Offshore Legal and Tax Regimes

Overview

Aruba established the New Fiscal Regime (NFR), getting rid of its offshore regime as such and creating a dividend withholding tax and an imputation payment system in July of 2003.

Aruba “grandfathered” Companies formed prior to the introduction of the NFR into the NFR and were allowed to continue to enjoy existing privileges continued until the end of 2007; this means that they were charged an effective tax rate of 2.4% to 3% for foreign-owned companies.

The NFR includes a specific exemption for the Aruba Exempt Corporation (AEC); however, the exemption is cannot be applied if the AEC generates profits from illegal activities, as defined under Aruba criminal law. If an AEC is found to have generated profits from illegal activities, all of their profits earned since the day of incorporation are liable for the profit tax at the rate of 35%.

Since January 2006, Aruba has offered a revised tax regime, providing three choices for these companies:

• the AEC may choose to continue its activities as a fully taxed corporation and be subject to tax at the rate of 35%;

• the AEC can remain exempt provided it acts not as a bank but as a holding or financing company with foreign subsidiaries and be subject to a profit tax of not less than 17.5% on at least 95% of dividends. In this case, investment activities may remain exempt as well and the licensing of intellectual property is also permitted;

• the AEC can decide to be a pass-through entity in which case its income would accrue directly to the AEC’s shareholder(s) and would be subject to tax at the shareholder level. When deciding on transparency status, an AEC is compelled to disclose the identity of its shareholder(s) to the local tax authorities and to file its financial statements with the tax authorities in Aruba no later than six months after the end of the financial year.

The purpose of the NFR is to bring Aruba\'s fiscal legislation up to date and in-line with generally accepted standards as described by the Organization for Economic Cooperation and Development (OECD) and to enable it to ratify Double Tax Treaties with OECD countries. Moreover, the government wants to encourage greater investment and intends to reduce the effective personal and corporate income tax rates.

Before the NFR, qualifying for offshore status meant that an Aruban entity was required to be completely owned by non-residents, with income solely earned outside the jurisdiction; non-financial offshore operations usually take the Aruban Exempt Corporation form. Nevertheless, different business sectors have uniquely favorable taxation regimes that reflect their international nature as described below.

Legal Regime for Offshore Companies

For many years, the majority offshore operations in Aruba were established as Aruban Exempt Corporations (Aruba Vrijgestelde Vennootschap) and were exempt from the New Fiscal Regime until 2006.

Currently, offshore financial institutions are directed to use the NV form (Naamloze Vennootschap). Please refer to the section entitled “Incorporation” for the basic legal constitution of these two forms.

In several ways, the Aruban Exempt Corporation was a better form than the NV. In the first place, the process to establish an Aruban Exempt Corporation (AEC) was more straightforward and confidentiality was better. Furthermore, AECs were not compelled to prepare or file accounts provided they did not choose to be \'pass-through\' entities.

Tax Treatment of Offshore Companies

An imputation regime, which is open to entities that are engaged in listed activities such as hotel exploitation, holding, finance, insurance, leasing, licensing, music/film industry and aviation, whether carried out onshore or offshore, has been introduced in addition to the NFR. Aruba has decided to actually pay out the imputation credit directly to the shareholders in order to achieve neutrality between onshore and offshore shareholders of these so-called Imputation Payment Companies (IPC).

The government of Aruba levies the standard income tax rate of 35% on IPC\'s. Moreover, the shareholder of an IPC is entitled to an imputation payment of 33/65 of said dividend for each qualifying dividend payment. The actual dividend payment and the imputation will both be subject to a dividend tax of 10% (5% for quoted companies); this payment could possibly result in a combined tax burden of 11.8% (or 6.9% if the 5% dividend tax applies).

The National Ordinance on Profit Tax establishes the taxation procedures for Aruban companies. In the past, special taxation regimes applied to various different types of activity or company, as follows, as long as all income was derived from external operations (advance rulings need to be obtained from the tax inspectorate):

• Investment and Holding companies Income is taxed at 2.4% on the first Af 100,000 of net income and 3% on the balance. Although capital gains are not taxed, capital losses are not deductible.

• Mutual Funds These are exempt from profits tax provided they either have minimum net assets of $50m, at least fifty shareholders, and four local employees, or if they have minimum net assets of $300m and two local employees; in all other cases the fund will be taxed on its net assets, giving a minimum charge to tax of $1,000 rising to a maximum charge of $10,000.

• Trading companies Such companies are subject to the normal applicable rates of tax, which are 24% on the first Af 100,000 of net income and 30% thereafter; however, it is often possible to obtain a ruling from the Inspector of Taxes exempting 90% of income, this results in reducing the rates to the usual offshore levels of 2.4% and 3%.

• Banks The Investment and interest income of banks is taxed on the usual offshore basis at 2.4% and 3%; unless a tax ruling can be obtained, which is typically possible, commission and fee income is taxed at 24% and 30%.

• Intellectual Property Holding companies Provided a tax ruling can be acquired, the effective tax rate for income from royalties, licenses, patents, copyrights, trademarks and so forth is between 2.4% and 3%.

• Insurance companies Foreign-owned captive and reinsurance companies not in receipt of treaty-related income receive a concession that deems their income to be Af 100,000, which gives them a fixed tax rate of Af 2,400 annually.

• Real Estate Holding companies Such companies are not taxed on income derived from real estate, or subsidiaries whether wholly or predominantly engaged in owning real estate, outside Aruba.

• Ocean Shipping and Aviation companies Such companies benefit from substantial tax concessions depending on circumstances.