Aruba s relationship with Curaçao, the Netherlands and the USA Johan Paul Sjiem Fat, Sjiem Fat & Sjiem Fat, Aruba

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1 Aruba s relationship with Curaçao, the Netherlands and the USA Johan Paul Sjiem Fat, Sjiem Fat & Sjiem Fat, Aruba Aruba is an island nation in the Caribbean. It forms part of the Kingdom of the Netherlands, which consists of three countries: the Netherlands, the Netherlands Antilles and Aruba. Until 1986, Aruba obtained the status of a separate state within the Kingdom. Traditionally, Aruba s most important trading partners have been Curaçao, the major island of the Netherlands Antilles, the Netherlands and the United States of America. This article explores Aruba s relationship with Curaçao in the Netherlands Antilles, the Netherlands, the United States, and the influence of these countries on tax haven operations in Aruba. THE NETHERLANDS ANTILLES A LOW TAX TREATY HAVEN Before 1986, when Aruba still formed part of the Netherlands, Aruba and Curaçao, the main islands of the Dutch Antilles, basically offered the same tax facilities to international investors. The Netherlands Antilles was a low tax, treaty haven, with important treaties, or arrangements for the avoidance of double taxation, with the United States of America and the Netherlands. Curaçao, however, was the undisputed financial centre of the Netherlands Antilles. The fact that most governmental and financial institutions were located in Curaçao, coupled with intensive tax planning under the US-Netherlands Antilles tax treaty, helped Curaçao obtain its reputation as a major tax haven. Aruba, on the other hand, despite some serious attempts in the 1970a and early 1980s, was never really able to successfully compete with Curaçao as a tax haven. Aruba s financial sector was not of much importance, compared to Curaçao s booming offshore industry. ARUBA BECOMES A ZERO TAX HAVEN In 1986, when Aruba obtained its separate status within the Dutch Kingdom, the newly elected government took action to stimulate and diversify the economy. In order to stimulate the development of the international financial sector, and give the offshore industry a more competitive edge, the government introduced a new financial vehicle: The Aruba Exempt Company (AEC). The AEC was a completely new legal entity under the laws of Aruba. Basically the AEC is a low cost, tax exempt company, operates in a regulatory environment, with few restrictions as far as licensing, corporate formalities and financial reporting are concerned. Aruba s position has changed since The offshore business, with the introduction of the AEC, and despite some initial growing pains, has expanded rapidly. International investors and tax planners regard Aruba as an ideal offshore centre with its attractive tax climate for offshore transactions, it political stability, its favourable location, excellent communications and sophisticated professional infrastructure. With regard to the current relationship with Curaçao, experience has shown that Aruba and Curaçao, instead of becoming fierce competitors in offshore land, seem to be complementing each other s qualities. Curaçao remains a low tax treaty haven, where much of the tax planning and operations revolve around the tax

2 arrangement with the Netherlands tax treaty, whereas Aruba is best known as a zero tax haven. In financial structures involving a NA company, where in the past zero tax companies from other jurisdictions would have been used, the AEC is now an often used alternative. Many of the major trust companies from Curaçao have set up shop in Aruba and are marketing AECs to their international clients next to products from the Netherlands Antilles. RELATIONSHIP WITH THE NETHERLANDS Aruba s relationship with the Netherlands remains close. The influence of the motherland, common for many Caribbean countries, is seen and felt in many areas, particularly on the legal system. The constitutional, civil and commercial law are based on the Dutch legal system. The court of last resort for Aruba remains the Dutch Supreme Court. Aruba and the other states of the Kingdom are bound by the rules and regulations stipulated in the Statute of the Kingdom. It governs the relations between the states of the Kingdom. The Statute provides which matters fall within the competence of the Kingdom and which matters can be handled autonomously by the separate countries in the Kingdom. Matters such as defence and foreign affairs are matters of the Kingdom. The countries within the Kingdom are autonomous and have internal selfgovernment in all matters that do not fall within the competence of the Kingdom. POLITICAL INDEPENDENCE? ARUBA SAYS NO, THANK YOU An important additional responsibility of the Kingdom is to maintain the public order, to guarantee the integrity of government in the states of the Kingdom, to safeguard the democratic values of the Kingdom and protect the constitutional rights of all citizens in the Kingdom. These guarantees form the basis for Aruba s political stability, which is of essential importance for the Aruban economy and financial sector and for confidence of international investors in Aruba. In 1986 the plan was originally that Aruba would become an independent country and would no longer form part of the Kingdom after Because of the negative influence political independence would have had on the economy, the financial sector and internal political stability, a majority of the Aruban population, and the Aruban government, wanted Aruba to remain part of the Dutch Kingdom. The Dutch Government has respected these wishes and agreed that Aruba will remain part of the Dutch Kingdom. This is obviously a development of major importance for Aruba and its financial sector. Aruba is autonomous in its internal self-government within the Kingdom and this autonomy also covers matters dealing with legislation and taxation, two areas of major importance in any tax haven. Aruba must, however, exercise its powers of self-government within the framework of the Statute of the Kingdom. THE POTENTIAL FOR CONFLICT What happens when the interests of Aruba, e.g. to protect or enhance its tax haven facilities, and those of the Netherlands, e.g. to prevent tax evasion by Dutch taxpayers or to participate in international campaigns against money laundering or the narcotics trade, come into conflict with each other? Experience shows that the Netherlands have a tendency to try to impose their will on Aruba, while Aruba will try to fight for its own interests. The adoption of the Aruba Exempt Company, not enthusiastically

