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The Tax Arrangement for the Kingdom is a sort of tax treaty for the avoidance of double taxation between the countries of the Kingdom of the Netherlands. Nowadays, the Kingdom consists of the Netherlands, Aruba, Curaçao and St. Maarten.
The current Kingdom Arrangement covers the Netherlands and the Caribbean Netherlands, the islands of Bonaire, St. Eustatius and Saba, also known as the BES islands. The countries of the Kingdom however desired to negotiate a new Tax Arrangement being bilateral agreements comparable to bilateral tax treaties.
Below we will discuss the most important changes of the new agreement between Curacao and the Netherlands, which is expected to be in force as per January 1, 2016.
The new tax arrangement between The Netherlands and Curaçao, Highlights
i) in addition to a withholding tax rate for dividends of 15% there will be a nil percent rate for active companies. There will be limitation of benefits clause;
ii) Interest and royalties may be taxed in both the resident and the source state, if payments exceed the amount the payment would be, without the special relationship between debtor and creditor;
iii) a withholding tax for providing services for more than 183 days (service PE);
iv) rules for hybrid entities ; and
v) new anti-abuse rules.
Dividend withholding tax
In the old BRK the source state could levy 8,3% withholding tax on dividends if the mother company held at least 25% of the shares in the daughter company. In other cases, the source state could levy 15% of withholding tax.
There are three rates in the new BRK
• 0%: if the beneficial owner of the dividends is (i) an entity that holds at least 10% of the capital of the distributing entity and is (a) considered a qualifying entity or (b) is directly or indirectly held for at least 50% by individual residents in one of the states, (ii) state, or any political subdivision or local authority thereof or (iii) a pension fund;
• 5%: if the beneficial owner of the dividend is an entity that is resident of the BES island;
• 15%: in all other situations.
Interest and royalties
In the old BRK interest and royalties were only taxable in the resident state. The source state was not permitted to levy tax.
The new BRK takes the ‘at arms length’ principle into consideration. If the payment is more than it would be without the special relationship, the excess may be taxed by each state in accordance to its own laws.
The PE article follows article 5 of the OESO Model treaty. But Curaçao requested the addition of a “service permanent establishment”. Consequently, if a resident of the contracting states provide services for a period exceeding 183 days, the source state will be allowed to levy taxes on payments.
Hybrid entities will now be qualified not by the contracting states own rules of legislation, but the source state will follow the state of residence with regard to the transparency of an entity.
At the request of the Netherlands, the new BRK contains a general anti-abuse provision to prevent improper use of the treaty. As a consequence of the implementation of the general rule, national anti-abuse rules are applicable again. This means that the Dutch anti-abuse provision under article 17, third paragraph, under b, of the Dutch Corporate Income Tax Act 1969 (the substantial interest levy) could be invoked by the tax authorities if needed.
Based on the announcement of the Ministry of Finance, article 17 of the Dutch Corporate Income Tax Act 1969 is not applicable up to December 31st of 2015.
Mr. Ronald H.H. van den Brink and Nicole de By
1. Internationale fiscale mededeling van 15 december 2014, IZV/2014/732