The Fiscal Consequences of funding through the Sint Maarten Recovery, Reconstruction and Resilience fund of the World Bank
Following the destruction caused by Hurricane Irma, the Government of the Netherlands made funds available for the reconstruction of Sint Maarten through the so-called Recovery, Reconstruction and Resilience Trust Fund (hereafter: “SXM TF”) for an amount of up to 470 million Euro. The SXM TF is managed by the World Bank, which, together with the Government of Sint Maarten and the Government of the Netherlands, selects projects that may be entitled to funding through the SXM TF. The procurement plans for these projects are accessible via the website of the World Bank (www.projects.worldbank.org) to parties that are interested in participating.
This article addresses the fiscal consequences of funding of projects through the SXM TF for entrepreneurs doing business on St. Maarten, focusing on profit tax, turnover tax, and wage tax.
The taxable subject for turnover tax (hereafter: “TOT”) is the entrepreneur. The TOT Ordinance provides a definition for this term: “anyone who independently carries out an enterprise or profession or exploits an asset in order to derive recurring income from it”.
The scope of this definition is intentionally broad. It is not required that the entrepreneur makes a profit. In most cases, when engaged in an enterprise, this business, whether it is carried out as a sole proprietorship or as an incorporated entity, resident in St. Maarten or elsewhere, will be considered an entrepreneur for TOT. The TOT rate is 5% on the remuneration paid by the customer.
There are basically two types of taxable turnover for the TOT:
- turnover generated by entrepreneurs who are resident on St. Maarten, in the course of their business, by delivering goods or rendering service
- turnover generated by entrepreneurs who are not resident on St. Maarten, in the course of their business, by delivering goods or rendering services, so far as
a. the delivery of goods takes place in St. Maarten, or
b. the services are consumed within St. Maarten.
For the domestic entrepreneur, this means in principle that his entire turnover generated by his business in St. Maarten is taxable for TOT.
In the case of entrepreneurs not residing in St. Maarten, take for instance, an architect residing outside St. Maarten who performs work on the Government Building, the service is consumed in St. Maarten. This service is then taxed with 5% TOT.
However, no TOT is due when the activity is explicitly tax exempt. One of the exemptions relates to solidarity-aid (in Dutch: “onderlinge hulp”) paid, for instance, by the Netherlands. It is our position that the SXM TF qualifies as solidarity-aid as meant in this exemption. Conditions governing this exemption are:
- the entrepreneur has rendered services or delivered goods in relation to a project that is funded through solidarity-aid;
- the entrepreneur can substantiate that his activities are carried out under the scope of the first criterion by issuing a substantiated declaration to the tax inspector.
Although there are no further directives pertaining to the form and content of the declaration, it is likely that some sort of document has to be attached to the monthly TOT return form.
For entrepreneurs who are working on World Bank Projects, we recommend requesting a tax ruling from the tax department in St. Maarten for the applicability of this exemption.
Companies with their effective management on St. Maarten are considered fiscal residents of St. Maarten. Effective management means in practice the decision-making of the board. Resident companies are subject to St. Maarten profit tax on their worldwide income. Non-resident entities are, for example, subject to St. Maarten profit tax for business income derived from a qualifying branch in St. Maarten, or income from real estate located in St. Maarten. The profit tax is levied at an effective fixed rate of 34.5%. The taxable base for profit tax purposes is the generated income minus deductible expenses and allowances. No distinction is made between trading income and capital gains. Both are included in the taxable profit. For the profit tax, biannual tax returns forms have to be submitted.
When investing in assets for more than USD 2,809 a year, the company is entitled to an investment incentive in the year of the investment and in the following year. The rate of the investment incentive is 12% in case of investment in new buildings (including the improvement of existing buildings) and 8% in case of investment in other fixed assets. Certain assets are excluded from this facility, for example investments in land.
If the asset for which the investment incentive has been claimed is sold or transferred (amongst others), a divestment surcharge will apply as a result of which the investment incentive is recaptured. The divestment surcharge is only applicable:
- If the asset is sold or transferred within 15 years of its acquisition, in case the investment incentive was claimed for an investment in a new building (or the improvement of an existing building);
- If the asset is sold or transferred within 6 years, in case the investment incentive was claimed for an investment in fixed assets other than a new building (or the improvement of an existing building).
The divestment surcharge is 12% in the case of a new building (or the improvement of an existing building) and 8% in the case of other assets. The percentage is calculated over the selling price or the transfer value and must be added to the profit in the year the asset is sold or transferred and the year after.
For hotels, large-scale land development projects and other businesses that substantially benefit the economy of St. Maarten, specific tax holidays may be applicable, greatly reducing the profit tax burden on these companies.
Wage tax is withheld by the employer from the gross salary of the employee, whereupon it is paid to the Tax Receiver based on monthly tax returns. Wage tax should, in principle, be withheld if all four of the following conditions are met:
- There is an employee;
- This employee is under a labor contract;
- There is a withholding agent;and
- The employee receives a taxable wage.
When the employee is living on St. Maarten, the entire salary is taxable for the wage tax on St. Maarten. The Wage Tax Ordinance features a specific provision pertaining to persons who do not live on St. Maarten. These persons are only considered employees for the wage tax, insofar as this person fulfills his employment on St. Maarten or receives, for instance, a pension from former employment fulfilled on St. Maarten.
The wage tax is levied in brackets, ranging from 12.5% to 47.5% for annual income over USD 79,000.
The wage tax ordinance on St. Maarten features a fiscally beneficial regime for expatriates that come to work in St. Maarten. Pursuant to St. Maarten’s expatriate facility, an employee may receive gross salary as net salary. The employer and the employee enter into an employment contract with a net salary equivalent, whereby the employer takes the wage tax for his account, without the obligation to gross up the salary. Moreover, wages in kind or allowances (for example a car or house) are untaxed up to a maximum of USD 13,800 per year. An employee is eligible for the expatriate facility if he or she has lived abroad during an uninterrupted period of five years directly prior to employment in St. Maarten. Furthermore, the person in question must have "specific expertise" that is not or scarcely/available on the local labor market. The employee should meet certain standards for education, experience and under circumstances earn a fiscal minimum wage.
Operating a business on St. Maarten could lead to the levy of local taxes, for instance, the profit tax, the turnover tax, and the wage tax. Local tax legislation comes with numerous obligations, but also offers several tax incentives and facilities. If you would like to know more about the fiscal possibilities on St. Maarten, please do not hesitate to contact Baker Tilly.
Maarten Tervoort, Tax Advisor Baker Tilly St. Maarten