End of Year Tax Alerts – Curaçao
December 2, 2021
With the end of the year approaching fast, 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 advice to avoid any additional tax costs by preparing you for the end of the tax year.
Territorial Profit Tax regime
As of January 1, 2020, onwards Curaçao has changed its profit tax law, so that no longer a system of worldwide inclusion with exemptions would apply, but a territorial system in which only profits that are attributable to a domestic enterprise are included in the profit tax basis. However, passive income (i.e. income that does not derive from material business activities) is always attributable to the domestic (Curaçao) company. This includes dividends, interest and royalties.
The attribution of profits to either Curaçao or a foreign jurisdiction takes place based on the division between domestic direct expenses and foreign direct expenses.
Please ensure that all your documentation and cost allocation is up to date and shows the division between domestic and foreign expenses. It might also be advisable to change the cost structure of your company in such a way that more direct expenses can be attributed to a foreign jurisdiction, so that the profit tax burden in Curaçao can be reduced.
Furthermore, please consider that entities applying the territorial system should meet substance requirements in order to avoid penalties. These substance requirements consist of core income generating activities (CIGAs) and annual recurring costs. As these CIGAs differ per business sector, please consult your tax advisor for further details.
As a general rule, deductible costs should be attributed to the year in which they are incurred. With large projects the payment of the costs may not align with the business activities in the fiscal year to which the costs apply. Under certain conditions a tax allowable provision could be recognized for future expenses that originate from prior years.
If you expect any (large) expenses in future years (for example major maintenance expenses), it could be assessed whether a provision can be entered into the balance sheet for taxation purposes. This will lead to a lower taxable profit.
Recognizing a provision can also be helpful to support the liquidity position of the Company. If there is a reasonable level of certainty that the expenses will arise in the future, it may be beneficial to recognize a provision for – amongst others – the following items:
- Expenses for legal proceedings;
- Medical expenses and other employee benefits;
- Risk of irrecoverable loan receivables and claims;
- In case your business was impacted by the COVID-19 pandemic, please contact us to review additional tax provision possibilities.
Depreciation and Revaluation of Assets
Assets used within the company should be activated on the tax balance sheet and depreciated over time in accordance with the applicable rules. The depreciation rate depends on the life span of the assets and the remaining value.
Under certain circumstances it is possible to revalue assets or increase the depreciation, for instance in case of bad debt or decreased prices. Such revaluation or depreciation may be deductible for tax purposes.
Optimizing the depreciation rates and valuation of your assets may lead to a lower taxable profit. In times of economic crisis, for instance the following write-offs could be considered:
- Review the financial position of your debtors. If it is likely that they will not be able to meet their (re)payment obligations, you may take into account the part that will presumably not be paid back when drawing up your financial statements (provided no provision has been recognized in connection therewith);
- Price declines in the market and/or the lapse of expiration dates of stock may give rise to write-offs on the balance sheet item stock.
Please do not hesitate to contact one of our tax advisers for the applicable conditions when considering such write-offs.
Postponement of profit reporting
If it is intended that sold inventory or business assets are to be replaced it is possible to postpone the reporting of profits on such sale, in case certain conditions are met. In connection therewith, it is recommended that you timely seek advice so that no profit needs to be reported in the year of sale.
When a business invests more than Naf. 5,000 in assets in 2021, 10% of the qualifying investments is (additionally) deductible from taxable profit.
If your qualifying investments in 2021 are below Naf. 5,000, it could be considered to make additional qualifying investments before the year end to meet the threshold.
Besides the aforementioned possibility of profit reporting postponement it can be important to postpone the transfer of a business asset until after January 1, 2022. This particularly applies to investments made in 2015 and for real estate investments made in 2006 in light of a previously claimed investment deduction. The so-called disinvestment addition on the sales price will expire after 6 and 15 years respectively.
Carry forward losses
A tax loss may be carried forward for ten subsequent years and deducted from taxable profits in those years. After ten years the losses are no longer offset against profits.
