Curaçao M&A: An overview of the tax rules in Curaçao

March 27, 2015 3:18 PM
Emile Steevensz of Steevensz|Beckers Tax Lawyers provides a comprehensive overview of the tax rules applicable to M&A transactions in Curaçao.

 

I. Participation exemption rules and earn out arrangements
 
The participation exemption rules are important in transactions where the shares are acquired (seller’s side) or when the shares in the acquired target company are sold, as income derived from shares – dividend income as well as capital gains realised upon the alienation of shares in the subsidiary – is fully exempt provided the following conditions are met:
 
a. The Curaçao parent company holds an interest of 5% or more in the nominal paid-in capital in the subsidiary or 5% of the certificates of participation in a fund for mutual account (fonds voor gemene rekening); or
b. The Curaçao parent company is a member of a Cooperative Association.
 
The participation exemption includes a corresponding holding of profit sharing certificates. 
 
Note that not only the dividends and capital gains are exempt, but that also expenses, including foreign exchange results, directly or indirectly related with the participation are not deductible, unless these expenses are indirectly instrumental in making profits in Curaçao. This means that only certain expenses in connection with a domestic participation are deductible. 
 
Interests in Funds for Mutual Account (Fonds voor Gemene Rekening)
The participation exemption is applicable on interest in a domestic Fund for Mutual Account (‘FMA’) that is considered to be a special purpose investment vehicle (doelvermogen) or a foreign FMA that is independently and fully subject to tax in its country of residence or fully subject to tax in one of the countries mentioned in the ministerial decree, PB 2009/78 dated December 29, 2009, containing the countries that are considered to have a tax regime that is comparable with the tax regime of Curacao.
 
Interests less than 5%
The Curaçao parent company that holds less than 5% of the nominal paid-in capital but has paid at least Nafl. 890.000 ($500,000) for its participation also qualifies for the Curaçao participation exemption.
 
No quantitative demands for interests in cooperatives
Contrary to the holding of shares in another company, no quantitative demands are applicable in case of a membership in a cooperative; mere membership is sufficient.
 
Anti-abuse measure passive subsidiaries
Under the anti-abuse measure, 10/T, part (where T stands for the applicable tax rate in the book year) of the dividend income received from subsidiaries, which qualify for the participation exemption, is taken into account if the following cumulative conditions are met:
 
A The gross income of the subsidiary, derived from investments (beleggingen) comprises more than 50% of dividends, royalties or interest received outside the framework of an enterprise it operates, has acquired or has alienated; and
 
B The subsidiary is not subject to a nominal tax rate of 10%.
 
The taxable dividend is taxed against the applicable tax rate and results in a effective tax of 10%.
 
The demands under A and B before are hereafter referred to as the activity test and subject-to-tax test.
 
Note that capital gains are always fully tax exempt provided that the conditions of the participation exemption rules are met.
 
The activity and subject-to-tax test may be determined on the consolidated gross income respectively on the consolidated profit of the subsidiary. Participations held by the subsidiary, that are not consolidated in the statutory financial statements, may be considered as if they were tax transparent in determining whether the activity and subject-to-tax test are met. On request, the activity and subject-to-tax test may be determined on the basis of the average taxable profit of the past two years.
 
Tax-free repatriation profits in case anti-abuse rules apply
The profit tax ordinance contains a definition of dividends. As a result it will be possible to obtain income free from taxes from a participation that does not qualify for the full Curaçao participation exemption by way of repayment of capital, (partial) liquidation and repurchase of shares.
 
Real estate companies
The activity test and subject-to-tax test are not applicable on dividend income of a participation of which the assets consist, directly or indirectly, of 90% or more of real estate. 
 
Other anti-abuse rules
The participation exemption rules contain anti-abuse rules in case receivables held by the Curaçao parent company have been amortised by the parent company and are converted into capital, have been sold or transferred to a non-resident. 
 
Earn-out arrangement and participation exemption rules
In the M&A practice it is not uncommon that (a part of) the purchase price for shares in the acquired company is paid under an earn-out arrangement. Under an earn-out arrangement, the sellers are paid an additional sum which is based on future earnings of the acquired company.
 
According to the decision of the Dutch Supreme Court of June 30 1999 (BNB 1999/139) additional payments under an earn-out arrangement do not qualify for the participation exemption. According to the Supreme Court decision, both buyer and seller must make an estimate of the expected obligation respectively receivable for the future payments to be made/received under the earn-out arrangement. The buyer would like to valuate the obligation as low as possible, as additional payments are deductible, whereas the seller would like to valuate his receivable as high as possible as payments received exceeding the receivable are taxable.
 
II. Acquisition of stock vs acquisition of assets.
 
a. Acquisition of shares 
 
The participation exemption rules are an important tool in Curaçao’s M&A tax environment. As mentioned in paragraph I, the proceeds, upon acquisition of shares from another Curaçao company, may be tax exempt at the seller’s side provided certain conditions are met.
 
