Dear Sir, Madam,

The year 2008 has come to an end, and some of you are already starting with the preparation of the 2008 financial statements.

As we have informed you already in our previous WTS Tax Special, as per January 1, 2008 transfer pricing requirements were introduced. In this letter we would like to focus your attention on these requirements, since the Servicio di Impuesto y Aduana (the Aruba tax authorities, hereinafter: SIAD) is becoming much stricter in the event the documentation is not present.

Reasons for incorporating the transfer pricing requirements in the law

If related parties participate in transactions that can be deemed not at atm’s length, profits can be shifted from one tax payer to another. In practice, some tax payers try to allocate profits to low tax payers, implying the tax burden is decreased. The SIAD can only challenge such profit allocations in case of shareholders’ relationships. Since the at arm’s length criterion has a broader interpretation, a new definition should be introduced.

Transfer pricing requirements – when applicable?

In case a corporate person or individual participates, directly or indirectly, in the management, supervision or the capital of two or more corporate entities, the conditions which are applicable to the supply of goods and the rendering of services between these entities must be arm’s length, i.e. similar to the conditions that would have been closed with third, unrelated, parties.

Unfortunately, any participation already leads to application of the transfer pricing requirements. If one shareholder has 1% of the shares in company A and 100% of the shares in company B, a relation is deemed present. Also being a supervisory director of company A and being director of company B leads to a relation.

If applicable – what to do?

In case a relation via management, supervision or capital exists, documentation to substantiate the arm’s length transactions must be kept in your administration. This documentation should include – according to the explanatory notes – e.g. (i) the agreement, (ii) the transfer pricing method that was chosen, (iii) why this method was chosen and (iv) how the consideration has been determined.

Of the documentation, choosing the best transfer pricing method will be the most difficult criterion. Generally, the following methods can be used (as per the OECD Committee):

• Comparable, uncontrolled, price, i.e. the price of the non-related, similar, transaction.
• Resale price.
• Cost-plus.
• Transactional net margin.
• Profit split.

Transfer pricing documentation – keep them in your administration

The transfer pricing documentation is included in the administration obligation of article 48, General State Ordinance on Taxes and allows the SIAD to determine if at arm’s length transactions have taken place. Not complying with the documentation obligation may result in the reversal of the burden of proof.

Possible consequences if the transfer pricing requirements are not met

As mentioned above, not complying with the documentation obligation may result in the reversal of the burden of proof.

If the SIAD deems the pricing not at arm’s length, the SIAD can transform the transaction into an at arm’s length transaction. Usually the pricing will be amended. If for example the intercompany price is determined on 100, while the SIAD deem the at arm’s length price 80, a correction of 20 will be made. The remaining 20 may be transformed into a dividend distribution. This deemed dividend is subject to dividend withholding tax, while the applicable rate varies between 0%, 5%, 7.5% and 10%, depending on the country of residence of the shareholder.

After the at arm’s length transaction and pricing has been established, it will have to be determined if the payment is tax deductible for Aruba tax purposes. Summarizing, the payment is only deductible if your company can make credible that:

• The receiving entity is – from a fiscal point of view – not related[1] to you; or
• The receiving entity is, directly or indirectly, for at least 50% of the shares and voting rights, listed at a qualified stock exchange; or
• The receiving entity pays an effective tax rate of at least 15% on the payment.

If one of these criteria is not met but the receiving entity is subject to a tax over its income, 75% of the payment can be deducted.

[1] A relation is deemed to exists at interests over 1/3. We will not elaborate in detail.

Transfer pricing documentation – examples of possible transactions
It is our experience that many intercompany transactions do not comply with the requirements per January 1, 2008. Not complying with the transfer pricing requirements may lead to corrections by the SIAD and even to the reversal of the burden of proof, i.e. you will have to prove that the estimates of the SIAD are incorrect. Intercompany transactions that may be subject to the documentation requirements are amongst others:

• Management
• Administration
• Royalty
• Loans
• Rent
• Supply of goods or rendering of services.

How may WTS assist you with the transfer pricing requirements?

The team of WTS can assist you with the following:
Determine if a relation is present which could lead to the documentation obligation.
Determine if the documentation present complies with the requirements.

If you would like to know if you are in compliance with the at arm’s length requirements, we can perform a quick scan at your organization. A quick scan focuses on the most obvious comments the SIAD would have and identifies any visible exposure you may have. Contrary to a due diligence however, it is cost efficient and does not burden your organization. We would be happy to provide you with a fee proposal should you require so.

Additionally, WTS can also assist you with:

• Preparing or amending any documentation that is missing or incomplete.
• Determine if the pricing chosen can be deemed in accordance with the at arm’s length requirements as per the OECD model convention.
• Determine if the – at arm’s length – payments made are tax deductible.
• Make suggestions to mitigate the consequences of the limitations in the deduction of payments.