If you still have existing carry forward losses, please review whether these can be carried forward to 2022. If not, it could be reviewed if (re)structuring options are available to prevent these tax losses from expiring.
Income in relation to participations in other companies (e.g. dividends and capital gains) are exempt, if the participation exemption is applicable. The participation exemption applies for all participations in local entities. In case of foreign participations, the participation exemption applies when the participation is not held as a passive investment and/ or is subject to tax over its profit.
We advise to review annually before the end of the financial year whether the participation exemption applies.
For affiliated companies it can be considered applying for a fiscal unity before the end of the year, so that a (fiscal) consolidation can be applied with retroactive effect to January 1, 2021.
By forming a fiscal unity, losses of one group company can be offset against profits of another group company. Please note that various conditions apply.
Curaçao Investment Company
Under certain conditions, a Curaçao limited liability company (“B.V.”) or a Curaçao public company (N.V.) can opt for the status of a Curaçao Investment Company (“CIC”, in Dutch: Curaçaose Beleggingsvennootschap, “CBV”), making it profits taxable at a rate of 0% for profit tax purposes. If you use a CIC, you should in any event be aware of the following points of attention:
- The CIC must meet the legal and substance requirements at all times. It is therefore of great importance to check whether your CIC has met and still meets all relevant conditions, so that the company can continue to use its status;
- The annual financial statements, should be approved within twelve months after the end of the relevant financial year by an independent expert appointed by the general meeting of shareholders;
- The CIC’s income may not exceed the allowed maximum of so-called “tainted dividends”. It is therefore important to closely evaluate what the income of the CIC consists of.
Entities located in Curaçao that are part of a multinational group with consolidated revenues of Naf. 1.5 billion or more must prepare annual Country-by-Country Reporting documentation that consists of a Master file and one or more Local files. In addition, a notification must be filed in advance of the financial year to the tax authorities and a Country-by-Country Report (CbCR) must be filed as well.
Please review whether your Country-by-Country documentation is up to date and if the required documents and notifications have been filed to avoid penalties.
Please note that if a company is part of a consolidated group they need to provide documentation showing that the intercompany transactions are dealt with on an “at arm’s length” basis. The information that must be documented includes the transfer pricing method used, the reasons why that method was chosen, and a substantiation of how the price was determined. This will provide the Tax Inspector with guidance to better determine whether the contractual terms and conditions are at arm’s length. The Transfer Pricing documentation must be included in the company’s records. Failure to comply with this recordkeeping obligation will cause the burden of proof to shift to the taxpayer.
Please ensure that all your Transfer Pricing documentation is up to date and shows all intercompany transactions to avoid additional assessments and penalties.
Gifts to charitable institutions
Gifts, that do not qualify as business expenses, are deductible to a maximum amount of 3% of the profit if made to religious, charitable, sport, cultural, scientific and (registered) public benefit organizations and insofar the amount of the gift is at least 1% of the profit of the company and above Naf. 500.
If you made any deductible gifts, please keep the proof of payment to ensure deduction of the gift from the taxable profit.
Under certain circumstances it is possible to provide tax free cost allowances to staff members. Examples of these cost allowances include:
- phone allowance
- travel allowance
- car and representation costs
Optimizing the cost allowances within the conditions set in the tax law, may lead to significant tax savings.
Benefits in Kind Valuation
When an employer provides benefits in kind, these benefits are considered to be taxable wages. However, under circumstances, the prescribed method to calculate the benefit of the use of certain company assets, such as a car or a house or even a company meal, can lead to tax savings for the employer and employee.
Optimizing the salary package with fringe benefits may lead to tax savings.
Expat Ruling and Administration
Additional tax free allowances and other benefits are available for employees who have not worked in Curaçao for a period of at least 5 years and will earn at least Naf. 150,000 per year. The so called expatriate status or expat status.
These benefits include:
- benefits in kind not exceeding Naf. 15,000 annually.
- tax free allowance for school fees
- tax free allowances for house rent
Also, the employer and employee can agree upon a net wage contract. The wage tax will then be calculated on the net wages and not be grossed up.