If acquiring shares of another Curaçao company it is recommended to use a Curaçao acquisition vehicle as fiscal unity can be formed upon acquisition of 99% of the shares in the Curaçao target. As a result of 
the fiscal unity the parent company can set-off its interest expenses of acquisition loans provided certain conditions are met. The acquired subsidiary continues with the book value of its assets.
 
The acquisition of real estate companies is, contrary to the Netherlands, not subject to real estate transfer tax. The acquisition of shares is not subject to sales tax (omzetbelasting) in Curaçao.
 
The shares purchased are booked against the purchase price. No tax deductible amortisation of goodwill is possible in case the participation exemption rules apply for the acquiring company.
 
Domestic acquisitions
The acquisition of a domestic target is preferably executed through a local holding company in order to form a fiscal unity. In case the acquisition is financed, the interest can be set-off against the operational results of the target, though anti-abuse measures exist. 
 
Domestic acquisitions of companies in certain industries can be executed by using the treaties to promote economic activities between Curaçao and Denmark, Sweden and Finland, granting certain tax advantages in those countries, including exemption of dividends distributed to these countries. It does not seem to be necessary that it is a company in those countries in the same line of businesses that make the qualified industries mentioned in these treaties.   The tax benefits these treaties grant also seem to also apply to foreign companies investing in Curaçao through intermediary holdings in those countries. Of course, in such a case the local rules and demands in Sweden, Denmark and Finland must be met.
 
Foreign acquisitions
It may be beneficiary to use a Curaçao holding to acquire a foreign target for the following reasons:
- Asset protection possibilities because, as a country within the Kingdom of the Netherlands, Curaçao is party to more than 90 bilateral investments treaties;
- Through its participation exemption rules, dividends received and capital gains realised with the alienation of shares are exempt provided that certain conditions are met;
- Curaçao levies no withholding taxes;
- Advantageous possibilities to create group finance companies and IP structures;
- Access to the Dutch treaty network by using a Dutch intermediary holding. Under the new Tax Arrangement of the Kingdom, which is envisioned to come into force from January 1 2016, no dividend withholding tax is due provided the Limitations of Benefit (LoB) clauses are not applicable or an appeal can be made on the safety net provision;
- Access to the Spanish treaty network by using a Spanish holding qualifying for the ETVE regime. 
Spain does not levy Spanish dividend withholding tax on dividend distributions to Curaçao;
- Access to the Norwegian treaty network by using the Curaçao-Norwegian tax treaty.
 
US companies should be able to use the Curaçao fiscal unity rules for their foreign acquisitions though it depends on the country where the target is located.
 
b. Acquisition of assets
Alternatively, the buyer can purchase the assets and liabilities of the target in Curaçao. In such a case, the buying company may valuate the assets and liabilities, including goodwill, at fair market value. In case real estate is purchased with the asset transaction, 4% real estate transfer tax is due. No sales tax is due provided the deal concerns the acquisition of a business or independent part of a business.
 
As mentioned, in asset transactions the buyer is allowed to account for the assets and liabilities at fair market value, which creates a higher amortisation base. Goodwill can be amortised, generally, in five years. 
 
For 2015, it is still possible to apply the accelerated depreciation rules, under which a third of the acquisition value of the assets can be depreciated at once. These rules will be abolished on January 1 2016. 
 
An investment deduction for tangible assets is available provided certain conditions are met. The investment deduction is 10% of the acquisition value of the tangible assets. For real estate the investment deduction is 15%. Divestments within six years (15 years for real estate) of the year of 
investment results in an addition of 10%/15% of the divestment amount.
 
Note that the rules for depreciation of real estate will change on January 1 2016.
 
III. Share exchange, enterprise mergers, mergers
Share exchange
The draft of tax facility rules regarding share exchange, merger, demerger and conversion rules published in 2004 and 2006 have never been submitted to parliament. With respect to the share exchange, a directive was issued on July 30 1997, based upon which a tax facilitated share exchange is possible. On December 1 2012 the directive was republished with additional anti-abuse measures in case the acquiring company is a tax exempt company or becomes a tax exempt company at a later date.
 
From the directive it appears that the share exchange facility is only possible between two Curaçao companies. However, the draft tax provisions that facilitate the share exchange allow a cross-border merger provided that the Curaçao company is the acquiring company. In the past we have experienced the tax inspector cooperating in cross-border share exchanges provided that the acquiring company is a Curaçao company.
 
An advantage of the share exchange is that there is hardly any need for cash. The draft rules only allow limited cash payments (10%) in case of a share exchange.
 
