www.pwc.com/dutch-caribbean September 2015 Newsflash Tax Arrangement Netherlands - Sint Maarten Resume of most important amendments Dividend tax The current Dutch dividend withholding tax rate of 8.3% will be reduced to 0% in case the shareholder is one of the following (legal) entities. Government of Sint Maarten; Pension fund; Company listed at a stock exchange or whose shares are held for more than 50% by companies listed at a stock exchange; Head office or a group financing company; Entity with at least three qualified employees; Entity with real business activities; Entity whose shares are held by one or more residents of Sint Maarten or the Netherlands. With the exception of Government entities and pension funds, a participation of at least 10% in the dividend paying entity is required. Substantial shareholding The Netherlands and Sint Maarten may tax benefits from a substantial shareholding according to their own laws insofar as it concerns shareholder value that had accrued in the entity at the time of emigration. The Netherlands may tax at their tax rate of 25% and Sint Maarten at its own tax rate of 18.75%. The old regulation remains in force with regard to those who emigrated before 24 August 2015. Inheritance and gift tax The Netherlands may tax former residents who have emigrated to Sint Maarten on or after 24 August 2015, in case of death or a donation, up to five years after emigration. Pensions As source country, the Netherlands and Sint Maarten may tax private pensions at a rate of no more than 15%. The other country will credit the source tax. This only applies to those who emigrate on or after 24 August 2015 and those who emigrated earlier if the pension payments start on or after that date. Hybrid entities Hybrid entities are entities that are deemed transparant in one country and nontransparant in the other. In that case the source country will in general follow the deemed status in the country of residence. In cases where there is no acceptable solution the two countries will consult (mediation) with each other.
Introduction The Tax Arrangement for the Kingdom regulates the right to tax between the countries of the Kingdom of the Netherlands. Until 10 October 2010 these were the Netherlands, Aruba and the Netherlands Antilles. From that day onwards, the Kingdom consists of the Netherlands, Aruba, Curaçao and Sint Maarten. A Tax Arrangement for the Netherlands now regulates the right to tax between the Netherlands and the Caribbean Netherlands, the islands of Bonaire, Sint Eustatius and Saba, also known as the BES islands. Following the dissolution of the Netherlands the countries desired to negotiate a new Tax Arrangement. It was decided to no longer conclude a multilateral agreement but to come to bilateral agreements comparable to bilateral tax treaties. Apart from the constitutional changes there were other reasons to change the old Tax Arrangement for the Kingdom. The new agreement between Sint Maarten and the Netherlands, as it is now proposed, conforms more to the latest internationial developments with regard to double tax treaties. Below we will discuss the most important changes. 1 Permanent establishments now also in case of services in the other country Profit of a permanent establishment in the source state may be taxed by the source state. In case business activities are performed for more than 183 days within any period of 12 months, this is deemed to be a permanent establishment. Unlike the old Tax Arrangement, a permanent establishment is now also deemed to exist in case of services performed for more than 183 days in a period of 12 months. 1.1 Explanation Both the old and the new agreement refer to a continuous activity, project or service. If a foreign entrepreneur performs two completely seperate services for local clients and each of those services take less than 183 days to complete, this will not be deemed a permanent establishment, even if the total of those two projects takes more than 183 days. On the other hand, if a foreign entrepreneur cooperates with other entrepreneurs on behalf of one project and in connection with that project performs services to local clients, each of the foreign entrepreneurs will be deemed to have a permanent establishment if the project and the providing of these services, takes more than 183 days to complete, even if the services of each entrepreneur take less than 183 days. 2 PwC Dutch Caribbean - Newsflash Tax Arrangement for the Kingdom
