Important changes Aruba Transparent/ Pass-through legal entity
- Introduction
Pursuant to the General Tax Ordinance (“GTO”), it is possible to establish a pass-through (legal) entity, in Dutch “transparante vennootschap" (“TV”), in Aruba. A limited liability company (“VBA”), public limited company ("NV") or Aruba Exempt Company (“AVV”) may be treated as a partnership for profit, income and dividend tax purposes, thus becoming a pass-through or transparent entity. In order for these entities to be classified as a TV, they have to formally request to be treated as transparent for tax purposes.
In 2019, Aruba made changes to the TV-regime[1]. Most importantly, Aruba now requires real economic presence commensurate with the activities (or substance) of TV’s established in Aruba carrying out certain activities.
- Economic substance
The relevant activities and minimum criteria to demonstrate economic substance have been stipulated in a National Decree containing general measures[2] (the “Decree”).
If the TV is engaged in any of the following sectors, its core income generating activities should take place in or from Aruba:
- head office;
- distribution and other services;
- financing and leasing;
- wealth management;
- banking;
- insurance;
- shipping;
- pure holding; and
- intellectual property.
For each of the sectors mentioned above, the Decree stipulates what are to be considered the core income generating activities for that particular sector.
Based on the Decree, a TV will be deemed to have real economic presence (or substance) if it:
- owns fixed assets suitable for its size and activities;
- employs a number of qualifying local fulltime employees (whether on payroll or not), that is suitable for its size and activities; and
- incurs a minimum amount of annually recurring, local operational costs that is suitable for its size and activities.
If the abovementioned criteria are not met, a TV can still be deemed to have real economic presence (or substance) if its core income generating activities[3] are being carried out by an entity resident in Aruba which is actively managed and controlled by the TV.
- Entry into force and grandfathering period
The aforementioned changes entered into force on 6 April 2019 with effect as of the 2019 tax year, with the understanding that the sanctions due to non-compliance (see hereafter) will apply from fiscal years ended on 31 December 2018 or thereafter. For the sake of legal certainty, a transitional provision has been included for entities qualifying for application of the tax transparent status as in effect on 31 December 2018 at the time the new legislation went into effect (i.e. 6 April 2019). Such entities will not have to comply with the substance requirements until 1 January 2022[4].
- Tax consequences
For TV’s with foreign corporate shareholders, this real economic presence (or substance) in Aruba in principle constitutes a permanent establishment in relation to such foreign shareholders which may be subject to profit tax in Aruba. The tax law amendment includes an addition to the National Ordinance on Profit Tax stipulating that “the real economic presence in Aruba of a transparent company” will be deemed to constitute a permanent establishment of a foreign enterprise and is, therefore, subject to profit tax at the rate of 25% (in 2020).
- Sanctions due to non-compliance
A TV that no longer complies with the conditions to be treated as a partnership (including having sufficient substance), issues or otherwise disposes of bearer shares in its capital, or neglects to file the shareholder’s declaration within 6 months from the end of its fiscal year, will no longer be treated as a partnership commencing with the fiscal year in which it no longer meets the requirements. In addition, punitive fines up to AWG 10,000 may be imposed for each infraction
For further information, please contact:
Anjli Finessi, tax adviser, finessi@bakertillycuracao.com
Jeroen Diekerhof, tax adviser, diekerhof@bakertillycuracao.com
Arthur van Aalst, tax attorney, vanaalst@bakertillycuracao.com
[1] AB 2019 no. 21
[2] AB 2019 no. 22
[3] As determined in AB 2019 no. 22
[4] AB 2019 no. 21