandfathering rules still exist, as well as solid alternatives to guarantee similar effective tax rates.
2.1 Corporate income tax after 2001
For many years, the Netherlands Antilles has had double corporate tax rules: one for local business companies and one for International Business Companies (IBCs). Local companies are subject to normal profits tax at 34.5 per cent. Old IBCs, however, can still benefit from lower tax rates provided certain activities are executed. These companies are taxed at a corporate tax rate of 2.4 per cent up to 3 per cent, with full exemptions for capital gains, foreign exchange results and foreign branch profits. In practice, this means a tax reduction of almost 90 per cent compared to local business entities. Due to international pressure from both the EU and the Organisation for Economic Co-operation and Development (OECD), these favourable offshore rules have officially been abolished. However, existing IBCs are grandfathered and can in general benefit from these low effective tax rates up to and including 2019 due to extended transitional rules. New tax rules introduced a flat 34.5 per cent corporate tax rate (including the island surcharge) that is applicable to all remaining (non-offshore) corporate taxpayers and new incorporated entities. Due to these new rules, the Netherlands Antilles has been removed from the OECD blacklist for tax havens. Still, the Netherlands Antilles remains blacklisted in the following countries: Argentina, Brazil, Chile, Greece, Italy, Mexico, Peru and Portugal.
Although a dividend withholding tax act was drafted, the government has never implemented these rules due to continuing discussions with the Netherlands about double tax arrangements and other tax rules within the Kingdom. No dividend withholding tax for outbound dividends is expected to come into force in the near future.
All Netherlands Antilles companies are obliged to file a profit tax return at the end of every tax year together with financial statements comprising a balance sheet, a profit and loss account, and explanatory notes. The final tax returns are due within six months after the end of the calendar or financial year but an extension with six additional months is possible. If a company fails to file a tax return by the due date, the revenue department could impose an estimated tax assessment that includes penalties and additional costs. However, offshore companies are not subject to strict filing terms and periods.
2.2 The Netherlands Antilles participation exemption
One of the main features is the participation exemption, which currently consists of a 100 per cent exemption for dividends and capital gains from local companies, and a 95 per cent exemption for dividends and capital gains derived from non-Netherlands Antilles companies. A qualifying participation exists if a company in the Netherlands Antilles holds at least five per cent of the capital or five per cent of the voting rights of a subsidiary. No holding period is required. A qualifying participation also exists if the acquisition price of the shares (which could be less than five per cent of the total share capital/voting rights) exceeds one million Netherlands Antilles guilders (approximately US$560,000). Finally, a membership in a co-operative association and revenues derived from a permanent establishment outside the Netherlands Antilles could also qualify for the participation exemption.
The distinction between domestic and non-domestic exemption has two exceptions. Participations in Netherlands Antilles tax-exempt companies (see 2.3) qualify for 95 per cent only. For participations in Dutch companies a 100 per cent participation exemption is available, provided that a share interest of 25 per cent or more is held. Changes to the participation exemption have been announced already in 2006 but have not come into force. However, it is expected that these changes will be approved in the near future.
2.3 Tax-exempt company
As of 2001, a private limited liability company (NABV) can apply for tax-exempt status, provided the company meets some legal requirements regarding shareholders, local management, bookkeeping and supervision from the Netherlands Antilles Central Bank. The company should limit its activities to qualifying passive activities only, including financing and holding activities. NABVs will be exempt from corporate income tax. An extension for royalty income is expected, but has not been implemented in 2008.
2.4 E-zone companies
Like many jurisdictions in Asia, Africa and Latin America, the Netherlands Antilles provides (at least until 2026) geographical facilities where corporate tax is limited, and sales tax and excise duties are exempted for storage and assembly activities as well as Internet and call centre activities. Corporate entities (or permanent establishments of foreign entities) that obtain approval to conduct business activities in allocated e-zones in the Netherlands Antilles are subject to a reduced corporate income tax rate of two per cent for revenues derived outside the Netherlands Antilles, and exemptions from sales and real estate tax and excise duties. Revenues derived outside the e-zone but within the Netherlands Antilles remain subject to 34.5 per cent corporate income tax. These local business activities are, however, limited by law.
2.5 Personal income tax
Netherlands Antilles personal income tax does not differ much from standard personal income taxes worldwide. In general, employment and business income, as well as pensions and similar payments, are taxed against progressive tax rates (costs are deductible, while sound business principles apply for the calculation of business income). Capital gains on portfolio investments are exempted. Social taxes are levied separately.
The Netherlands Antilles introduced favourable incentives for retired individuals in 1998. This facility, which introduces a flat 10 per cent personal income tax regime for foreign-sourced income is known as the ‘penshonado regime’ and depends highly on the domicile status of a pensioner/retiree as a full resident. Local-sourced income, however, remains subject to standard income tax rates (with a maximum of 49.4 per cent on taxable income above approximately 107,500 Netherlands Antilles guilders). An election can be made annually to have the foreign-source taxable income fixed at 500,000 Netherlands Antilles guilders (approximately US$280,000).
2.6 International tax aspects.
The Netherlands Antilles is not well known for its extended double tax treaty network, but domestic rules for the prevention of double taxation are extensive and cover many situations. Although quite a lot of double tax treaties were concluded in the past (with the US, the UK and Nordic countries like Denmark) these treaties have all been abolished. Currently the Netherlands Antilles has a tax arrangement with the Netherlands and Aruba (as being members of the Kingdom of the Netherlands) and a double tax treaty with Norway. A double tax treaty was concluded with Venezuela but has never come into force. However, since 2002, Tax Information and Exchange Agreements (TIEAs) have been concluded with the US, Australia, New Zealand and Spain. Finally, the Netherlands Antilles has committed to implementing and executing the EU Savings Directive by means of introducing an interest-withholding tax on outbound interest payments to residents within the EU.
Jeroen Adeler, ITIS, Deloitte & Touche LLP