New tax treaty between the Netherlands and Curaçao enters into force

Executive summary

A new bilateral Tax Arrangement between the Netherlands and Curaçao (TANC), which essentially functions as a tax treaty,1 was ratified by the Dutch Parliament and formally published on 9 October 2015. The TANC will apply to income received on or after 1 January 2016.

This long-awaited TANC will further facilitate new investments and trading between the countries and provides an excellent platform for investment into the Netherlands and the European Union (EU). Entry into force of the TANC is an important building block in the strategy of the Curaçao Government to transform part of the island’s economy into a modern financial center at the heart of the American continents.

The TANC is based on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention and is in compliance with the OECD’s views on substance and prevention of treaty abuse.

This Alert summarizes the Treaty highlights.2

Detailed discussion

Corporate taxes

Dividends

The TANC prescribes that the source country will provide for a full exemption of dividend withholding tax subject to certain conditions. This a big improvement compared to the reduced dividend withholding tax rate of 8.3% under the current situation. If the conditions are not met, a 15% withholding tax rate applies under the TANC. However, grandfathering rules will apply to ensure that a 5% withholding tax rate will apply for existing situations until the end of 2019.

The statutory Dutch dividend withholding tax rate is 15%, whereas Curaçao currently does not levy withholding taxes on outgoing dividends. Dutch dividend withholding tax consequences in the three most common situations where a Curaçao parent company holds the shares in a Dutch subsidiary are described in more detail below:

• Exemption of Dutch dividend withholding tax will apply in a number of cases. The most important are when the Curaçao beneficial owner:

(i) Holds at least 10% of the shares in the Dutch company and satisfies one of the following tests:

• Publicly-traded test
• Headquarter test
• Local substance test (employment of at least three local individuals)
• Main purpose test or competent authorities’ test (the main purpose is not to make use of the benefits of the reduced dividend withholding tax rate under the TANC)

The explanatory notes to the TANC explain that this confirmation may be granted if the beneficial owner meets (i) standard substance requirements, (ii) is directly or indirectly held by a business enterprise, and (iii) the Curacao company performs an essential role by establishing a link between the business activities of its (indirect) parent company and its Dutch subsidiary and/or other indirect subsidiaries.

Other provisions

General anti-abuse article

Based on the TANC, domestic rules in each country regarding fraud, abuse and improper use of the TANC, may in principle overrule the articles for avoidance of double taxation.

The Dutch Corporate Income Tax Act (CITA) may subject foreign entities to Dutch corporate income tax when – among others – they hold a substantial interest (5% or more) in a Dutch entity, subject to certain conditions (article 17, 3, b CITA). According to the TANC, this substantial interest provision does not apply (to dividend distributions or to capital gains realized upon disposition of such a subsidiary) if the Netherlands has no right to levy Dutch withholding tax under the TANC.

Furthermore, based on the grandfathering rule in the TANC, the Dutch substantial interest provision should in any case not apply until the end of 2019 for other existing structures.

Investment structuring

The TANC provides for a number of interesting opportunities for investments and trading between the Netherlands and Curacao. For structures currently in place between the Netherlands and Curaçao, taxpayers should assess to what extent the TANC will result in a different outcome.