Important changes to the Aruba Tax-exempt company
1. Introduction
Pursuant to the Profit Tax Ordinance (“PTO”), the profit of an entity incorporated in Aruba as an AVV (Arubaanse Vrijgestelde Vennootschap) or as a limited liability company (“VBA”) may be exempt from taxation, if certain conditions are met. These conditions relate primarily to the activities such an entity may engage in and are stipulated in the National Decree designating exempt activities (“the Decree”)[1]. It is not necessary to request to be treated as a tax-exempt company, but rather the election is made when submitting the profit tax return.
2. Tax reform
With respect to the tax-exempt entities, Aruba amended the Decree (“the Amendment”) and (i) introduced an economic substance requirement and (ii) restricted their allowed activities
2.1 Economic substance
Aruba requires real economic presence commensurate with the activities (or substance) of tax-exempt companies established in Aruba carrying out certain activities.
If a tax-exempt company is engaged in any of the following sectors:
- holding;
- financing;
- wealth management; or
- insurance;
its core income generating activities must take place in Aruba. For each of the above sectors, the Decree now stipulates what are to be considered the core income generating activities for that particular sector. A tax-exempt company will be deemed to have real economic presence (or substance) if it:
- owns fixed assets suitable for its size and activities;
- employs a number of qualifying local fulltime employees (whether on payroll or not), that is suitable for its size and activities; and
- incurs a minimum amount of annually recurring, local operational costs that is suitable for its size and activities.
If the abovementioned criteria are not met, a tax-exempt company can still be deemed to have real economic presence (or substance) if its core income generating activities[2] are being carried out by an entity resident in Aruba which is actively managed and controlled by the tax exempt-company.
2.2 Restriction of allowed activities
In addition to the above substance requirements, a tax-exempt company will no longer be allowed to generate income from the exploitation of intellectual and industrial property and similar rights (“IP”).
3. Entry into force and grandfathering period
The Amendment entered into force on:
- 1 January 2020 with respect to substance requirements; and
- 1 January 2020 with retroactive effect to 15 November 2018 with respect to the IP-restriction.
For tax exempt companies existing on 15 November 2018, the Amendment enters into force on 1 July 2021 only in so far as it relates to activities and assets present and for the amounts accounted for on even date. If the requirements in the Amendment are not met during the reporting year, the tax-exempt status will be denied and the entity’s profits in that reporting year will be subject to profit tax (at a rate of 25% for the year 2020).
For further information, please contact:
Anjli Finessi, tax adviser, finessi@bakertillycuracao.com
Jeroen Diekerhof, tax adviser, diekerhof@bakertillycuracao.com
Arthur van Aalst, tax attorney, vanaalst@bakertillycuracao.com
[1] In Dutch: Landsbesluit aanwijzing vrijgestelde activiteiten, AB 2005 no. 88.
[2] As stipulated in AB 2020 no. 24.
