End of the Year Tax Alerts – Aruba

December 4, 2023

With the end of the year approaching, we would like to take this opportunity to offer you some general information about possibilities for tax savings which may be implemented before the end of the year as well as some general tax advice to avoid additional tax costs by preparing you for the end of the tax year.

Profit tax – Tax provisions
As a general rule, deductible expenses should be allocated to the year in which they are incurred. In the case of large projects or periodic non annual returning costs, the costs incurred may not be in line with the business activities in the financial year to which the costs apply. Under certain conditions, a tax provision may be created for future expenditure arising from business activities in previous years for tax purposes.

If you expect expenses in the coming years (e.g. large maintenance costs), it can be examined whether a provision on the fiscal balance sheet can be created. This will lead to an allocation of costs in earlier years and therefore a lower taxable profit in those years.

Depreciation and revaluation of assets
Any assets used within the enterprise, excluding stock parts, should be capitalized on the tax balance sheet and depreciated over time in accordance with the applicable rules. The depreciation rate depends on the (economic) life span of the assets and the residual value at the end of the life span.

Under certain circumstances, it is possible to revalue assets or increase depreciation, for example in the event of bad debts or lower prices. Such revaluation or depreciation may be tax deductible.

Optimizing depreciation rates and valuation of your assets can lead to a lower taxable profit.

Depreciation of real property
The depreciation of real estate or buildings, including the ground upon which it is built and all appurtenances, will be limited to a base value of the property. The base value is considered to be 50% of the value for Ground Tax purposes (thus as valued by the tax authorities).

Investment deduction
When a company invests more than Afl. 5,000 in assets bought in Aruba in 2023, 10% of the eligible investments are (additionally) deductible from the taxable profit.

If your eligible investments in 2023 are below Afl. 5,000, it may be considered to make additional qualifying investments before the end of the year to meet the threshold.

Interest Deduction – Amendments
In 2023 the limitation of deduction of interest is extended to include the following further limitations:

• The limitation of deduction of interest is also extended to individuals and is no longer limited to interest payments made to entities;
• Parties are deemed to be affiliated (and thus the interest deduction can be limited) when one party holds an interest, directly or indirectly, in another of at least 25% (was 33.33%)
• The affiliation through individuals includes also interests held by the spouse, children, and anyone related in the first or second degree;
• The exemption of the limitation for interest paid to entities listed on a stock exchange has been abolished;
• The possibility to deduct interest payments to the amount of 75% if payments are made to a company that is subject to at least 15% profit tax has been abolished.

These amendments introduced in 2023 may have led to certain interest deductions being limited or some interest that was limited in deduction before is no longer limited. You may need to reassess the financing of your activities before the end of 2023.

Carry forward losses
A tax loss can be carried forward over five consecutive years and deducted from taxable profit in those years. After five years, the losses are no longer deductible from the taxable profit.

If you still have existing carry forward losses, see if they can be carried over to 2023. If not, you may need to examine whether (re)structuring options are available to prevent these tax losses from lapsing.

Abolition of the IPC regime
The Imputation Payment Company (IPC) regime, allowing for lower profit tax rates (10% up to 15%) and 0% dividend withholding taxes has been abolished as per January 1, 2023, with a grandfathering rule applying until the last day of the financial year starting before January 1, 2026, for existing IPC structures.

If your company is using this regime, we suggest to look at alternative structures mainly for profit tax and/or dividend withholding tax purposes.

Participation exemption
Income relating to subsidiaries (e.g. dividends and capital gains) is exempt if the participation exemption applies. The participation exemption applies to all participations in local entities. In the case of foreign participations, the participation exemption on dividends applies when the participation (i) is not held as a passive investment and (ii) is subject to income tax.

We advise you to check annually before the end of the financial year whether the participation exemption applies.

Country-by-Country Reporting
Entities based in Aruba that are part of a multinational group with a consolidated revenue of Afl. 100 million or more must prepare annual Country-by-Country Reporting documentation consisting of a Master file and one or more Local Files. In addition, a notification must be submitted to the tax authorities prior to the financial year. A Country-by-Country Report (CbCR) must also be submitted if the consolidated income of the multinational group exceeds Afl. 1,5 billion.

