Aruba: Domestic Corporate Taxation
Scope of Profits Tax
In 1999, the Parliament of Aruba passed new tax legislation known as The New Fiscal Regime (NFR) which came into effect on 1st July 2003.
Under the NFR Aruba in principle levies a tax on profits earned by, among others, corporate entities resident in Aruba and profits generated by non-resident foreign companies from an enterprise carried out through a permanent establishment located in Aruba. Profits tax is imposed on the world-wide income of all corporations resident in Aruba, which means, all those corporations having their place of incorporation in the jurisdiction. Foreign companies having their management and control in the jurisdiction are also subject to the tax, as are branches of foreign companies in respect of their local income.
The NFR significantly broadened the then existing participation exemption by eliminating the difference in treatment between domestic and qualifying foreign participations. Pursuant to the participation exemption, income (including dividend income and capital gains realized on alienation of the shares) derived by an Aruba company from a qualifying participation is exempt from taxation, provided that the shares are not held merely as a portfolio investment and the company concerned is subject to tax on income. Under this participation exemption, expenses that are connected with investment in a participation are not tax deductible.
For purposes of the participation exemption, a 'participation' is defined as (i) any interest in shares or certificates of participation in an entity resident in Aruba, and (ii) any interest in shares or certificates of participation in a company resident outside of Aruba. With regard to the applicability of the participation exemption, neither a specific holding period nor a minimum participation is required.
The participation exemption also applies to any interest in shares or certificates of participation in a so-called 'imputation payment company' (IPC). However, an IPC is excluded from applying the participation exemption to income it receives from its shareholdings.
Resident and non-resident shareholders of an IPC (a qualifying limited liability company) are entitled to an imputation payment equal to 26/72 of formal dividend distributions if certain strict conditions are met. Both corporate and individual qualifying shareholders may claim an imputation payment. The imputation payment is itself subject to the dividend withholding tax. The arithmetic is complicated, but the result is an effective profit tax rate of 2% for corporations (against the mainstream rate of profits tax of 28%).
The conditions for qualification as an IPC include:
- engaging in one of the listed activities e.g. hotel exploitation, holding, finance, insurance, leasing, licensing, music/film industry and aviation, whether carried out onshore or offshore;
- submitting a written notice to the tax inspector stating that the shareholder wishes to avail itself of the imputation payment facility;
- undertaking a statutorily prescribed full audit of the financial statements;
- obtaining certification from a qualified expert that the company is in compliance with certain stated conditions; and
- having at least one Aruba resident individual on the board of directors.
For the shareholder, the conditions which must be met to benefit from the imputation payment facility include the filing of a written request to receive the imputation payment within six months of the end of the financial year in which the dividend was made payable.