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On January 1, 2009, a new corporate entity was introduced in the Aruba laws, the limited liability company (comparable to the LLC, hereinafter: VBA). The VBA is a very flexible corporate entity that can be shaped according to the wishes of the incorporator.

Some legal aspects

The VBA has the following legal flexibility:

• The VBA can be incorporated by one individual or entity;
• The articles of incorporation can be in Dutch, English or Papiamento. All other languages can be used as well, if a certified translation is attached to the original Dutch or Papiamento version.
• The share capital of the company has no minimum.
• Shares have a value equal to the nominal value or, if no nominal value is determined, equal to the consideration.
• Shares can be with or without voting rights or profit rights, as long as one share with both voting and profit rights is issued, or one share with voting rights and one share with profit rights are issued;
• A usufruct can be established on the shares.

Certain (types of) shareholders can be held responsible for certain specified or all debt of the VBA, if this is included in the articles of association of the VBA.

• The board of directors can have different tiers, e.g. managerial and supervision.
• The VBA can legally merge and divide (a regular NV cannot), either locally or cross-border.
• The VBA can be converted into a regular corporation (NV) or a foreign entity, if the foreign entity is similar to an AVV, NV or VBA.

An Aruba exempt company (AVV), a corporation (NV), or a foreign entity similar to an AVV, NV or VBA, can convert itself in a VBA
Important to note is that the VBA’s financial statements will have to be deposited at the Chamber of Commerce. No person or entity can look into the financial statements without prior permission from the VBA.

Tax regime

The VBA is eligible for:

• The imputation payment regime (we refer to our “highlights imputation payment company”);
• The transparency regime (we refer to our “highlights transparency regime”);
• The tax exempt regime (we refer to our “highlights tax exempt company”);
• The fee zone regime (we refer to our “highlights free zone company”);
• Normal tax regime (we refer to our “highlights corporate income tax”).

Tax implications of merger, division, conversion, or transfer

• In case a VBA merges or divides (either locally or cross-border), converts into a foreign entity, or transfers its statutory seat abroad as per the State Ordinance Transfer of Statutory Seat Entities, the assets of the VBA will be revaluated to the fair market value, and the gain (hidden reserves, fiscal reserves, and goodwill) will be subject to 28% corporate income tax.
• In case of a conversion of an AVV or NV into a VBA, or a VBA into an NV, no tax implications arise. This would however be different if afterwards the tax regime would be changed.
• In case of a conversion of a foreign entity into a VBA or a transfer of the statutory seat of a foreign entity to Aruba, the VBA will receive a step-up for corporate income tax and dividend withholding tax purposes.

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Directors’ liability – for what can the director be held responsible?

All members of the Board of Directors can be held severally liable for wage tax, corporate income tax, room tax, gaming tax, dividend withholding tax, turnover tax (BBO) and social security premiums (AOV, AWW and AZV) of the company. Please note a director cannot be held liable for debts the company itself is held liable for.

Directors’ liability – how and when do I notify the SIAD?

The SIAD will issue a special form (“melding betalingsproblemen”) that can be used to notify the SIAD of the inability to pay the taxes due. This form should be filed within two weeks after:

Taxes paid via return (e.g. wage tax and social security premiums, BBO and dividend withholding tax): 15th of the month in which the taxes were ultimately due. For example, should the payroll taxes for the month June 2008 not be paid ultimately July 15, 2008, within two weeks after July 15, 2008 the notification should be filed.

Taxes via assessment (e.g. corporate income tax): 2 months after the date of the assessment. For example, if an assessment is issued on July 25, 2008, the corporate income tax should be paid ultimately September 25, 2008 and the notification of the inability to pay should be filed within two weeks after September 25, 2008.

You can also consider asking for an extension of payment of the taxes due or close a payment regulation with the SIAD. Both the notification and the request for an extension of payment can be filed at the same time.

Directors’ liability – do I have to notify each time?

We understand that the SIAD will allow you to file one notification, which is valid until the time you pay the taxes due on time. After that, you will have to file another notification should you again be unable to pay the taxes due.

Please note that having filed the notification, does not exonerate you from filing the (monthly) returns. You will have to file the returns timely each period in order to avoid penalties.

Directors’ liability – what is the inability to pay?

The inability to pay can be defined as not paying the taxes due in time, regardless of why the taxes cannot be paid. You will have to explain to the SIAD however why you are unable to pay. It will most likely not suffice to mention “cash flow issues”.

Directors’ liability – what if the notification is filed too late?