3 received in the Netherlands, shows that Aruban interests can nevertheless prevail in the relationship with the motherland. The recent adoption of Aruban legislation against money laundering (National Ordinance of 22 December 1993) which was prompted by the UN s Vienna Treaty to fight drugs, which the Kingdom had entered into, on the other hand, shows that Aruba will sometimes have to accept that being part of the Dutch Kingdom brings with it not only benefits but also burdens and responsibilities, to remain a respected member of the international community. In the tax area it is important to mention the Tax Agreement for the Kingdom of the Netherlands, which is basically an arrangement for the avoidance of double taxation, between the Netherlands, the NA and Aruba. The arrangement also contains rules about exchange of information and mutual legal assistance in tax matters. PROTOCOL ON FISCAL MATTERS Aruba and the Netherlands have recently signed a protocol addressing the possible conflicts that may arise between the two countries, in tax policy maters. The protocol provides criteria and a procedure to deal with differences of opinion. The premises are that both Aruba and the Netherlands will retain their fiscal autonomy within the Kingdom, in light of the fact that such fiscal autonomy is an important instrument to further national economic interests. However, national fiscal legislation may have to be amended, where it would conflict with generally accepted international norms and standards, or where it would cause disproportionate harm to one of the two countries. These criteria can serve as a basis for both protection or limitation of future tax haven operations in Aruba. The procedural element of the protocol provides that the two countries will conduct bi-yearly conferences to deal with pending tax issues ad to evaluate tax regulations in light of the premises as to substance, contained in the protocol. RELATIONSHIP WITH THE USA Aruba has always maintained a close and friendly with the USA. The tourist industry is one of the main pillars of the Aruban economy. All of the major US hotel chains Hyatt, Hilton, Holiday Inn, Radisson operate in Aruba. Marriott is scheduled to open a major resort next year. As many as 85% of visiting tourists in Aruba come from the USA. There are daily flights to New York and Miami from Aruba. Aruba has US immigration clearance for travellers going to the US and may soon have customs clearance as well. The island has American oil refinery and oil transhipment operators. Most of the imported goods are from the US. In short, the US influence is strong and the Aruban government is generally disposed to preserving friendly relations with the United States as fast as possible. US CONCERNS OVER TAX HAVEN OPERATIONS IN THE CARIBBEAN The USA has traditionally held a dim view of tax haven operations in the Caribbean. The IRS has always tried to prevent an erosion of its tax base and has tried to use its long arm to pursue United States tax payers, wherever their quest for tax relief might take them outside the boundaries of the US. In the past, tax haven operations in Aruba were never a major source of irritation for the United States, since there was not much of an offshore sector in the island to begin with.

4 The wrath of the USA was reserved for tax havens like Panama and Curaçao in the Netherlands Antilles. In 1987 the long-standing irritation of the US with treaty shopping, by nationals of third countries, under the USA-Netherlands Antilles tax treaty led to the termination of they treaty, which was a major blow for the financial sector in the Antilles. Aruba was not much affected by the termination of the treaty. Recently Aruba has come under fire from uniformed United States officials, who have branched Aruba as a haven for money launderers, who supposedly find shelter by using Aruba Exempt Companies with bearer shares. While it is correct that the Aruba Exempt Company has indeed put Aruba on the map as a tax haven and has stimulated the flowering of the financial sector, the accusation about the island being a haven for money laundering has no basis in fact at all. ARUBAN LEGISLATION AGAINST MONEY LAUNDERING Aruba is one of the first countries in the Caribbean to have adopted national legislation against money laundering. The Statute (National Ordinance of December 1993) prohibits the acquisition, possession or transfer of funds that have criminal origin. Violation is a felony. Furthermore, the trust companies, banks, lawyers, accountants and other professionals in the financial sector, have voluntarily adopted a code of conduct that requires that clients must be carefully screened, before they are accepted. In practice, clients with questionable background are quickly turned away by a financial sector that is very serious about self-regulation. USA ARUBA MUTUAL LEGAL ASSISTANCE TREATY IN CRIMINAL MATTERS There is a treaty for mutual legal assistance in criminal matters between the US and Aruba, under which the US Justice Department may request assistance from Aruban authorities in criminal investigations and procedures. An important point for the offshore sector is that an explicit reservation has been made for the prosecution of fiscal offences. These are not covered by the treaty, since it was regarded as detrimental to tax haven operations to make the treaty applicable to fiscal offences. Most United States requirements for legal assistance under the treaty concern requests to the Aruban authorities to conduct searches and seizures of financial and bank records in Aruba. Searches and seizures can only be carried out in conformity with Aruban law, which requires a subpoena or warrant issued by a court. The defendant has the right to oppose any search and seizure that he believes to be in violation of his constitutional rights. A court can issue an injunction in summary procedure, blocking a search and seizure that violates a defendant s constitutional rights. The Dutch Supreme Court has recently ruled that seizure of bank accounts is not possible under Aruban law. The case in re Leon et alia, HR March 4, 1994, concerned a request for legal assistance under the treaty. THE FUTURE: ARUBA S BALANCING ACT The Netherlands Antilles, the Netherlands and the United States of America all have a measure of influence on tax haven operations in Aruba. The influence of the Netherlands is positive. The Antilles have been an example for Aruba and are an ally in defending the financial sector against attacks from the Netherlands and the USA, who usually have their own agenda s with rather different priorities.

5 The influence of the Netherlands has forced Aruba into a balancing act. On the one hand, being part of the Dutch Kingdom is crucial for Aruba in order to guarantee political stability. On the other, the Dutch influence can be potentially negative for the development of Aruba as a tax haven. The Aruban government, however, has demonstrated maturity, wisdom and no small degree of adroitness in performing this balancing act, and the financial sector continues to consult closely with the Aruban government to provide the necessary guidance in this area. Aruba s relationship with Sam is similar to that which it has with the Netherlands. Aruba continues to balance the need for autonomy in fiscal and legal matters affecting its offshore sector with the very real need to maintain its friendly relations with the United States.