Applying for the expat ruling can allow for a more competitive offering to potential overseas candidates.
Reduced Tax rate for termination payouts
It often happens that an employee is entitled to a lump-sum as part of the termination agreement. After year-end, when completing the employee’s personal income tax return a lower income tax rate can be applied to this lump-sum.
However, upon the actual moment of paying out this lump-sum, the employer should consider obtaining a tax ruling from the Tax Authorities allowing the employer to apply the reduced rates when computing and withholding the payroll taxes due on this lump-sum. In doing so, the employee and employer can benefit from the reduced rates at once, upon payment of the lump-sum.
Furthermore, from an employer’s perspective, it is recommended to determine what type(s) of remuneration to include in the termination payout if you opt to deviate from the court formula. Assess upfront if the total employers’ costs involved fit your specific company needs and requirements.
When a current employee intends to become a third-party consultant through an assignment agreement, make sure that both the formal agreement and the factual activities carried out can be considered as third-party consulting services. Note that existing assignment agreements require continuous assessment to prevent disguised employment triggering unintended wage tax consequences.
Review if any additional contributions made to employee pension benefits are within the legally allowed thresholds and requirements. Be aware of decisions that may jeopardize pension entitlements and can possibly trigger unintended wage tax consequences.
Services from foreigners
If you retained services from foreign services providers or any business established overseas, you as a local entrepreneur established in Curaçao could be held liable for the Turnover tax (in Dutch: omzetbelasting or OB) due on these cross-border transactions. Considering, the penalties that can accumulate in these types of cases, it is highly recommended that you verify with the overseas services providers if they are duly registered with the Tax Authorities in Curaçao.
Allocation formula for shared costs
If you regularly conclude agreements for specific periods with other entrepreneurs with which you cooperate regarding the mutual allocation of shared costs but are using a different allocation formula, we would like to draw your attention that the adjustment of the allocation formula is in principle only possible if the composition of the cooperating parties changes.
Real Estate Rental income
Real estate entrepreneurs are advised to closely monitor to which extent they are engaged in commercial rental of units and spaces versus long term rental for residential purposes. It is advisable to make a distinction between these two types, because of the different Turnover tax consequences resulting from each activity:
- Commercial lease is taxed with Turnover tax;
- In case of lease for habitation it can be permanent habitation or short-term lease. If it concerns permanent habitation, i.e. habitation for at least one year, an exemption from Turnover tax can be applicable. On the other hand, if it concerns short-term lease, the rental income will in principle be subject to Turnover tax.
Personal income tax return
If you are an entrepreneur for Personal income tax purposes or have a Sole Proprietorship, please also consider some of the items in the above paragraph on Profit tax as these may also apply to you in your Personal income tax position.
It is possible to deduct certain expenses from the taxable income, resulting in a lower levy of Personal income tax. Some examples are:
- Donations to certain organizations, such as cultural and religious institutions. These reduce your taxable income with a maximum of 3% of the income, provided the applicable requirements are met;
- Certain expenses related to your own home that may reduce your taxable income, such as financing costs (maximum of ANG 27,500);
- Interest paid on personal loans which can reduce your taxable income for a maximum of ANG 2,500;
- Interest paid and debt pay-offs for loans taken out for the financing of studies.
If you incurred any deductible costs and/or deductible gifts, please make sure to keep invoices and proof of payment, since this documentation is required.
Reduced or 0% Tax Rate
If you are looking for possibilities to let your savings grow in a tax friendly manner, you may consider:
- Buying local Treasury Bonds on which the interest received is exempt from Personal income tax;
- Investing your capital in financial products with the goal to realize tax-free capital gains instead of an annual income;
- Saving with a local bank, whereby the interest received on local savings deposits or life insurance premiums will be taxed at the low Personal income tax rate of 8.5%;
- Expanding your pension contributions and future pension income by contributing to tax friendly annuity premiums.
We would like to emphasize that the above described is general information and may not be considered as tax advice for any specific case.
Our tax professionals will be glad to assist you at any time with any questions you may have.
Francine Da Costa Gomez