Global Tax Alert | 16 December 2013

The Netherlands and Curacao agree on new tax arrangement

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Executive summary

The Dutch State Secretary of Finance and the Curaçao Minister of Finance reached an agreement on a new tax arrangement (TAK) for the Kingdom of the Netherlands between Curaçao and the Netherlands, according to an announcement issued by the Dutch Ministry of Finance on 12 December 2013 (the Announcement). The TAK will be a bilateral agreement. It is the intention that the TAK enters into force as of 1 January 2015, under the condition that parliamentary approval will be obtained in both jurisdictions.

Detailed discussion

Background

On 10 October 2010, the country Netherlands Antilles, which consisted of five island territories in the Caribbean Sea (Bonaire, Curaçao, Saba, Sint Eustatius and Sint Maarten) was dissolved. With this dissolution, Curaçao and Sint Maarten each became an autonomous country within the Kingdom of the Netherlands while Bonaire, Saba and Sint Eustatius (the BES-islands) became part of the Netherlands as extraordinary overseas municipalities.

Consequently, the existing TAK, covering the islands of the former Netherlands Antilles, The Netherlands and Aruba will be replaced by separate bilateral agreements. The Announcement highlights the features of such a bilateral agreement between the countries of the Netherlands and Curaçao. The exact wording of the TAK has not been made public yet and the Announcement only provides a brief summary of its main provisions. Note that the existing TAK remains in existence with respect to Aruba and Sint Maarten until new separate bilateral agreements have been concluded.

Withholding tax on dividend distributions

Since 2002, a Dutch dividend withholding tax of 8.3% is levied on distributions to Curaçao in corporate structures to which the existing TAK applies. Curaçao currently does not levy withholding taxes on outgoing dividends.

Three situations can be distinguished:

  • A 0% Dutch dividend withholding tax rate will apply for “participations” held by “active companies.” It is neither explained what level of interest constitutes a participation nor when a company is active. It is however noted that the TAK will contain a limitation on benefits (LOB) provision, but no further details on its contents have been provided yet. Such LOB provision can be found in some other tax treaties as well, where it basically requires that a company has sufficient nexus with its country of residence to claim the reduced withholding tax rate in the source country. It may be likely that the shareholder needs to satisfy some substance requirements or for instance listing requirements which is quite common in modern tax treaties nowadays, but this will be made public at a later stage.
  • A 5% Dutch dividend withholding tax rate will apply for existing participations with an interest of at least 25% which will not be eligible for the 0% Dutch dividend withholding tax rate. This grandfather clause ensures that a 5% withholding tax rate will apply in these cases until the end of 2019 at the latest.
  • A 15% Dutch dividend withholding tax rate will apply in all other situations.

Substantial interests

The Dutch Corporate Income Tax Act (CITA) foresees in taxation of a foreign entity if – among other factors – it holds a substantial interest in a Dutch entity, provided certain criteria are satisfied (article 17(3)(b) CITA). Currently, the TAK states that the right to levy taxes is allocated to the country of which the alienator is a resident and effectively hindered the Netherlands in effectuating its taxation rights.

The Announcement states that the source country shall have the right to levy its source taxes with respect to dividends and capital gains derived from a substantial interest and which have been built up in the source state before emigration.

As also was the case for the years 2012 and 2013, it has been confirmed by the Dutch Ministry of Finance that article 35a of the TAK will not be applied for the year 2014 with respect to the substantial interest (article 17(3)(b) CITA). Note that article 35a TAK states that the domestic rules in each country regarding to fraud, abuse and improper use still would be allowed, but it has been agreed that neither Curaçao, nor the Netherlands will apply article 35a TAK in case of a substantial interest.

Other provisions

  • The new TAK will provide for an (automatic) exchange of information between the Netherlands and Curaçao in line with international standards.
  • The new TAK will provide for a mutual agreement procedure with a (mandatory) arbitration clause.
  • The source state will be allowed to levy taxes on payments for services provided for a period exceeding 183 days (a “service permanent establishment”).
  • The new TAK will contain a provision with respect to hybrid entities. No further guidance on the wording of this provision has been provided yet.
  • The source state will on the basis of the new TAK be allowed to levy taxes on sportsmen’s and artists’ remunerations.

Implications

The Dutch State Secretary of Finance and the Curaçao Minister of Finance have agreed on a new tax arrangement for the Kingdom of the Netherlands between Curaçao and the Netherlands. Although the exact wording of the arrangement has not been published yet, the Announcement provides certain guidance. It is advisable for taxpayers to closely monitor developments in both jurisdictions and start assessing the impact of the new TAK on existing structures, in order to timely identify potential opportunities and address potential issues.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Amsterdam
  • Johan van den Bos
    +31 88 407 1457
    johan.van.den.bos@nl.ey.com
Ernst & Young Belastingadviseurs LLP, Rotterdam
  • Michiel Swets
    +31 88 407 8517
    michiel.swets@nl.ey.com
Ernst & Young LLP, Belgium-Netherlands Tax Desk, New York
  • Dirk Stalenhoef
    +1 212 773 3390
    dirk.stalenhoef@ey.com
Ernst & Young LLP, Belgium-Netherlands Tax Desk, Chicago
  • Frank Schoon
    +1 312 879 5508
    frank.schoon@ey.com
Ernst & Young (China) Advisory Limited, Belgium-Netherlands Tax Desk, Shanghai
  • Bas Leenders
    +86 21 2228 4782
    bas.leenders@cn.ey.com
Ernst & Young LLP, Dutch Tax Desk, London
  • Jelger Buitelaar
    +44 20 795 15648
    jbuitelaar@uk.ey.com

EYG no. CM4041