In that case the directors are assumed to have mismanaged the company. You will have to make credible that not filing the notification in time was not your fault, and you will have to make credible that you have not mismanaged the company. Especially this last item may be difficult to prove, since mismanagement can be described as reckless decisions, irresponsible investments or already knowing that the buyer of your products or services will not pay (on time). Any actions taken in the last five years prior to the notification are of importance in determining if mismanagement took place. External factors, like bankruptcy of your biggest client or this client going to a competitor, may exonerate you from “mismanaging” the company.

Contractors’ liability – for what can the contractor be held liable?

A contractor can be held liable for all wage tax and social security premiums of the persons the subcontractor (and subsequent subcontractors) employed to execute the specific tangible work. This liability includes any interest or collection costs, but no penalties.

Contractors’ liability – what is a specific tangible work?

A tangible work can be defined as construction of real estate, roads and repair of tangible assets. However, also certain services are included, such as typing, wrapping of goods and cleaning. If the services provided are the result of intellectual efforts, no tangible work is deemed to exist.

Contractors’ liability – when is a contractor not liable?

In case the subcontractor performs the tangible work, for more than 50% of the man-hours required, in his own company, then the contractor cannot be held liable. An example could be a printing company. If the printing takes place in his company for more than 50% of the required man-hours, the contractors’ liability will not be applicable.

Another exception is when a purchase agreement is closed for an existing asset, but the seller will perform additional services regarding these assets. An example could be a contractor buying doors at a supplier, where the supplier agrees that he will also install the doors. Installing the doors implies that the supplier is a subcontractor of the contractor, but because the installation is insignificant compared to sale of the doors, the contractor cannot be held liable for wage tax or social security premiums not paid by the supplier of the doors.

Contractors’ liability – how can I mitigate my liability?

There may be several ways to limit your liability. First, you may ask a subcontractor to provide a statement of payment behavior. This statement can be requested at the SIAD and will be issued within 14 days. Although this statement does not imply you cannot be held liable anymore, it does assist in determining if the subcontractor met its obligations in the past (and is likely to continue to do so).

Secondly, you may include a clause in your contract that prohibits the subcontractor to subcontract part of the work to another subcontractor (the so called “kettingbeding”). This clause does not prevent you from possibly being held liable, but it keeps control on your possible liability.

Thirdly, you can keep a project administration showing e.g. how many and which employees of the subcontractor work each day, for how long, what they do, where they perform the work, and such. Based on your experience of the remuneration of such employees, you can then keep a shadow payroll of the subcontractor or even execute the payroll on behalf of your subcontractor. This administration may mitigate your liability and, combined with the “escrow account” (in Dutch: “vrijwaringsrekening”), can minimize your risks of being held liable.

Finally, the SIAD will open an “escrow account” per request of a subcontractor, which request must be accompanied by the agreement between the contractor and the subcontractor. Please note that the request may be denied. The subcontractor will have to request the use of this escrow account per project. The SIAD and the subcontractor will close an agreement (per project), which agreement will obtain a specific assigned number. On this account, the contractor can deposit funds from which the wage tax and social security premiums due by the subcontractor can be paid. The contractor will have to specify the assigned number and other invoice details when depositing the funds, so the SIAD can keep track of the payments.

Using this escrow account, combined with a good project administration, will minimize your contractors’ liability.

Liability for hiring employees – for what can one be held liable?

The individual or entity hiring the employee (“borrower”) will be held jointly and severally liable for all wage tax and social security premiums owed by the entity hiring out the employees (“lender”) for the employees hired by the borrower and who are under his/her supervision or management. This liability includes any interest or collection costs, but no penalties.

Liability for hiring employees – what is management or supervision?

Management or supervision will depend on the facts and circumstances. Of importance may be (i) the wordings of the contract (i.e. is the lender hired to perform certain services or are specific employees of lender hired), (ii) whether or not the employee of the lender has to report to the borrower, (iii) is the work borrower hires from lender (part of) his core business, and/or (iv) if the employee of the lender can easily be replaced by another without the borrower objecting.

Liability for hiring employees – how can I mitigate my liability?

A similar situation applies for the borrower of employees as for contractors. We refer to the above.

Other – can I be exonerated from the contractors’ or hiring of employees liability?

Under certain conditions, one cannot be held liable. These circumstances are for example a sudden and severe recession in the economy, or natural disasters. Such circumstances must therefore be out of the control of both the contractor/ borrower and the subcontractor/ lender.

Other – can the different liabilities coincide?

Yes, they can.

For example, if a subcontractor hires employees to execute a tangible work, the subcontractor can be regarded as a borrower of employees and can be held liable (hiring of employees liability) for the wage tax and social security premiums of these employees. If the subcontractor, after being held liable, does not pay the tax due, the contractor can be held liable (contractors’ liability) for these taxes as well.

