To promote the investment climate in Aruba, the government of Aruba recently introduced interesting tax incentives and tax legislation to attract foreign investors to Aruba.
As to this aim, in 2013 the government and representatives of the employers- and employee’s organizations discussed a tax reform for Aruba. As a result of this discussion, the correspondent parties signed protocols which led to the introduction of a beneficial policy and new legislation as to several tax aspects in Aruba. The following aspects will be discussed:
• Special zone in San Nicolas
• Free Zone
• Imputation Payment Company reform
• Expat regulation
• Other tax reforms
Special zone in San Nicolas
The government introduced through beneficial policy tax incentives for companies located in a designated special zone in San Nicolas. The tax incentives are attractive for both foreign and local companies.
Only legal entities can qualify as a special zone company. These are entities such as public limited companies, limited liability companies, Aruba exempt companies, associations, coops, foundations and permanent establishments of such legal entities qualify as special zone companies.
An eligible entity has to file for admission with the Aruba Financial Center (‘AFC’). The AFC will issue approval or denial of the qualification request as a special zone company. Before the approval or denial of the qualification request is issued, the San Nicolas Business Association (‘SNBA’) advises on the admission. If the advice of the SNBA is negative, the Minister of Economic Affairs can overrule that advice and decide that the company is admissible to the special zone. The admission fee amounts to Afl. 500 (USD 281).
There are some requirements a special zone company will have to comply with. A minimum investment is required for the qualification as a special zone company. The amount of the minimum investment is divided in two categories. A minimum investment of AWG 150,000 (USD 84,270) applies to retail trade, providing services, lighter industry, minor tourist activities, hospitality and agriculture. For heavy industry and tourist activities such as hotel and golf courses a minimum investment of AWG 1,000,000 (USD 561,798) is required.
A special zone company has to employ a minimum number of employees. The number of employees is determined by the turnover of the company. If a company has a turnover below Afl. 1,000,000 (USD 561,798), the company is required to employ 3 fulltime employees.
The special zone company has to invest Afl. 30,000 (USD 16,854) in 5 years in the (owned) building to meet the maintenance requirement. A company may have to fulfill additional requirements depending on the industry in which it operates.
If a company qualifies as a special zone company, the following tax incentives will apply:
• 15% profit tax for activities particularly aimed on the local market.
• 10% profit tax for activities aimed for more than 75% on export and hotels.
• 2% profit tax for captives, activities related to sustainable development, green energy and agriculture, provided that at least 75% of the sales revenue is locally.
• Exemption from dividend withholding tax.
• 50% exemption on property tax for a period of 5 years.
• Exemption from turnover tax for the business turnover realized by providing goods and rendering services to non-residents.
• The Minister of Infrastructure may set a lower land value for investors.
• The Central Bank of Aruba may grant an exemption of payments of foreign exchange commission to a special zone company.
• The fringe benefits regulation (including the expat regulation) will apply in the special zone.
• An additional investment allowance of 10% will be applicable for all investment on assets, regardless if the assets are purchased from local or foreign suppliers.
• The regime will apply for a period of at least 10 years.
The Freezone is a special designated area in Aruba where goods can be stored, processed, adapted, assembled, packaged, displayed and spread out, or can be subject to other treatments, or where services can be provided. The Freezone company is only allowed to perform qualifying activities in the Freezone.
However, after the tax reform, Freezone companies rendering services are no longer obligated to establish the company in the actual Freezone.
Freezone companies were allowed to sell 25% of the turnover on the local market, with the obligation to reduce this percentage to 5% within 7 years. Based on the tax reform, Freezone companies are allowed to sell 25% of the turnover on the local market. The provision regarding the reduction of the percentage is no longer applicable. In certain cases, the standard of 25%/75% local turnover can be changed to 50%/50%.
These cases are, in example, turnover related to sustainable energy, medical tourism, sustainable transport, airline companies, and sustainable supply of food, shipping companies, maintenance and repairs. Permission from the Minister of Finance must be acquired in this regard.
A Freezone company is subject to a so called Free Zone facility charge. The facility charge was 1.12% over the turnover of the company. This facility charge is reduced to 0.75% over the turnover of the company. The facility charge can be further reduced to 0.01% depending on the turnover of the Free zone company.
Additional incentives were also introduced for Freezone companies. A Freezone company is now exempted from dividend withholding tax. The fringe benefits regulations for employees as well as the expat regulation are also applicable in the Freezone.
Imputation Payment Company reform
The Imputation Payment Company (hereinafter: IPC) is in principle an ordinary limited liability company (N.V. or V.B.A.) that pays the regular corporate income tax rate of 28%. However, when certain stringent conditions are met, the shareholder of the IPC will obtain an imputation payment of 26/72 of the (formal) dividend distributed.
The government of Aruba adopted the following changes to the IPC regime through beneficial policy:
• The general corporate income tax rate for the IPC will be 10%.
• The new IPC has an exemption for dividend withholding tax. The refund system is abolished.
• Hotels are classified in four categories for the corporate income tax. The applicable corporate income tax rate, which varies from 10% to 15%, will depend on the revenue per available room (‘Revpar’). Hotels are also subject to additional requirements.
At this moment it is uncertain as per which date the IPC reform will apply. Unclear is also whether there is a transitional period as to the former IPC regime.
An expat regulation is also introduced through the beneficial policy. If an employee is temporarily employed in Aruba from abroad, he normally incurs costs that are not incurred by an employee who works in his country of origin or who permanently immigrates to another country. According to the expat regulation temporarily means that, after termination of his employment, the employee will usually return to his country of origin.
The Fringe Benefits Taxation Regulations will be supplemented with rules applicable to the expatriate.
If an employee who lived abroad during a consecutive period of at least five years immediately prior to his employment in Aruba is hired, this employee will be considered an expat for purposes of the expat regulation.
One of the conditions to be considered an expatriate is that the expatriate should train a local employee.
Three allowances paid to the expatriate may remain untaxed, in addition to the untaxed allowances mentioned in Fringe Benefits Taxation Regulations. Consequently, an employer may pay the expatriates untaxed allowances not exceeding AWG 15,000 per calendar year.
It concerns in this regard remunerations paid in cash, such as a daily reimbursement. Likewise, the employer may pay the expatriate untaxed allowances for the educational expenses of its children up to AWG 25,000 per child per calendar year. If the employer does not make a house available to the expatriate and the expatriate rents his own house, the employer may pay an untaxed allowance not exceeding AWG 2,500 per calendar month for this purpose.
Finally, if a net salary is agreed with the employee, no gross up is necessary to determine the tax due on this salary. The tax rate is applied only once on the net salary.
Other tax reforms
Extension of temporary investment allowance
The government considers it desirable to extend the temporary investment allowance for the financial years 2013 and 2014. The investment allowance rate is 6% of the investment and is subject to conditions.
- Deductibility of interest from the purchasing of local participation
- In the law right now when buying shares of a local participation the interest paid for the acquisition is not deductible form the taxable profit due to an omission in the law.
- If it concerns interest related to the financing of a purchase of a local participation, these interest costs may be deducted fully from the taxable profit, provided that the interest will not be deductible during the first two years after having purchased the participation.
Subsequently as of year three, the interest and costs of the first two years may be deducted from the profit in three equal shares. The interest costs due as of the third year are fully deductible. This will apply as of the financial year 2013.
Brian Dake LL.M.
Assistant Tax Manager at PwC Aruba