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December 31, 2019
Curaçao amends profit tax legislation from a worldwide tax system to territorial system
The Curaçao tax legislation has undergone several changes in recent years to align with Organisation for Economic Co-operation and Development (OECD) and European Union (EU) requirements. For example, the so-called nexus approach for income from intellectual property was introduced as of 1 July 2018, the export regime was abolished, and the e-zone regime was amended to eliminate those aspects that were considered ringfencing or harmful.
On 1 February 2019, the Code of Conduct Group of the EU (the EU COCG) required further changes to certain aspects of the Curaçao Profit Tax Ordinance 1940. This led to draft legislation that was presented to and approved by the EU COCG and should therefore be considered compliant with the current minimum requirements of the EU. This draft legislation was presented to and passed by the Curaçao Parliament on 30 December 2019 and will enter into force as of 1 January 2020.
The main new feature in the amended profit tax legislation is the change from a worldwide tax system with exemptions for foreign permanent establishments, sales to foreign buyers and foreign real estate, to a stricter territorial system where only income from a domestic enterprise is included in the taxable basis. The territorial system will not apply to passive income or any kind of royalty income as defined by the OECD. In addition, certain domestic activities such as ship building and the repair of ships and airplanes; warehousing and logistics; support services; and fund management and administration will be subject to a reduced rate of tax at 3%.
Change to a territorial system
The foreign-sourced income exemption as it existed until 31 December 2019 has been replaced by a new tax regime that solely includes income from a domestic enterprise. Income that is considered derived from foreign entrepreneurial activity is excluded from the taxable base for profit tax purposes. To determine whether income is considered domestic or foreign, the profit before indirect cost is allocated based on direct expenses but excluding costs of materials. A simplified example may illustrate the allocation between domestic and foreign source income:
Please see the PDF file for the illustration.
When the activities are conducted by a single entity in Curaçao, the domestic net profit of the entity can now be calculated as [local direct cost/total direct cost]*net profit = 100*(150/500) = 30. This 30 is taxed at the headline tax rate of 22%. If there are more entities in the Curaçao group, the indirect costs need to be allocated based on group direct cost rather than entity direct cost.
For financial services companies such as banks and finance companies, the source of the income is determined based on the place of (non) residence of the counterparty and in the case of insurance companies on the location of the risks to be insured.
Passive income, income that is not generated through active business activity, will be considered domestic income. This may include interest, rents and portfolio dividend income. Royalty income will always be considered passive income.1
Reduced profit tax rate for designated activities
A reduced profit tax rate of 3% has been introduced for income from certain designated domestic activities conducted by taxpayers in Curaçao. Income from the following activities may be subject to the reduced profit tax rate:
The above changes to the profit tax legislation also come with several measures that are aimed at curbing abuse of the new tax system.
Use of Curaçao Investment Company (CIC) regime by bank or similar enterprises
Banks and other regulated credit institutions are prohibited from investing in a CIC, which is subject to 0% profit tax, unless the activities of the CIC are limited to investing the excess cash of the bank or similar credit institution and provided that all other requirements for the application of the CIC regime are satisfied.
Deemed dividends by bank-held CIC and passive foreign investment companies
Passive investment companies held by a bank or other regulated credit institutions are considered to have distributed their annual profits to the extent of the banks interest in the passive investment company. For domestic passive investment companies this deemed distribution is 50% and for foreign passive investment companies this dividend is 100%.
Failure to meet regular accounting requirements
Taxpayers that do not meet the requirement of regular accounting or regular annual closing will be considered to have derived all their income from a domestic enterprise and as a result be subject to profit tax at the rate of 22% (in 2019) for their complete income.
Abolishment of special e-zone tax rate
The reduced profit tax rate applicable to e-zone companies (2%) will be abolished as of 1 January 2020.2
Foreign tax relief
The relief for foreign source tax will be limited to that part of the foreign tax which is levied at source in relation to income derived from a domestic enterprise operated in Curaçao. Relief for foreign sourced tax will be granted by means of a tax credit which will be limited to:
Expansion of the permanent establishment definition
The so-called permanent establishment (PE) definition has been modernized to realign it with international developments and to improve any future treaty negotiations involving Curaçao. The PE definition has been aligned with the PE concept in the OECD Model Tax Convention on Income and Capital and the Tax Arrangement between the Netherlands and Curaçao.
Broadening tax incentives on domestic investments
The proposed changes to the domestic tax incentives ordinance can be summarized as follows.
The aforementioned amendment is intended to enter into force on the day following the date of publication of the new legislation and will have retroactive effect to 1 January 2017. The following amendments will enter into force on 1 January 2020:
The amendments to the Tax Incentives Ordinance shall not apply to taxpayers who obtained a Tax Incentive prior to the date on which the new legislation enters into force or whom filed a Tax Incentive request prior to this date, but which has not been processed at the date on which the legislation enters into force.
For Curaçao profit taxpayers in general but especially those with cross-border activity, the changes in the profit tax may have considerable effect. Also, the new substance requirements as well as the change in the method of calculating the taxable base may require taxpayers to reassess their operating models and their financial systems. Therefore, taxpayers should expeditiously start analyzing the potential impact for each specific case.
1. If and to the extent that the royalty income can be regarded as ”qualifying income” from ”qualifying intangible assets,” the royalties may be subject to a profit tax rate of 0% in Curaçao.
2. The proposed changes to the National Ordinance Economic Zones are intended to enter into force on 1 January 2020. Based on a transitional arrangement, the current wording as contained in the National Ordinance Economic Zones will however remain applicable to taxpayers who are subject to the e-zone regime on 31 December 2019 and ultimately up to 31 December 2022.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Willemstad