2 Dividend withholding tax The source state may levy 8.3% withholding tax on participation dividends, in case the entity that collects the dividends has an interest of at least 25% in the entity paying the dividend. In other cases the source state may levy 15%. In specific situations a 0% rate will apply. First of all, the 0% rate applies to pension funds and governmental entities. The 0% rate further applies to any entity that holds a 10% interest in an entity in the other country in case it also satisfies one or more of the following criteria. Listed on a recognized stock exchange; More than 50% of the shares is held by an entity listed at a recognized stock exchange; It is the head office of a multinational or engages in group financing; It has at least three qualifying employees; The entity is commercially active and has less than three qualified employees but the dividend is connected to business activities of the receiving entity; The entity is commercially active and employs less than three qualified workers but, at the request of the entity, the competent authority of the state of source has confirmed that the main purpose of the establishment and existence of this entity or the shareholding by this entity is not the eligibility for benefits under the Tax Arrangement; The shares are held for more than 50% by natural persons resident in the Netherlands or Sint Maarten. Exception for the BES islands An entity that is resident of the BES islands will always charge 5% revenue tax. 2.1 Explanation 0% rate Please note that the reduced tax rate applies in case of a shareholding of 10% instead of 25% as required under the old Tax Arrangement. Sint Maarten does not levy a dividend withholding tax so this clause is only relevant with regard to entities in the Netherlands paying dividend to an entity established in Sint Maarten. 2.2 Listing at stock exchange A direct or indirect listing on a stock exchange may qualify for the 0% rate. The Sint Maarten entity receiving the dividend must be listed at a recognized stock exchange or more than 50% of the shares in the Sint Maarten entity must be held by one or more entities that are listed at a recognized stock exchange. In thelatter case the listed companies must also: a. be a resident of Sint Maarten or the Netherlands; or b. be resident of another country that has concluded a tax treaty with the Netherlands based on which a 0% rate applies, or in case the Netherlands and the country of residence of the entity listed on the stock exchange are both party to a multilateral treaty based on which the 0% rate applies. This might for example be the case if the shareholding entity is resident of one of the member states of the European Union and the Parent-Subsidiary directive applies. - Recognized stock exchange: The following stock exchanges are recognized: all stock exchanges in the member states of the European Union; the Dutch Caribbean Securities Exchange (DCSX) in Curaçao; the NASDAQ and each stock exchange in the United States that has been listed with the SEC as a national stock exchange, and; the stock exchanges of Mexico, Chile and Toronto. This list can be amended at a later date by the Netherlands and Sint Maarten jointly. PwC Dutch Caribbean - Newsflash Tax Arrangement for the Kingdom 3
2.3 Head office The 0% rate applies in case the Sint Maarten entity fulfills the function of a head office of a multinational group of companies or as a group finance company. The following criteria must be met: 1. The head office must have independent and discretionary powers to perform at least one of the following functions: a. a substantial part of the overall supervision and management or the administration of the group; b. a substantial part of the financing of the group. 2. The group of companies for which the head office is active must consist of companies that: a. are resident in at least five countries or groups of countries; b. are engaged in business activities in those countries and the activities should result in at least 10% of the gross income of the group in each of these countries. 3. No more than 50% of the gross income of the head office may come from the Netherlands. 4. The head office in Sint Maarten may not apply a special tax regime that is directed towards financial services, royalty payments and insurance activities. The participation exemption is not a special regime. The export regime also does not seem to be a special regime in this regard as it is readily available for a wide range of business activities. 2.4 At least 3 qualifying employees The 0% rate is also applicable in case the dividend receiving entity employs at least three residents of Sint Maarten and these employees have sufficient knowledge to perform the business activities of the entity. This requirement is similar to that which applies to the deemed establishment clause of art. 5.2. of the Tax Act BES. 2.5 Participation connected to business activities In case the entity is commercially active and employs less than three qualified workers the 0% rate will apply if the shareholding in the Dutch entity is in connection with the operations of the Sint Maarten entity. This may for example occur if the Sint Maarten entity is an intermediate holding company, e.g. the operating company s business is in line with the parent company and the Sint Maarten company acts as the link between the subsidiary and the parent company. Such a linking function may also exist in case the entity holding the shares in the Sint Maarten company is a top holding company performing an essential function with regard to the operations of the group and the subsidiary is an operating company. 