Real Economic Presence requirements for Transparent, Exempt and Imputation Payment Companies in Aruba

September 7, 2021

In April 2019 and February 2020 the Aruban government passed legislation requiring Transparent Companies, Exempt Companies and Imputation Payment Companies to have a real economic  presence in Aruba. Grandfathering rules applicable for existing companies will end soon.

Real Economic Presence

As per National Decree of 10 April 2019 and 5 February 2020 the government has implemented economic substance requirements for the above-mentioned companies if they perform certain activities.
The core-income generating business activities have to be performed in Aruba, but can be outsourced to another Aruban company provided the company is actively coordinating the efforts of the other entity.
The activities are considered to be performed in Aruba if the company avails of:

• A sufficient and adequate amount of tangible assets;
• A sufficient and adequate number of fulltime employees working in Aruba, which are considered appropriate in relation to the nature and scope of the activities of the company; and
• A sufficient and adequate (minimum) amount in annually recurring operational costs, which are appropriated in relation to the nature and scope of the activities of the company.

Special purpose vehicles in Aruba

The changes in the legislation regarding the real economic presence in Aruba impact the Transparent company, Exempt company and the Imputation Payment Company established in Aruba.

Transparent Company

A company established in Aruba can apply for the transparent status within one month of the incorporation of the company. The company will then be disregarded for profit tax and dividend withholding tax purposes, unless it is deemed to have a permanent establishment in Aruba. Any profits that cannot be attributed to the permanent establishment in Aruba will be attributed to the shareholders of the company.

Exempt Company

An Aruba Limited Liability Company (VBA) or Aruba Exempt Company (AVV)[1]  can request for the exempt company status for profit tax and dividend withholding tax purposes if they solely perform one or more of the activities mentioned in the National Decree Designation of Activities Aruba Exempt Company.

All profits from the company will be exempt for profit tax purposes and any dividends to the shareholders will be exempt from dividend withholding tax.

Imputation Payment Company

Any company that complies with the requirements of the Imputation Payments Company, may request its profits to be taxed against the special rate of 10% (or between 10% and 15% for hotels). The requirements mainly entail a list of activities that the company is allowed to perform to ensure the Imputation Payment Company status.

Deadlines and grace periods

The real economic presence requirements with regard to the transparent company have retroactive effect as of 1 January 2019, but a grace period has been provided for transparent companies that existed on 1 January 2019 requiring them to comply with the real economic presence requirements before 1 January 2022.

The real economic presence requirements with regard to the exempt company have been effective since 1 January 2020. For exempt companies that existed on 15 November 2018 a grace period has been provided, the real economic presence had to be in place before 1 July 2021.

For Imputation Payment Companies the real economic presence requirements have been effective since  1 January 2021, with a grace period for  Imputation Payment Companies that existed on 15 November 2018 until 1 January 2023.

Loss of tax status

If a company does not comply with the real economic presence rules, it will lose it tax status as per the beginning of the financial year in which it does no longer comply and revert to being a “normal” taxed entity. This will include taxation of all profits against the normal rate of  25% and possible dividend withholding tax on any profit distributions.

It is therefore important to ensure the company complies with the real economic presence requirements and to ensure that the administration with regard to the real economic presence and the manner in which the company complies is prepared to be able to substantiate the status.

Further Guidelines

The  tax authorities in Aruba have not yet provided further guidance with regard to the implementation of the  core-income generating activities and the manner in which these need to be substantiated, but some guidance may be found in the Central Bank of Aruba guidelines (for entities that need to register with the CBA) or OECD guidelines regarding certain activities.

[1] Please note an AVV can no longer be incorporated with the introduction of Book 2 of the Civil Code in Aruba