Another example is the contractor who hires a subcontractor to execute a tangible work, and the subcontractor does not pay the wage tax and social security premiums. In that case, both the contractor (contractors’ liability) and the directors of the subcontractor (directors’ liability) can be held liable.

In principle, the SIAD will first try to collect the taxes due from the directors before holding the contractor/ borrower liable. Under conditions, the SIAD has the authority to go to the contractor/ borrower directly.

Other – can I recover the amounts I paid because I have been held liable?

Yes, you can. The general rule is that you must recover the amount at the tax payer itself first, and perhaps even its directors. It is advisable to also file an attachment at the SIAD, so that should any refund be provided to the tax payer, you may recover (part of) the amount you paid. If more than one individual or entity can be held jointly and severally liable, you can recover a pro rata part at these individuals or entities. Your lawyer can assist you with the (details of the) recovery process.

In the above we have highlighted some frequently asked questions related to the coming State Ordinances regarding the liability for taxes and premiums, as well as the collection of taxes. Please note that no action should be taken on the basis of information contained in this memorandum prior to consulting your tax advisor.

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Wage tax is levied on the employment income of an individual, and is a pre-levy to the individual income tax. The social security is levied in connection with the wage tax (we refer to our “highlights social security”). The wage tax has to be withheld (and paid) by the withholding agent, being:

1. In case of a resident, the employer (either entity or individual).
2. In case of a non-resident entity, the permanent establishment in Aruba of the non-resident entity. For the determination if a permanent establishment exists, the corporate income tax law will be used.
3. In the case that a non-resident entity is appointed by the tax authorities, the non-resident entity.

Wage

The definition of wage is broad and includes all remunerations (in cash or in kind) that are received because of an (former) employment. Excluded from wage are e.g. the employers’ part of the social premiums and pension premiums (if certain conditions are met), as well as medical insurance premiums paid by the employer on behalf of the employee.

Tax rate

The wage tax rate is equal to the individual income tax rate and is a progressive system. As of an income of AWG 20,252 (USD 11,314) individual income tax is due. The maximum rate of 58.95% is reached at an income of AWG 296,956 (USD 165,897).

Fringe benefits

Some benefits (either in kind or cash) provided by the employer however are tax exempt or taxable against a fixed amount/rate. These benefits include:

• Company car. In that case 15% of the catalogue value of the car is considered to be wage in kind.
• Car and representation allowance. The following amounts can be provided tax exempt to certain categories of employees:

• Meals. If meals are provided by the employer free of charge, the wage in kind amounts to AWG 5 (USD 2.81) for a warm meal and AWG 2.50 (USD 1.41) for every other meal.
• Housing. If the employer provides the employee with free housing, the wage in kind is set at 8% of the fair market value of the house, with a maximum of 15% of the annual gross income of the employee. If the house is furnished, the percentage changes to 10% or 20%.
• Own products. If an employee is supplied with products the employer produces, the integral cost of the product is considered to be wage in kind, in as far as the consumption is normal.
• Anniversary allowance. If an employee has 10 (or 12.5), 25, 35 (or 40) years of service, the employer may provide ½ (in case of 10 or 12.5 years of service) or 1 (all other cases) monthly gross salary tax exempt.
• Gift. A gift with a maximum value of AWG 200 (USD 112) can be provided tax exempt annually .
• Telephone allowance. The employer can provide AWG 1,680 (USD 943.82) to the employee per year for reimbursement of telephone costs, of which AWG 480 (USD 269.66) will be considered taxable income. Any reimbursement exceeding AWG 1,680 (USD 943.82) is taxable.

Please note that each fixed allowance mentioned above must be substantiated, which substantiation must meet the following conditions:

• The fixed allowance must reimburse the necessary employment costs made by the employee.
• The employer must have the following information regarding the benefits in his administration:
  • An overview regarding the (periodic) costs made by the employees relating to the employment, for which the employer provides the (tax exempt) benefit. Please bear in mind that costs can no longer be reimbursed on a declaration basis if they are included in the this overview!
  • Granting the fringe benefits to (certain) employees must be documented.

Expatriates

If expatriates are hired, the employer can:

• Reimburse the airline ticket of the employee and his/her family tax exempt, as well as the costs related to shipping the household of the employee.
• Provide tax exempt hotel accommodation, lodging and car rental, for a maximum of 2 months.
• Provide a tax exempt refurbishment allowance of two times the monthly gross salary, with a maximum of AWG 15,000 (USD 8,427).
• Provide one free ticket per year to the  country of origin, for a maximum of 5 years.

Deemed employments

The law deems certain individuals to be (fictitious) employees, i.e.