2.6 Access to the 0% rate is not the main reason for the structure In case the aforementioned requirements are not met, the 0% rate may still be applicable if the Netherlands as the source state determines that the Sint Maarten entity and the Dutch operating company have not been established, maintained or acquired with the primary purpose to be eligible for the 0% rate. The explanatory notes show that the Netherlands will apply the substance criteria it also applies in the evaluation of entities established in the Netherlands. 2.7 Natural persons The 0% rate is applicable in case the shares of the Sint Maarten entity are held for at least 50% by natural persons who are resident of the Netherlands or Sint Maarten. Transitional rule Entities that do not qualify for the 0% rate but who were established in Sint Maarten on 24 August 2015 and held an interest of at least 25% in a Dutch entity may apply the transitional rule. Based on the transitional rule these entities are entitled to a 5% rate until the end of 2019 instead of the former 8.3% rate. From 2020 onwards they will be subject to the general 15% rate. 4 PwC Dutch Caribbean - Newsflash Tax Arrangement for the Kingdom
3 Interest and royalties Interest and royalties are taxable in the residence state. The source state is not entitled to levy tax. Interest and royalties are taxable in the residence state. Where a payment on account of the special relationship between debtor and creditor is higher than it would be without that special relationship, this provision does not apply to the excess amount because of that special relationship. The excess may be taxed by each state in accordance with its own laws. 3.1 Explanation If the business relationship is not at arms length and a Dutch debtor pays120 while in a normal business relationship 100 would have been paid, the Netherlands will in general provide no deduction for excess payment of 20. If it is an interest or royalty payment made by a subsidiary the Netherlands may tax the 20 with dividend withholding tax. In Sint Maarten the 20 will be considered a dividend which may remain tax exempt based on the participation exemption. 4 Substantial holding and emigration The resident state may levy income tax on the income from shares or profit shares. The source state may levy a withholding tax of 15%. Gains from alienation of shares or profit shares belonging to a substantial interest may be taxed in the resident state, although the source state is entitled to levy tax (in the Netherlands 25%) in the five years after emigration. In that case, the resident state will give a credit for the tax levied by the source state. The resident state may levy income tax on the income from shares or profit shares. The source state may levy a withholding tax of 15%. Notwithstanding the general rule, the old resident state may levy income tax on dividends, distributions and capital gains on shares or profit shares to the extent of the value that is already present at the time of emigration, until 10 years after emigration. That means the Netherlands may levy 25% when such income is enjoyed during the first ten years after emigration. Conversely Sint Maarten may levy 18.75% in case a resident emigrates to the Netherlands. In both cases, the resident state provides a tax credit for the amount levied by the source state, but only up to the amount that the state of residence would levy itself. 4.1 Explanation The right to tax the benefit from a substantial interest is allocated to the resident state. Under the old regime, the former resident state was entitled to tax these gains until five years after emigration. The maximum withholding tax rate for dividends and profit distributions was 15%. Under the new agreement, the maximum of 15% withholding tax by the source state and income tax to the state of residence is maintained. However, during a period of ten years after emigration, the former resident state is now entitled to tax dividends and distributions as well as capital gains from a substantial interest, to the extent of the value that is already present at the time of emigration; the Netherlands at a rate of 25%, Sint Maarten at a rate of 18.75%. Transitional rule On the basis of the transitional regime, the period during which the former resident state may tax dividends, distributions and capital gains will be limited to five years. However, during this period, the higher rate of 25% income tax in the Netherlands and 18.75% in Sint Maarten will apply instead of the withholding tax of 15%. The resident state provides a tax credit for the tax levied by the source state. The transitional arrangement applies only to persons who already lived in Sint Maarten on 24 August 2015. PwC Dutch Caribbean - Newsflash Tax Arrangement for the Kingdom 5
