Published On: Thu, Jun 21st, 2018

Curaçao tax reforms promote an attractive investment climate for businesses

WillemstadWILLEMSTAD - The financial organizations CIFA and VAB have actively been cooperating with the Curaçao Government to ensure improvement and amendment of the legislation to keep pace with the constantly changing international requirements regarding compliance, substance and transparency.

In 2015 the OECD published the final reports of their BEPS Project (Base Erosion and Profit Shifting). It is expected that all members of the OECD Global Forum will introduce legislation to comply with these BEPS standards and it has been announced that jurisdictions that do not comply with these standards will be blacklisted, which will have negative ramifications for the economy of these jurisdictions. Moreover, the European Union already indicated that Curaçao will become EU-blacklisted, if Curaçao does not timely comply with these BEPS standards. CIFA and VAB therefore have actively promoted and contributed to the introduction of legislation that ensures that Curaçao remains compliant with these international standards.

On 7 June, the Parliament of Curaçao approved legislation to introduce one of these standards, the Country by Country Reporting. Based on this legislation, entities of large multinational companies that are established in Curaçao must file certain information with regard to their business activities in Curaçao.

Another BEPS requirement is that participating jurisdictions amend their legislation to terminate or modify regimes which are deemed preferential. The OECD indicated that the E-zone, Export Facility Regime and the legislation with regard to income from Intellectual Property (IP) have aspects that are considered preferential. CIFA and VAB have therefore been working diligently with the Government which has been preparing new legislation to comply with these OECD BEPS standards to ensure that our regimes are favorably reviewed and as such we can maintain a sound regulatory environment compliant with international standards, beneficial for our financial services industry and the investment climate of Curaçao in general.

IP income
The OECD has made it clear that all jurisdictions must adopt the so-called nexus approach. This is actually a form of substance, as it requires a company to have developed its own IP in order to benefit from tax incentives for the income generated from that IP. This means that income generated in Company A from IP that has been acquired and not developed within the same Company A will no longer qualify for a tax incentive. To be considered having developed its own IP, Company A must develop the IP in-house or it may outsource the development of the IP, but then it has to supervise and maintain responsibility over such development. Income from qualifying IP will be subject to a reduced tax rate of 5%.

Exempt company
The income of the Exempt Company will remain tax exempt. However, instead of an exemption for the entity itself, its income will in the future be subject to a 0% tax rate. This formal change ensures that the Exempt Company, under the new regime addressed as “the Curaçao Investment Company” (hereafter: “CIC”), must file an annual tax return. CIC’s income will remain tax exempt, as long as all requirements are met, which will amongst others be evident from the tax return. There will also be a broadening of the permitted activities, under the new regime a CIC may also develop its own IP. In that case, the qualifying income from IP will be subject to the 0% tax rate. Non-qualifying IP income earned by the CIC will be subject to the general tax rate of 22%.

Export exemption
The Export Facility regime that was introduced a few years ago, has recently been ruled  not in compliance with the current  OECD requirements with regard to transparency and ring-fencing. In order to repair these issues, the Export Facility will be replaced by a general exemption for foreign source income in connection with the sale of goods or performance of services to customers abroad. The profits may not be generated with local (im)movable assets that have locally been put to the disposition of foreign consumers and the regime will therefore not apply in case of e.g. renting a car on Curaçao to non-residents or the maintenance or other services with regard to local real estate owned by a non-resident. The exemption is based on the OECD-approved territoriality principle.

E-zone
Pursuant to the review by the OECD, the E-zone will return to its origin of Free Zone as it was in place until 2001. The activities that can be performed are trading goods to and from the E-zone, as well as services performed in the E-zone and services performed abroad, but using goods and/or equipment from the E-zone. Activities carried out using e-commerce, will no longer be allowed in the E-zone. However, these activities can still be performed in Curaçao using the foreign source income exemption as long as the requirements are met.

Substance
The international trend is that companies that operate in a jurisdiction should have real presence, or substance, in that jurisdiction. The substance should be proportional to the size and nature of the activities that the company performs. This means that, for example, a company with some basic investments that, if they were held directly by a natural person would not require much time and effort, will not require much substance. On the other hand, companies with a sizable amount of assets and a substantial turnover should have a number of full time local employees and operational expenses such as for office space and equipment that is in line with the reasonably required time and effort for these activities. The company may employ people directly or indirectly, but the core activities should be performed in Curaçao. To be certain that a company meets these substance requirements, it will be possible to request a ruling from the inspector, who must respond to such request within one month.

Sales tax
To insure that the proposed amendment is budget neutral, some changes to the Sales Tax legislation are also included. For example, it is considered ring-fencing when local profits of an E-zone company are taxed at a rate of 22%, while profits from international trade are taxed at a rate of 2%. Therefore, the total profits of an E-zone company will in the future be taxed at a rate of 2%. However, for budgetary compensation purposes, these companies will be charged 9% sales tax when they sell goods to local customers. A comparable change is proposed with regard to the new Export exemption that is replacing the Export Facility regime. For budgetary compensation purposes, a reduced sales tax levy will be introduced on exports. However, the combined result from these changes will on average not exceed an effective tax burden of 2-4% on the added value of the international trade or services.

CIFA and VAB are of the opinion that our new modernized legislation will be attractive to both foreign and local investors. Consultations with the OECD have taken place regarding the changes to our legislation. The aspects that were reviewed negatively will be eliminated and as such we will be in compliance with OECD and EU standards. It is our view that all the amendments together form a balanced new system that will ensure that both the investment climate of Curaçao and doing business in our country remains attractive for investors!

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