1. supervisory board members
2. a child older than 14 years who works in the enterprise of his/her parents
3. individuals who work on a commission basis, if they do not conduct an enterprise
4. resident and non-resident artists and sportsmen
5. trainees
6. contractors and his/her assistants for the execution of specific tangible jobs, unless the contractor is an NV or an entrepreneur and

Permanent establishment definition

The wage tax has the same definition of a permanent establishment as the corporate income tax. We refer to our “highlights corporate income tax”. If a permanent establishment is deemed present, the foreign enterprise will have to withhold wage tax and social security premiums on the remunerations paid to its employees working in Aruba.

Identification obligations employee & anonymity rate

The tax authorities can impose penalties if the employer fails to have the following information in his administration:

• The name, address, age, civil status, personal tax pin number, as well as a copy of an official identification document, which original has to be shown to the employer, of each employee. Please note an employee must provide this information.
• To whom the wages were paid to or how much was paid to each employee.

Failure to comply with any of the above will result in application of the anonymity rate. The anonymity rate is set on the maximum rate of Rate category II (2008: 58.95%) on the relevant employees’ wages, excluded deductions like social security and pension premiums.

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Subject to turnover tax (“belasting op bedrijfsomzetten”), hereinafter: BBO, are entrepreneurs that in the course of their enterprise supply goods or render services in Aruba. The taxable base consists of all remunerations (in cash or in kind) received by the entrepreneur for the supply of goods or the rendering of services. The rate is, as per January 1, 2010, set on 1.5% (before: 3%).

Transitional regulation regarding rate change

As per January 1, 2010, the rate has been decreased from 3% to 1.5%. For entrepreneurs using an invoice/accrual based system for the BBO, the BBO is due on the date of issuing the invoice. In case of goods sold and/or services rendered in December 2009, 1.5% BBO is due and should be paid no later than January 15, 2010.

For cash based entrepreneurs, the change of the normal BBO rate per January 1, 2010 of 1.5% implies that on all receipts as of January 1, 2010, regardless of the year in which the good was sold or the service was rendered, 1.5% BBO is due.

Export

Export of goods to buyers residing or situated outside of Aruba will be subject to a 1% BBO (in stead of 3%) as long as the entrepreneur can make credible that the sold goods are send or transported by him to a destination outside of Aruba. Additional regulations may follow.

Entrepreneur

An entrepreneur is defined as any person or entity that conducts an enterprise. Therefore even a company established abroad is an entrepreneur for BBO purposes on Aruba.

Goods and services

Goods are defined as all physical objects as stipulated in the Aruba civil code, but also include water, gas and electricity.

Services are defined as all activities, except the supply of a good, rendered against a payment.

Payment

All income received that relates to the supply of a good or the rendering of a service is considered a payment. Therefore the BBO charged on for example the supply of a good is also subject to BBO. If the payment received is not arm’s length or non-monetary, the taxable base is the fair market value of the good supplied or the service rendered. An exception is made for own products, for which the payment is determined on the cost of the good.

Supply of goods

Goods are in principle supplied at the moment of transfer of ownership via an agreement. There are some exceptions however, in which cases from a legal point of view no supply has taken place yet but for BBO purposes it has.

In case in connection with the supply the goods are shipped or transported, unless an installation supply is deemed present, the taxable event is there where the transportation of the good started. In all other cases the taxable event is there where the goods physically are. An example to illustrate. If X Inc., situated in the US, sells a water scooter to an Aruba hotel, X Inc. is not subject to BBO since the transportation of the water scooter (in connection with the supply) starts in the US.

Rendering of services

If services are rendered, the taxable event is there where the entrepreneur is established or has a permanent establishment from which the services are rendered.

Exceptions are made for services related to:

• Real estate and movable property, which are taxable there where the real estate or movable property is located.
• Transportation of goods and persons (including loading and offloading), movable property, culture, sports, science, education, entertainment or similar events, which are taxable there where the services are physically rendered.

Fiscal unity (group tax relief)

If the parent company owns 100% of the shares in the subsidiary, upon request the turnover generated with intercompany transactions is exempt from BBO.

Cash or invoice (accrual) based

The BBO is levied on a cash basis. Upon request however, an entrepreneur may opt for an invoice (accrual) based BBO. The tax authorities will have to approve the request however.

Requirements invoices and cash register receipts

All invoices must (i) be numbered consecutively, (ii) be dated, (iii) mention the date on which the goods are delivered or the service is performed, (iv) mention the entrepreneurs’ name, address and personal identification number for tax purposes (“tax PIN”), (v) mention the name and address of the buyer of the goods or recipient of the services, (vi) mention a description of the goods sold and delivered and/or the services rendered, including quantities involved and (vii) mention the consideration owed.

