On 1st July, 2003, the Aruba offshore regime as such was abolished and replaced by a dividend withholding tax and an imputation payment system (the New Fiscal Regime (NFR)).
Companies formed prior to the introduction of the NFR are ‘grandfathered’ into the NFR. Their existing privileges continued until the end of 2007, meaning an effective tax rate of 2.4% to 3% for foreign-owned companies.
The NFR contains a specific exemption for the Aruba Exempt Corporation (AEC), although the exemption is disapplied in the event that the AEC generates profits from illegal activities, as defined under Aruba criminal law. In such case all of the AEC’s profits earned from the day of incorporation will be liable to profit tax at the rate of 35% (reduced to 28% as of 1st January, 2007).
However, as from January 1, 2006, Aruba has introduced a revised tax regime for these companies, which offers three possibilities to AEC companies:
- The AEC can continue its activities as a fully taxed corporation, subject to tax at the normal rate.
- An AEC can remain exempt if it acts as a holding or financing company (but not as a bank) with foreign subsidiaries subject to a profit tax of at least 17.5 percent on at least 95% of dividends. Investment activities can also remain exempt, excluding real estate. Licensing of intellectual property is also permitted.
- An AEC can elect to be a pass-through entity. The income of a “pass-through AEC” would accrue directly to the AEC’s shareholder(s) and would be subject to tax at the shareholder level. When electing for transparency status an AEC has to disclose the identity of its shareholder(s) to the local tax authorities, and has to file its financial statements with the tax authorities in Aruba within six months of the financial year-end.
The NFR is intended to modernize Aruba’s fiscal legislation in line with generally accepted standards set by the Organization for Economic Cooperation and Development (OECD), and to allow it to conclude Double Tax Treaties with OECD countries. The government also wants to encourage increased investment and plans reductions in the effective personal and corporate income tax rates.
Aruba Scope of Profits Tax
In 1999, the Parliament of Aruba passed new tax legislation known as The New Fiscal Regime (NFR) which came into effect on 1st July 2003.
Under the NFR Aruba in principle levies a tax on profits earned by, among others, corporate entities resident in Aruba and profits generated by non-resident foreign companies from an enterprise carried out through a permanent establishment located in Aruba. Profits tax is imposed on the world-wide income of all corporations resident in Aruba, which means, all those corporations having their place of incorporation in the jurisdiction. Foreign companies having their management and control in the jurisdiction are also subject to the tax, as are branches of foreign companies in respect of their local income.
The NFR significantly broadens the existing participation exemption by eliminating the difference in treatment between domestic and qualifying foreign participations. Pursuant to the participation exemption, income (including dividend income and capital gains realized on alienation of the shares) derived by an Aruba company from a qualifying participation is exempt from taxation, provided that the shares are not held merely as a portfolio investment and the company concerned is subject to tax on income. Under this participation exemption, expenses that are connected with investment in a participation are not tax deductible.
For purposes of the participation exemption, a ‘participation’ is defined as (i) any interest in shares or certificates of participation in an entity resident in Aruba, and (ii) any interest in shares or certificates of participation in a company resident outside of Aruba. With regard to the applicability of the participation exemption, neither a specific holding period nor a minimum participation is required.
The participation exemption also applies to any interest in shares or certificates of participation in a so-called ‘imputation payment company’ (IPC). However, an IPC is excluded from applying the participation exemption to income it receives from its shareholdings.
Resident and non-resident shareholders of an IPC (a qualifying limited liability company) will be entitled to an imputation payment equal to 33/65 of formal dividend distributions if certain strict conditions are met. Both corporate and individual qualifying shareholders may claim an imputation payment. The imputation payment is itself subject to the dividend withholding tax. The arithmetic is complicated, but the result is an effective tax rate of 11.8% for corporations and 26.5% for individuals (against the mainstream rate of profits tax of 28%).
The conditions for qualification as an IPC include:
- engaging in one of the listed activities e.g. hotel exploitation, holding, finance, insurance, leasing, licensing, music/film industry and aviation, whether carried out onshore or offshore;
- submitting a written notice to the tax inspector stating that the shareholder wishes to avail itself of the imputation payment facility;
- undertaking a statutorily prescribed full audit of the financial statements;
- obtaining certification from a qualified expert that the company is in compliance with certain stated conditions; and
- having at least one Aruba resident individual on the board of directors.
For the shareholder, the conditions which must be met to benefit from the imputation payment facility include the filing of a written request to receive the imputation payment within six months of the end of the financial year in which the dividend was made payable.
Aruba Rates of Profits Tax
Prior to the introduction of the New Fiscal Framework, tax rates were as follows:
|Chargeable income||Rate of Tax|
|up to Af 40,000||31%|
|between Af 40,000 and 50,000||32%|
|between Af 50,000 and 60,000||33%|
|between Af 60,000 and 70,000||34%|
|between Af 70,000 and 80,000||35%|
|between Af 80,000 and 90,000||36%|
|between Af 90,000 and 100,000||37%|
|between Af 100,000 and 1m||38%|
|over Af 1m||39%|
As from 1st July 2003, there was just one 35% rate of corporation tax, but this was reduced to 28% as of 1st January, 2007. The tax applies to all non-exempt companies. However, there were ‘grandfathering’ rules for pre-existing offshore companies until 2007, and there is a statutory exemption for the Aruba Exempt Corporation.