A share exchange can be interesting in case of a reversed take over, where public listing is sought. There are some companies that are still listed but hardly have any activities. Such companies are sometimes used to acquire shares in the company that seeks a listing in exchange for shares in the already listed company. 
The share exchange rules are especially interesting for shareholders with a substantial interest in the company that is going to exchange its shares for shares in the acquiring company. Under the share exchange rules, the substantial interest is not levied but the tax claim is passed on to the shares received. The tax claim is preserved by passing on the original cost-price of the shares to the shares obtained in the acquiring company.
 
Briefly speaking, a shareholder (individual) has a substantial interest if he possesses 5% or more of the shares. Under the substantial interest rules, individuals are taxed on their dividends as well as capital gains. Foreign individuals are generally not taxed under the substantial interest rules, unless they receive income from their substantial interest within 10 years after leaving Curaçao.
 
The share exchange rules are also advantageous for the creation of joint ventures.
 
The share exchange directive and draft rules contain a claw back provision under which it is not allowed for the acquiring company to sell the shares within a period of three years. If sold within three years, the 
substantial interest claim not levied upon the exchange of shares is then levied. 
 
Enterprise mergers (shares in exchange for assets)
The enterprise merger rules are particularly interesting for the transfer of a family-owned business where the business is transferred from one generation to another.
 
The enterprise merger can also be used to merge the assets of two businesses and create holding companies of the original entities. 
 
A characteristic for the enterprise merger is that the assets and liabilities are transferred to a new entity in exchange for shares in the new entity. The contributing entity becomes a holding company, provided certain conditions are met. No taxes are levied at the time of the merger. The tax claim is preserved as the new entity continues the book value of assets received. Therefore the new company that acquires the assets and liabilities cannot account for goodwill or revaluate assets. The tax not levied at the time of the merger will be levied if the shares are sold within three years of the enterprise merger.
 
A special form of the enterprise merger is where the assets and liabilities that form a business or independent part of a business are transferred in exchange for cumulative preference shares. As a result it is possible to transfer all business assets to a new company in exchange for cumulative preference shares placed with the company of the contributor of the assets. Nominal shares can be placed with a company incorporated by a third party, for example the son. After three years, the cumulative 
preference shares can be repurchased as a result of which the company is fully owned by the company of the third party. The proceeds of the repurchase of the cumulative preference shares are not taxable under the participation exemption rules.
 
 
Legal merger
 
The Curaçao Civil Code (CCC) contains merger, demerger and conversion rules, but the tax rules that facilitate the merger, demerger and conversion have not been implemented yet. However, a tax-neutral 
merger ande demergers are possible as the inspector of taxes applies the rules contained in the draft as well as the Dutch rules regarding merger and demerger (plus Dutch standard conditions).
 
In both the share exchange,legal merger and demerger, the companies continue with the original cost-price of the assets and, contrary to an asset transaction, no tax is levied upon acquiring assets through a merger.
 
The merger rules of the CCC allow an inbound cross-border merger in which a foreign legal entity is the disappearing entity (provided that foreign law allows such merger) and an outbound cross-border merger were the Curaçao legal entity is the disappearing entity.  
 
A tax neutral conversion or redomicilation, inbound as well as outbond, is also possible.
    
IV. Other transaction taxes
No stamp taxes are due upon the acquisition of shares. The same goes for the asset transaction.
Curaçao does not levy any capital duties upon issuing new shares or in case shares are paid-in.
 
No sales tax is due upon the transfer of shares or the transfer of assets and liabilities that constitute a business or independent part of a business. 
 
Real estate transfer tax is due if, under an asset transaction, real estate is acquired.
 
A draft ordinance exists upon which no real estate transfer tax is levied in the case of mergers and demergers. The exemption is generally applied.
 
V. Losses.
In case of an asset transaction, the losses remain with the selling company which can use them to offset the capital gain realised with the sale of the assets.
Loss compensation can be continued in case of a transfer of shares provided that the activities of the company acquired have not been ceased or nearly ceased. However, this anti-abuse rule is not applicable if these profits are put mainly at the disposal of individuals who were also shareholders at the time when the activities were ceased.
 
VI. Interest deduction and anti-abuse measures.
Interest is generally deductible. However, the Curaçao profit tax ordinance contains several anti-abuse measures:
- Interest and other remunerations paid for the use of assets to other group companies are not deductible if the remuneration is not at arm’s-length;
- Interest, including foreign exchange results, paid to a tax-exempt group company, domestic or foreign, is not deductible if the average debt in a book year exceeds one third of the equity of the borrower;
 
Furthermore, the Curaçao profit tax ordinance contains measures that prevent base erosion. Under these measures, no interest paid to group companies is deductible if the debt is related to:
a. Profit distributions and repayment of capital;
b. The acquisition of shares, certificates of participation or membership rights in companies belonging to the same group and established in one of the other countries of the Kingdom or in a country with which Curaçao has entered into a tax treaty except and insofar as a change is made in the ultimate interest and control of that company;
c. A capital contribution by the taxpayer in the company to which the contribution is indebted.
 