The same requirements are also applicable to cash register receipts, with the exception of the listing of the name and address of the buyer.

Exemptions

Exempt from BBO is the turnover generated with amongst others (please note this list is not complete):

• Selling of real estate, in as far as transfer tax is due.
• Prescription medicines, including certain medical aids.
• The turnover of WEB and Elmar, in as far as it concerns generating and supplying water and/or electricity.
• Renting out of apartments or hotel rooms, in as far as room tax is due.
• Providing the opportunity to gamble, in as far as gaming tax is due.
• International transportation of goods and persons via ships or airplanes.
• Renting out of real estate that is used as an own dwelling.
• Investment income, like interest and dividends.
• Certain bank transactions.
• Insurances and the services performed by intermediaries of insurance companies.
• Transitional expenses, in as far as the supply of the good or rendering of the service is done on behalf of and for risk & account of another entrepreneur.
• Export of goods and services by a company established in the free zone (we refer to our “highlights free zone company”).

Can WTS assist you further?

Should you be interested in more information or should you have plans to start a business on Aruba, our team of professionals is there to assist you with any questions you may have. You can reach us via the above mentioned contact information.

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Aruba exempt companies (AVV), corporations (NV), and the per January 1, 2009 newly introduced limited liability company (VBA), can opt to become transparent, i.e. for corporate income tax, individual income tax and dividend withholding tax purposes the AVV, NV, or VBA is treated as a partnership. In case the AVV, NV, and VBA has foreign shareholders, the shareholders will only be subject to Aruba taxes if the shareholders have a permanent establishment or permanent representative.

Permanent establishment or permanent representative

A permanent establishment is deemed present in case of (i) a permanent representative or (ii) a foreign enterprise which builds, installs, maintains, cleans or repairs capital assets (whether movable or immovable) on Aruba for more than 30 days. Included in these 30 days are e.g. the technical preparation and cleaning up of the site. If the activities on Aruba are less than 30 days, the commentary to article 5, paragraph 3, OECD model convention will be used to determine if a permanent establishment is present.

Formal requirements

• The AVV/ NV/VBA must opt for the transparent status within one month after its incorporation. It is not possible for an existing AVV, NV or VBA to opt for the transparent status.
• Within six months after the end of the financial year, the shareholders of the AVV, NV, or VBA must be disclosed to the tax authorities. Special forms exist for the notification, which notification should be accompanied by a balance sheet and profit & loss account.

Transparency and turnover tax / dividend withholding tax

Transactions between the transparent entity and its shareholders are in principle subject to turnover tax.
Dividend withholding tax is, because of the treatment as a partnership, not applicable.

Country of residence shareholder

For the transparent regime to be fully effective, it is essential that the country of residence of the shareholder does not tax profits until realized. This because in the absence of a taxable presence on Aruba, Aruba does not levy taxes, while the shareholder does not pay taxes either because no income (in the form of a dividend or capital gain) has been realized.

Important points of attention

Changing the transparent regime to the normal regime will result in a corporate income tax rate of 42% (150% of the normal tax rate of 28%). The transparent status is therefore a permanent regime choice.
If the shares in a transparent entity are sold, for corporate income tax, individual income tax, and dividend withholding tax purposes, the assets of the transparent entity are sold. Any selling gain will be subject to these taxes (if any).

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Social security premiums are levied in connection with the wage tax. Aruba knows 5 different social security taxes:

1. Old age pension and widow & orphans pension insurance.
2. General health insurance.
3. Sickness insurance.
4. Accident insurance.
5. Cessantia.

AOV/AWW (old age pension and widow & orphans pension insurance)

The total premium amounts to 13.5%, which premiums are due up to a maximum wage of AWG 54,600 (USD 30,503). The total premium is in principle divided between the employer (9.5%) and the employee (4%). The employer can however pay the employees’ part of the premiums tax exempt. The AOV/AWW premiums are only due until the employee reaches the age of 60.

AZV (general health insurance)

The total premium amounts to 9.5%, which premiums are due up to a maximum wage of AWG 85,000 (USD 47,486). The total premium is in principle divided between the employer (7.9%) and the employee (1.6%). The employer can however pay the employees’ part of the premiums tax exempt.

SVb (sickness insurance)

This premium is only paid by the employer. The premium amounts to 2.65%, which premiums are due up to a maximum wage of AWG 52,728 (USD 29,622).

SVb (accident insurance)

This premium is also only paid by the employer. The premium varies between 0.25% and 2.5%, depending on the risk of the work performed and up to a maximum wage of AWG 52,728 (USD 29,622).

