On June 10, 2014 the new bilateral rules for the avoidance of double taxation between the Netherlands – including the Caribbean part – and Curaçao (“BRNC”) were announced and presented to the Dutch parliament for approval. The intention is for the BRNC to replace the Tax Regulation for the Kingdom of the Netherlands (“BRK”) in the relationship between the two countries in order to once again bring the system into line with current international standards and the constitutional reform of October 10, 2010. The BRNC contains significant changes in relation to the BRK, with transitional arrangements for some elements.
An overview of the main features of the BRNC was already published at the end of 2013, as previously reported to you. In addition, we note the following.
In the case of entities with dual residence, the state of residence for the purposes of the BRNC will be determined in mutual agreement between the two countries. If no agreement can be reached, the BRNC will not apply, with the exception of a few provisions. For existing situations, where facts and circumstances remain unchanged, the state of residence will not change from what it was for the purposes of the BRK.
Dividends: maximum taxation in the source state
A rate of 0% applies to a shareholding of at least 10% by the entity receiving the dividend:
- whose shares are traded on a recognized stock exchange (direct stock exchange test);
- whose shares are at least 50% held directly by residents of one of the countries and whose shares are traded on a recognized stock exchange (indirect stock exchange test for residents);
- whose shares are at least 50% held by non-residents of one of the countries and whose shares are traded on a recognized stock exchange and these non-residents would also have been entitled to 0% on the basis of a treaty or a multilateral agreement with the country of the entity distributing the dividend (indirect stock exchange test for non-residents);
- that complies with the headquarters test of a multinational group;
- that has sufficient ties with the state of residence, i.e. at least three full-time active employees who are residents of the state in which the entity is resident and who manage the assets of that entity at a “fundamental level” (“sufficient ties test”);
- if it carries on a business in the state of residence and the dividend of the other country derives from the carrying on of that business (activities test);
- if at least 50% of the shares are held directly or indirectly by individuals who are residents of one or both countries.
In the case of non-compliance with the above criteria but compliance with the 10% shareholding criterion, a request can be made on the basis of the catch all provision. This request will be granted if it is clear that obtaining a tax exemption is not the main purpose or one of the main purposes of incorporating, acquiring or maintaining the entity receiving the dividend. Based on the Explanatory Memorandum, the fiction is that this is deemed to apply if the entity receiving the dividend meets the Dutch nexus requirements for holding entities and the shares in the entity receiving the dividend form part of its business assets. For the rest, full exemption also applies if the shareholder is a government body or a pension fund. The rate of 8.3% in relation to Curaçao will be canceled. The 5% yield tax with regard to BES entities in the Caribbean territory of the Netherlands will not be reduced by the BRNC under any circumstances.
A maximum rate of 15% applies in all other cases, although there are two exceptions to this:
- If a reduced exemption to 8.3% was applied under the BRK, but was not reduced to 0% under the BRNC, a rate of 5% applies as a transitional measure in the case of a shareholding of at least 25%. This rate applies until the end of 2019, with a commitment being made that the Netherlands will not tax on the basis of the anti-abuse rules for a technical substantial interest.
- The national rate will apply to dividends from a substantial interest for a period of ten years after the emigration of the holder of the substantial interest to the extent that an amount is still outstanding (on a protective assessment) from the capital gain calculated upon emigration. Where income tax is concerned, this means tax of 19.5% for Curaçao and 25% for the Netherlands. A transitional arrangement will apply for existing cases, however, so that the five-year substantial interest reservation period will remain and taxation in the source state will be limited to a maximum of 15%.
Profits on substantial interest
Besides source state taxation on dividends from a substantial interest for a period of ten years after emigration (see above), during this period the source state will also have the right to tax capital gains on shares, profit-sharing certificates, call options, usufruct and certain receivables. By contrast, the new state of residence of the holder of the substantial interest must provide a step-up to prevent double taxation in the case of actual disposal.
The source state may in future levy a maximum of 15% tax on the gross amount of regular private pension and life insurance benefits. This tax is in principle deductible in the state of residence. This does not apply to Dutch nationals already receiving a pension and who are resident on Curaçao: they will only be subject to tax in the state of residence. Capping does not apply in the case of surrender.
The general anti-abuse provision in the existing BRK is included in the BRNC, so the doctrine of fraus legis and specific anti-abuse provisions included in the tax legislation can be applied. These provisions, however, also state that in the case of entitlement to apply a withholding tax exemption on participation dividends, the Netherlands will not levy corporate income tax on the basis of a technical substantial interest.
Gift and inheritance tax
The BRNC contains just one provision on gift and inheritance tax. The Netherlands, as the former state of residence of the testator or benefactor, may levy taxes during the first five years after emigration, whereby the gift and inheritance tax of Curaçao is offset.
If an entity is considered to be transparent for tax purposes by a country and non-transparent by the other country and this leads to double taxation or taxation that is inconsistent with the provisions of the BRNC, the countries will enter into mutual consultation in order to prevent this double taxation or taxation that is inconsistent with the BRNC and simultaneously to avoid income components being subject to taxation, in whole or in part, simply as a result of the application of the BRNC. In addition, the way in which the BRNC will be applied in a number of specific situations has been established, so that consultation is no longer necessary in such cases.
The main changes discussed here may be reason for you to quickly seek advice about any steps you need to take. Our tax advisors would be pleased to help you with this.