Check that your documentation is up to date by country and that the required documents and notices have been submitted to avoid fines of up to Afl. 100,000.

Transfer Pricing
Keep in mind that if a company is part of a consolidated group, they must provide documentation showing that the intercompany transactions are handled on an “at arm’s length” basis.

Make sure all your transfer pricing documentation is up-to-date and shows all intercompany transactions to avoid additional reviews and penalties.

Gifts
Gifts, which do not qualify as business expenses, are deductible up to an amount of Afl. 50,000 if made to church, charitable, sports, cultural, scientific and (registered) public benefit organizations. If you have made deductible donations, keep the proof of payment to ensure that the gift is deducted from taxable profits.

Wage tax
Under certain circumstances, it is possible to provide tax-free expense allowances to employees. Examples of these expenses are:

• telephone allowance
• travel allowance
• car and representation expenses

Optimizing the cost reimbursements within the conditions laid down in the tax law can lead to significant tax savings.

Benefits in kind valuation
When an employer provides benefits in kind, these benefits are considered taxable wages. However, under certain circumstances, the prescribed method of calculating the benefit of using certain business assets, such as a car or a house or even a business meal, can lead to tax savings for the employer and employee.

Optimizing the salary package with fringe benefits can lead to tax savings.

Expat Ruling and Administration
Additional tax-free allowances and other benefits are available to employees who have not worked in Aruba for a period of at least 5 years and will earn at least Afl. 150,000 per year.

These benefits include:

• tax-free benefits in kind up to Afl. 15,000 per year.
• tax-free allowance for school fees up to Afl. 25,000 per child per year.
• tax-free allowances for house rent up to Afl. 2,500 per month.

The employer and employee can also agree on a net salary arrangement. The wage tax is then calculated on a net salary basis and not the gross salary.
Applying for the expat ruling can enable a more competitive offer to potential candidates from abroad.

Wage Tax – Market Salary for director-shareholders
Any employee holding a major shareholding as defined in article 11 of the National Ordinance Income Tax (more than 25% of the shares or profits sharing rights) in their employer needs to take a market salary into account. The market salary per year will be set on the highest of:

• 75% of the salary in a comparable role (not taking into account the shareholding);
• the salary received by the employee with the highest salary working for the employer not holding a major shareholding;
• Afl. 48,000.

Please note that if the taxpayer can substantiate that in similar situations where no major shareholding applies, the market salary is actually a lower amount than the outcome of the above, the lower amount can be applied.

Income Tax – Deductible costs main residence
The cost of any interest on loans for the main residence is deductible for income tax purposes up to an amount of Afl. 40,000 per year.

Cost Deduction for Student Finance
The interest, costs and repayment of student loans is deductible up to an amount of Afl.10,000 per year for a period of 10 years.

BBO/BAVP/BAZV – Fiscal Unity Requests
On request, a subsidiary and parent company that are taxable entities for BBO/BAVP/BAZV purposes can be treated as a fiscal unity. Such a unity is treated as a single taxable entity and intercompany transactions are ignored for BBO/BAVP/BAZV purposes.

Opting for a fiscal unity for BBO/BAVP/BAZV purposes can lead to tax savings on intercompany transactions and lower compliance costs.

Refunds on BBO/BAVP/BAZV from bad debts and discounts
Keep in mind that the BBO/BAVP/BAZV can be refunded on invoices that have not been (fully) paid and that are not paid in full, as well as with regard to discounts on invoices.

It is important to check before the end of the year whether a refund has been requested for all discounted invoices and bad debts.

BBO/BAVP/BAZV upon Import
As per August 1, 2023 the government of Aruba has introduced a levy of BBO/BAVP/BAZV upon the importation of goods in Aruba.

A credit is awarded to entrepreneurs upon the import of trade goods. Trade goods are defined as goods imported that are deemed to be sold to other entrepreneurs and individuals. If the credit of BBO/BAVP/BAZV on goods imported exceeds the amount of BBO/BAVP/BAZV payable in any month, the entrepreneur will be able to receive a refund of the amount of credit exceeding the amount payable.