SVb (cessantia insurance)

This premium is also only paid by the employer. The premiums amounts to AWG 40 (USD 22.47) per employee per year. The cessantia is in principle paid out upon dismissal of the employee by the employer. If the dismissal is due to acts of the employee, no cessantia is due.

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Aruba’s penalty system is quite strict. The penalties can be divided into two categories:

• Omissions.
• Gross negligence or intent.

Omissions

The tax authorities can impose penalties for not filing your return (on time) and for not, not timely, or only partially paying the amounts due. These penalties can “cumulate”. The maximum penalties (which will depend on the number of omissions) are:

Assessment taxes (e.g. corporate income tax and individual income tax):

• Not filing your return (on time): AWG 10,000

Filed return taxes (e.g. payroll taxes, turnover tax and dividend withholding tax):

• Not filing your return (on time): AWG 500
• Not paying on time: AWG 5,000
• Not or partially paying: AWG 10,000

If the withholding agent (i) does not provide the employee with a wage tax card or (ii) fails to have the proper employee documentation in his/her administration, a penalty with a maximum of AWG 10,000 can be imposed.

Gross negligence or intent

According to the Aruba penalty policy, no penalty will be levied in case of less than gross negligence or if an arguable position exists. The penalty policy defines gross negligence as an omission, attributable to the tax payer. Gross negligence is deemed present if the tax payer should or could have known that his/her behavior could result in levying or paying less taxes than otherwise would have been the case. The penalty amounts to 25% of the additional tax due. Intent is defined as knowingly and deliberately doing or omitting something, resulting in not or not within the stipulated period levying or paying taxes. Conditional intent is defined as knowingly and deliberately accepting the chance that doing or omitting something results in not (timely) levying or paying taxes. The penalty amounts to 50% of the additional tax due. A penalty of 100% of the additional tax due can be levied in case of e.g. repetition, fraud or substantial amounts not being levied or paid. The burden of proof for these aggravating circumstances lies at the tax authorities.

Penalties are not tax deductible

Penalties paid are not tax deductible for corporate income tax or individual income tax purposes.

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An imputation payment company (hereinafter: IPC) is a corporation (NV) or a per January 1, 2009 newly introduced limited liability company (VBA) which is subject to the normal corporate income tax rate of 28%. However, upon distribution of a dividend, the shareholder can claim an imputation payment amounting to 26/72 * dividend distributed. This implies that the profit of the IPC is, on a shareholders’ level, subject to an effective corporate income tax rate of 2%. Together with the dividend withholding tax, the total effective tax rate over the profit of the IPC, on a shareholders’ level, varies between 6.9% and 11.8%. The actual effective rate depends on (i) whether the shareholder is directly or indirectly listed at a qualified stock exchange or (ii) the country of residence of the shareholder.

An example to illustrate

The IPC intends to work as follows:

Because a dividend must be distributed for the imputation payment to be claimed, often an intermediary Aruba holding is used. This has no immediate dividend withholding tax effects (due to the participation exemption; we refer to our highlights dividend withholding tax), but the imputation payment can be claimed.

Requirements for becoming IPC

The IPC regime is open to NVs or VBAs which:

• Perform only qualifying activities in Aruba.
• Have at least one Aruba resident individual as managing director.
• Meet the following statutory requirements:
  • A shareholders register exists in which the names of the shareholders are registered.
  • The financial statements will be drawn up in accordance with internationally accepted principles and a qualified (group of) independent certified public accountant(s) must perform an audit. An exception to the audit requirement exists when the purchase value of the assets is less than AWG 1,000,000 (USD 561,798) and the net turnover is less than AWG 2,000,000 (USD 1,123,596).

Board of managing directors:

• Notifies the tax authorities before the financial year as of which the IPC status takes effect, that the shareholder(s) will claim the imputation payment when a dividend over that financial year will be distributed.
• Asks an independent (group of) certified public accountant(s) to provide an opinion regarding compliance with respect to the qualifying activities of the IPC, an Aruba resident individual being a board member, that the shares are by name and that the shares are registered in a shareholders register. This opinion will have to be sent to the tax authorities.

Besides the requirements the IPC must adhere to, the shareholders must:

• Have legal and beneficial ownership of the shares in the IPC for at least an uninterrupted period of 12 months. Prior to this period, the shareholder(s) will not be granted the imputation payment.
• File a request at the tax authorities to claim the imputation payment over a certain dividend distribution. This request must be accompanied by various documents, such as the (final) corporate income tax assessment over that year, proof of payment of the amounts paid, the (preliminary) financial statements, and such.