However, the anti-abuse measures under a. to c. are not applicable if:
a. The loan is based on business reasons;
b. The interest received by the lender is taxed at a rate that is considered to be reasonable for Curaçao tax purposes (10%);
 
Debts that fall within the reach of a. - c. are not taken into account in case the interest is already non-deductible because it is paid to a foreign or domestic tax exempt group company and the average loan during the book year exceeds one third of the debtor’s equity.
 
As mentioned under paragraph II, using a domestic company to take over the shares in another domestic company can be advantageous as under the fiscal unity rules the interest can be set-off against the operational results of the acquired company. The above mentioned anti-abuse rules also apply in case of a fiscal unity. 
The main rule within the fiscal unity is that interest paid on intercompany loans entered into for the acquisition of shares in the subsidiary is only deductible if the interest amount does not exceed the profit of the parent which it would have realised without a fiscal unity or interest deduction. 
 
However, loans related to the acquisition of shares remain deductible within the fiscal unity:
a. In as far as the group company which has granted the loan to acquire the shares has taken up a loan with non-related parties (banks and so on); or
b. If the parent company in the fiscal unity can prove that the ultimate interest in the subsidiary has been changed; or
c. If the parent company in the fiscal unity can prove that the reasons for the loan agreement are not tax evasion.
As the rebuttal rules mentioned before are also applicable, the interest paid to group companies is also deductible if the interest received by the lender is taxed at a rate that is considered reasonable for Curaçao tax purposes.
 
VII. Protections for acquisitions
When shares are purchased, seller and buyer often agree on a full indemnity by the buyer for tax costs relating to pre-acquisition period and that are not included in the acquisition balance sheet.
 
If the acquired company formed part of a fiscal unity with the seller, special warranties are usually agreed upon with respect to the period of the fiscal unity and transactions that might have taken place within the fiscal unity.  
 
Furthermore, seller and buyer may have determined certain tax indemnities in the due diligence and which are described in a separate schedule.
 
Provided that the participation exemption rules apply, payment under an indemnification should be tax-neutral for both the seller and acquiring company.
 
In case of an asset transaction, the tax indemnities are limited as the tax liabilities usually are left behind with the selling company.
 
VIII. Post-acquisition period.
Fiscal unity
As mentioned, entering into a fiscal unity is the most important post-fiscal unity tool. The fiscal unity can only be implemented if the acquiring company possesses all shares at the beginning of the book year. 
Provided certain conditions are met, a subsequent fiscal unity can be granted provided thaton the first day of the new book year the shares of the subsidiary are transferred. It is also possible to create a subsequent fiscal unity with a newly incorporated parent company. 
 
With a subsequent fiscal unity with a newly incorporated parent the purchase price of the subsidiary must be irrevocable and it is agreed that the shares in the subsidiary are held for the account and risk of the buyer. The shares must be transferred on the first working day after the day of incorporation of the acquiring company.
 
Demerger
Though the tax rules that facilitate a tax-neutral demerger are not yet introduced, a tax-neutral demerger is possible. The tax inspector uses the Dutch tax rules regarding demergers as well as the Curaçao draft, which is also based on the Dutch rules. 
 
Conversion
Under the civil code it is possible to re-domicile a Curaçao company and continue its existence under foreign law provided that under foreign law such conversion is permissible and is not considered a liquidation but a continuation of business. 
 
Conversely, it is also possible to convert a foreign company and continue its existence under Curaçao law.
 
If the articles of association of the Curaçao company incorporated before March 1 2004 have reference to the ‘National ordinance on statutory seat transfer to third countries’ (NOTS), then such transfer may be executed under this old ordinance. The NOTS was abolished upon the introduction of the new conversion rules in the CCC, but reinstated only for those old offshore companies which have an explicit reference to the NOTS in their articles of association.  
 
The ordinance contains a specific clause that the conversion is tax-neutral. As the draft tax facilities regarding conversions have not yet been introduced, it could be argued that the conversion under the CCC may have tax consequences. As no change has been signaled regarding the replacement of NOTS, the conversion under the CCC is also tax-neutral.
 
  
IX. Withholding taxes
 
Curaçao does not levy withholding taxes on dividends, interest and royalties.
 
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Disclaimer
 
This Publication contains general information only, and Steevensz|Beckers Belastingadviseurs, its member firms or related parties (collectively referred to as Steevensz|Beckers) are not, by means of this publication, rendering professional advice or services. Although we endeavor to provide accurate and timely information there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Before making any decision or taking any action that may affect your finances or your business you should consult a qualified professional advisor. No entity of Steevensz|Beckers shall be responsible for any loss whatsoever sustained by any person  who relies on this publication.
 
 
This article was also published in International Tax Review

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