In the Ministerial Decree of September 13, 2023, the Minister of Finance and Culture has specifically stated that the definition of “trade goods” as described in the National Ordinance BBO and BAVP and National Ordinance BAVP is deemed to include:

a.  goods intended for sale in a business, where these goods have not been altered materially if these goods have been processed within the business of the entrepreneur importing the goods.
b.  parts assembled or processed to create a new trade good in the business of the entrepreneur importing the goods, if these new trade goods are sold in a business.
c.  any processing or alteration of goods with regard to food and beverages, if these goods are intended to be sold in a business, insofar the sale of the goods is the main purpose of the business activities, and the business is not mainly providing services.

It is important to assess whether goods that are imported are to be defined as trade goods, since the BBO/BAVP/BAZV levied on these goods upon import is credited.

BBO on electronic services
As a general rule in the National Ordinance BBO/BAVP and the National Ordinance BAZV the place where services are provided is deemed to be the place of residence of the service provider. However, for some specific services, the place of provision of services is defined differently. One of these exemptions includes the provision of telecommunication services, radio and television services, and electronic services. These services are deemed to be provided at the place of residence of the customer.

Please note that when the services are provided to entrepreneurs that are registered for BBO/BAVP/BAZV purposes, the reverse charge mechanism will apply and the customer will need to withhold the tax themselves. For the provision of services to non-entrepreneurs or entrepreneurs with an exempt status for BBO/BAVP/BAZV purposes, the foreign service provider may choose to register themselves or use a tax agent/fiscal representative.

Please ensure which services are deemed to be electronic services and whether you need to withhold the tax yourself.

Small business scheme for 2023
The small business schemes is regulated in Article 14a of the National Ordinance on business turnover and additional provisions for PPP projects as well as in Article 15c of the National Ordinance on the ZONING LEVY AZV and applies from 1 January 2019.
In short, the scheme entails that the ‘small entrepreneur’ who is eligible for this scheme does not have to file a BBO, BAVP and BAZV return and does not have to pay the BBO, BAVP and BAZV in one year. If the requirements are met the entrepreneur receives an exemption for this.
To be eligible for the small business schemes, the following conditions must be met (in short):

• The entrepreneur is a natural person and lives in Aruba or is located in Aruba or has a permanent establishment in Aruba.
• The natural person in question is the owner of a company (sole proprietorship).
• The yearly turnover does not exceed the threshold of Afl. 50,000. (if the entrepreneur has more than one business or exercises more than one profession, the companies or professions will be taken into account jointly for the purposes of this regulation).
• If during the calendar year the turnover threshold of Afl. 50,000 is exceeded, the ‘small entrepreneur’ is obliged to file and pay a BBO, BAVP and BAZV return for the remainder of that calendar year and all subsequent calendar years, from the month in which and on the amount that the turnover threshold has been exceeded.

Real Estate Transfer Tax – Economic value and shareholdings
As per January 1, 2023, the definition of taxable transfer in the Real Estate Transfer Tax will be extended to include the transfer of the economic value of real estate and shareholdings in real estate companies.

An entity will be deemed to be a real estate company if the assets at the time of transfer of the shares include real estate and if the main purpose of the holding of the real estate is connected solely to the acquisition, transfer, or exploitation of real estate. This means that real estate exploitation or development needs to be the core of the business of the entity. If the real estate is held in the course of the business, for example, retail space property for the purpose of exploitation of a shop, the shareholdings may not considered to be real estate companies.

Please be advised upon the transfer of shares in a company to ensure no additional taxes are levied.

Dividend tax on excessive loans to director-shareholders
Excessive loans (loans exceeding Afl. 500,000) to director-shareholders are considered fictitious dividends and will be subject to income tax at a rate of 25%. The threshold of Afl. 500,000 is increased in subsequent years by the amounts that were classified as excessive in previous years (notional dividend) and taxed, to avoid double taxation.

For existing loans as of January 1, 2023, a transitional arrangement applies until December 31, 2024 so the existing loans can be repaid without tax consequences. As we are nearing the end of 2023, it is advisable to assess if there are excessive loans and repay existing loans if financially permitted.

The transitional arrangement does not apply to new loans taken out after January 1, 2023.