Activities of the IPC

The activities of the IPC are restricted to the following:

• Quality hotels, implying (i) a hotel license must be present, (ii) the hotel must be operated for its own risk and account and (iii) a revenue per available room in the financial year should average AWG 354 (USD 200).
• Shipping enterprises.
• Aviation enterprises.
• Developing, acquiring, holding, maintaining and licensing of intellectual and industrial ownership rights, similar rights and usage rights.
• Insuring special entrepreneurial risks (captive insurance).
• Holding, if the entities in which the shares are held are subject to a tax rate of at least 14%.
• Financing (not being a credit institution) of enterprises and entities.
• Investments, provided no funds are put at the disposal of related entities or invested in real estate.

It is essential that all activities that the IPC performs qualify. Otherwise, the shareholder(s) may lose their claim on the imputation payment and the profit of the IPC is subject to the normal corporate income tax rate of 28%.

Change from normal NV to IPC

It is possible for a normal NV to become an IPC. The most important requirement in that case, beside the required changes in the articles of incorporation, is that on the moment prior to becoming an IPC (usually the last day of the financial year) all assets must be revaluated to their commercial book value. This revaluation profit is taxable against the normal corporate income tax rate of 28%. The tax authorities will keep a deferred claim on the difference between the fair market value (including goodwill) of the assets and the commercial book value, which claim can only be effectuated by the tax authorities in case the assets of the IPC are sold.

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If an individual is considered to be a resident of Aruba – residency to be determined by the circumstances – the individual is subject to individual income tax on his world-wide income. If the individual conducts an enterprise, different regulations apply to determine the taxable income, which regulations are similar to the corporate income tax (we refer to our “highlights corporate income tax”).

A non-resident of Aruba is only subject to individual income tax on Aruba over certain sources of income.

Sources of income non-resident

A non-resident is subject to Aruba income tax for income derived from amongst others:

• Income from employment performed on Aruba.
• Real estate situated in Aruba.
• Salary received as a managing director or supervisory board member of an Aruba company.
• Substantial interest.

It is important to note that a non-resident individual is subject to the individual income tax as soon as he/she works 1 day or more on Aruba.

Tax rate

The Aruba individual income tax is a progressive system. As of an income of AWG 20,252 (USD 11,314) individual income tax is due. The maximum rate of 58.95% is reached at an income of AWG 296,956 (USD 165,897).

Substantial interest

A substantial interest is deemed present if an individual directly or indirectly owns or has owned in the last five years – alone or together with his relatives in the second line – at least 25% of the share capital of a company. Income and capital gains received from a substantial interest are taxable against an individual income tax rate of 25%. The capital gain is calculated by the selling price minus the price paid for the shares. The selling price of the shares has to be in accordance with their fair market value, otherwise the tax authorities can make the adjustment to the fair market value.

If substantial interest shares are owned in:

• A non-Aruban entity and the tax payer emigrates; or
• An Aruba entity, the tax payer emigrates and the factual place of management of the Aruba entity is transferred outside of Aruba; or
• The tax payer pass away and the heir(s) are not residents of Aruba,

such events are considered a fictitious sale of substantial interest shares and 25% individual income tax is due on the difference between the fair market value and the price paid for the shares. Since no actual sale has taken place, no cash may be available to pay the tax due.

Deductible amounts

Employment costs can be deducted based on the standard deduction of 3% of the gross income with a maximum of AWG 1,500 (USD 843). The actual employment costs cannot be deducted.

Premiums for life insurances or annuities (except for qualifying pension plans) can be deducted up to a maximum of AWG 5,000 (USD 2,809).

A maximum amount of AWG 3,360 (USD 1,888) can be deducted for payments made to a qualified savings plan.

Others

Gifts/ donations are only tax deductible if made to certain (to be announced) institutions, with a maximum of AWG 10,000 per book year.
Penalties paid are not tax deductible for individual income tax purposes.

Special rate

The individual income tax law provides for a special 25% rate for:

• dividends and imputation payments

• gains derived from the sale of a substantial interest

• income received for damage payments, dismissal or other income substituting payment.

Interest income tax exempt

Interest received from deposits at qualifying institutions (i.e. institutions in Aruba or abroad which are subject to supervision) are exempt from individual income tax.

Entrepreneurs deduction

Enterprises, not being a corporate legal entity, will receive a deduction of AWG 2,400 (USD 1,348) on their profit, i.e. the first AWG 2,400 profit is tax exempt.

Invoice requirements

All invoices must (i) be numbered consecutively, (ii) be dated, (iii) mention the date on which the goods are delivered or the service is performed, (iv) mention the entrepreneurs’ name, address and personal identification number for tax purposes (“tax PIN”), (v) mention the name and address of the buyer of the goods or recipient of the services, (vi) mention a description of the goods sold and delivered and/or the services rendered, including quantities involved and (vii) mention the consideration owed. The same requirements are also applicable to cash register receipts, with the exception of the listing of the name and address of the buyer.

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