5 Pension and annuity Private pensions are taxable in the resident state. Government pensions are always taxable in the source state. Lumpsum settlements of pension rights are taxable in the source state. The source state may levy a tax of 15% on private pensions. This also applies to annuities. The resident state provides a tax credit for the tax levied by the source state. Government pensions are always taxable in the source state. Lumpsum settlements pension rights are always taxable in the source state. Transitional rule In case a person already lived on Sint Maarten on 24 August 2015 and at that time enjoyed a pension or annuity, the payments will only be subject to tax in the resident state. 6 Inheritance and gift tax Upon death, the resident state may levy inheritance tax. A donation may also be taxed with inheritance or gift tax by the former resident state, but only during the first year after emigration. The Netherlands may levy inheritance and gift tax, up to five years after emigration. Sint Maarten will allow a deduction. Based on its own law, Sint Maarten does not levy inheritance and gift tax after the date of emigration. When Sint Maarten residents emigrate to the Netherlands, only the Netherlands will levy inheritance and gift tax. Transitional rule If someone was already living in Sint Maarten on 24 August, 2015, the period of five years after emigration will be limited to one year after the emigration. This effectively means that this only applies to someone who moved to Sint Maarten after 23 August 2014 for the period of one year after the date of emigration. 6 PwC Dutch Caribbean - Newsflash Tax Arrangement for the Kingdom
7 Hybrid entities Whether an entity is transparant or not will be decided by each country based on its own rules legislation. For the purpose of the application of the Tax Arrangement, the source state will in general follow the state of residence with regard to the transparancy or non-transparancy of an entity. 7.1 Explanation Under the new Tax Arrangement the source state will follow the determination of (non-)transparancy of an entity by the state of residence. Example: A Sint Maarten entity deemed transparant with Sint Maarten residents as shareholders. According to Dutch regulations the entity is non-transparant. Upon payment of a dividend, Sint Maarten will tax the income at the level of the shareholders. The Netherlands will grant access to the Tax Arrangement and if the shareholders qualify they will enjoy reduction of the dividend withholding tax. In the reverse situation where the Netherlands considers the entity transparant and Sint Maarten does not, Sint Maarten will tax the dividend at the level of the entity. The Netherlands follows Sint Maarten and grants the entity access to the Tax Arrangement. If a Sint Maarten transparant entity earns profit from a permanent establishment in the Netherlands, the latter will not tax the profit at the level of the entity but at the level of the shareholders, following the deemed transparancy in Sint Maarten. Exception to this rule is when an entity established in the Netherlands is deemed transparant by Sint Maarten. As the entity is established in the Netherlands, the latter will tax the entity for any profits gained. Sint Maarten may still tax this income at the level of the shareholders. PwC Dutch Caribbean - Newsflash Tax Arrangement for the Kingdom 7
PwC Dutch Caribbean To have a deeper discussion about the Tax Arrangement for the Kingdom, please contact one of the advisors of PwC Dutch Caribbean or send an email to info@an.pwc.com PwC Sint Maarten P.O. Box 195 Emmaplein Building Philipsburg Sint Maarten T: +(1-721) 542 2379 F: +(1-721) 542 478 Paul van Vliet T: +1-721 5422379 paul.r.van.vliet@an.pwc.com Jeroen van Dorresteijn T: +1-721 5422379 jeroen.van.dorresteijn@an.pwc.com Marco Aalbers T: +1-721 5422379 marco.aalbers@an.pwc.com Website: www.pwc.com/dutch-caribbean Tell us how you like Tax News and what topics you would like to hear more about. Just send an email to info@an.pwc.com 2015 PricewaterhouseCoopers Dutch Caribbean. All rights reserved. PwC refers to the Dutch Caribbean member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc. com/structure for further details. 8 PwC Dutch Caribbean - Newsflash Tax Arrangement for the Kingdom This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.