Under the old regime, if the profits of an overseas branch of an Aruban company are taxed in that country, the net income after tax was taxed at only 2.4% on the first Af 100,000 and 3% thereafter (these were the rates applicable to offshore operations generally). These rates of tax were abolished under the NFF except for grandfathered companies; but a 100% participation exemption has been introduced for profits derived from shareholdings in resident companies and qualifying Dutch-resident companies. The exemption is 95% for shareholdings in other non-resident companies.
Aruba Calculation of Taxable Base
Income is widely defined and includes capital gains on the purchase or sale of ‘business assets’ and shareholdings. Gains realised in a liquidation of a company or on the purchase by a company of its own shares are also taxable.
As a rule, tax and financial accounts in Aruba are required to be identical.
Operating losses can be carried forward for five years; there is no provision for carry-back of losses, for consortium or group relief.
Valuations for tangible fixed assets can include incidental costs of purchase; depreciation is normally by straight-line over the useful life of the asset, but reducing balance is also permitted.
Provisions are generally not deductible.
Inventory valuation should be commercially justifiable; subject to this requirement, both LIFO or FIFO are acceptable.
One third first-year capital allowances are available. Intellectual property assets can be depreciated over their useful lives; goodwill generated on purchase is depreciated over three to five years.
In principle, interest paid and accrued on borrowings, as well as payments for the use of material and immaterial goods and the provision of services, is not tax deductible insofar as the transaction is deemed to be not at arm’s length.
The New Fiscal Regime introduced a further limitation on the deductibility of interest paid or accrued on borrowings and on payments for the use of material or immaterial rights or for services rendered to an entity resident outside of Aruba, unless:
- the interest or payments are neither directly nor indirectly owed to an entity related to the paying company;
- the interest or payment received is actually taxed at an effective rate of at least 5%; or
- the entire interest in the entity to which the payment is owed is directly or indirectly held by a qualifying company whose shares are listed on a stock exchange approved by the Aruba minister of finance and economic affairs.
Dividends received from other corporations are now taxed under NFR (previously they were not taxed unless the dividend was received from an offshore Aruban corporation). But see above for the rules governing IPCs (Imputation Payment Companies) which benefit from reduced rate of tax on dividend income.
There are no ‘cfc’ rules: the undistributed income of foreign subsidiaries is not taxed.
Aruba Withholding Tax
The NFR introduced a dividend withholding tax rate of 10%. However, the applicable rate is 5% if:
- at least half of the issued shares representing at least half of the voting rights of the distributing company are listed on a stock exchange recognized by the minister of finance and economic affairs, or
- all the shares of the distributing company are held, directly or indirectly, by a qualifying company whose own shares are listed on a recognized stock exchange.
The applicable withholding tax rate is 0% if the shareholder of the distributing company qualifies to apply the participation exemption to income from the distributing company. As an IPC (see above) cannot apply the participation exemption, the 0% tax rate will not apply to dividends distributed by a company resident in Aruba to an IPC; such dividends will consequently be subject to dividend withholding tax at the rate of 10% (unless the 5% rate is applicable).
The 0% rate is also applicable to dividend distributions if it can be sufficiently shown that the distribution pertains to income generated by a company with a valid tax-holiday dispensation, provided that the dividend is distributed to:
- a legal entity;
- an individual within two years of the end of the company’s financial year, insofar as the shareholder would not have been liable to personal income tax on the dividend proceeds based on the tax-holiday legislation; or
- an individual not subject to personal income taxation.
If dividends are distributed to a shareholder who qualifies as a grandfathered offshore company, the 0% withholding tax rate will not be applicable (if the distributing company is itself a grandfathered offshore company, the dividend distribution is exempt from dividend withholding tax).
Withholding tax is withheld by the distributing entity at the time the dividend becomes payable, on behalf of the receiving shareholder. If the distributing entity wishes to pay the withholding tax for its own account, the amount of tax due is grossed up by 100/90 if the applicable rate is 10% or 100/95 if the applicable rate is 5%.
Aruba Real Estate Taxes
Real estate owners have to pay annual rates amounting to 0.4% of the value of the property. This value is determined in accordance to a prescribed valuation method.
The real estate buyer pays 3% capital transfer tax on the value of real estate purchased. Value in this case is the higher of the price paid or the value according to the prescribed valuation method.
Investment incentive programmes often include exemption from the capital transfer tax.
Aruba Turnover Tax
The Business Turnover Tax (or BBO) is an indirect tax, introduced as of January 2007. BBO is levied on the operating revenues realized by entrepeneurs within the framework of their business or profession by the supply of goods and rendering of services in Aruba. The general BBO rate amounts to 3%.
A reduced rate of 1% is applicable for that part of the operating revenues that has been realized by the export of goods. Furthermore, certain exemptions are applicable. Most of the exemptions are connected with the medical sector, education, tourism and avoiding double taxation.
Movement of assets within a single fiscal unit for Aruba profit tax purposes are faced with Turnover Tax. However, fiscal unity for Turnover Tax purposes can be requested at the Inspector of Taxes. This means that, for an Aruba established company (parent) which holds all the shares in one or more Aruba established company (subsidiary), Turnover Tax will only be levied at the level of the parent company.