Aruba Offshore Legal and Tax Regimes

The NFR contains a specific exemption for the Aruba Exempt Corporation (AEC), although the exemption is disapplied in the event that the AEC generates profits from illegal activities, as defined under Aruba criminal law. In such case all of the AEC's profits earned from the day of incorporation will be liable to profit tax at the rate of 35% (reduced to 28% as of 1st January, 2007).

However, as from January 1, 2006, Aruba has introduced a revised tax regime for these companies, which offers three possibilities to AEC companies:

The AEC can continue its activities as a fully taxed corporation, subject to tax at the normal rate.
An AEC can remain exempt if it acts as a holding or financing company (but not as a bank) with foreign subsidiaries subject to a profit tax of at least 17.5 percent on at least 95% of dividends. Investment activities can also remain exempt, excluding real estate. Licensing of intellectual property is also permitted.
An AEC can elect to be a pass-through entity. The income of a “pass-through AEC” would accrue directly to the AEC’s shareholder(s) and would be subject to tax at the shareholder level. When electing for transparency status an AEC has to disclose the identity of its shareholder(s) to the local tax authorities, and has to file its financial statements with the tax authorities in Aruba within six months of the financial year-end.

The NFR is intended to modernize Aruba's fiscal legislation in line with generally accepted standards set by the Organization for Economic Cooperation and Development (OECD), and to allow it to conclude Double Tax Treaties with OECD countries. The government also wants to encourage increased investment and plans reductions in the effective personal and corporate income tax rates.

Prior to the NFR, in order to qualify for offshore status, an Aruban entity had to be wholly owned by non-residents, and its income had to arise outside the jurisdiction; non-financial offshore operations usually take the Aruban Exempt Corporation form. However, various business sectors have specially favourable taxation regimes which reflect their international nature. These special regimes are described in this section.

Aruba Legal Regime for Offshore Companies

Until recently, most offshore operations in Aruba took the form of an Aruban Exempt Corporation (Aruba Vrijgestelde Vennootschap), which until 2006 was exempt from the New Fiscal Regime.

Offshore financial institutions are obliged to use the NV form (Naamloze Vennootschap).

See Types of Company for the basic legal constitution of these two forms.

The formation process for an Aruban Exempt Corporation (AEC) was more straightforward than for an NV, and confidentiality was better. AECs did not have to prepare or file accounts, unless they opted to be 'pass-through' entities..

Aruba Tax Treatment of Offshore Companies

Along with the NFR, an imputation regime has been introduced which is open to entities that are engaged in listed activities e.g. hotel exploitation, holding, finance, insurance, leasing, licensing, music/film industry and aviation, whether carried out onshore or offshore. To obtain neutrality between onshore and offshore shareholders of these so-called Imputation Payment Companies (IPC), Aruba has opted for actually paying out the imputation credit directly to the shareholders.

From January 1, 2007, IPC's are subject to the standard income tax rate of 28% (reduced from 35%). Each qualifying dividend payment will entitle the shareholder of an IPC to an imputation payment of 33/65 of the dividend. Both the actual dividend payment and the imputation will be subject to a dividend tax of 10% (5% for quoted companies), which may result in a combined tax burden of 11.8% (or 6.9% if the 5% dividend tax applies).

It is not yet clear whether any of the sectoral incentive tax rates described below will continue in effect, other than through 'grandfathering' until 2007. See Domestic Corporate Taxes for further details of the IPC rules and the general principles of Aruban corporate taxation.

The taxation of Aruban companies is governed by the National Ordinance on Profit Tax; special taxation regimes used to apply to various different types of activity or company, as follows, providing all income was derived from external operations (advance rulings need to be obtained from the tax inspectorate):

Investment and Holding companies Income is taxed at 2.4% on the first Af 100,000 of net income and 3% on the balance. Capital gains are not taxed; but capital losses are not deductible.
Mutual Funds These are exempt from profits tax if they have either minimum net assets of $50m, at least fifty shareholders, and four local employees, or if they have minimum net assets of $300m and two local employees; otherwise the fund will be taxed on its net assets, giving a minimum charge to tax of $1,000 rising to a maximum charge of $10,000.
Trading companies The normal applicable rates of tax are 24% on the first Af 100,000 of net income and 30% thereafter; however it is usually possible to obtain a ruling from the Inspector of Taxes exempting 90% of income, which has the effect of reducing the rates to the usual offshore levels of 2.4% and 3%.
Banks Investment and interest income is taxed on the usual offshore basis at 2.4% and 3%; commission and fee income will suffer 24% and 30% unless a tax ruling can be obtained (normally possible).
Intellectual Property Holding companies If a tax ruling can be obtained, the effective tax rate for income from royalties, licenses, patents, copyrights, trademarks etc will be from 2.4% to 3%.
Insurance companies Foreign-owned captive and reinsurance companies not in receipt of treaty-related income benefit from a concession that deems their income to be Af 100,000, giving them a fixed tax rate of Af 2,400 annually.
Real Estate Holding companies These companies are not taxed on income derived from real estate (or subsidiaries wholly or predominantly engaged in owning real estate) outside Aruba.
Ocean Shipping and Aviation companies Substantial tax concessions are available depending on circumstances. ·

Domestic Low-tax Regimes: Companies targeted by a specific fiscal incentive regime with a view to either broadening the economic base of Aruba or stimulating exports are either exempt from corporate income tax or pay negligible rates for a predetermined period. Included in this category are companies involved in:

The construction of hotels or the development of fallow land: These companies are exempt from corporate income tax where the initial investment is not less than 1 million Aruba florins. In the case of hotels the exemption can be granted for a maximum period of 10 years whereas in the case of a developer of fallow land the period is at the discretion of the Government, and the following additional benefits apply:
- exemption from income tax on dividends paid out to shareholders, provided the dividends are paid within two years after the year in which the profit has been made;
- exemption from import duties on building and construction supplies for hotels, roads and infrastructure;
- exemption from corporate tax on profits derived from the sale of improved land and premises;
- exemption from real estate tax.
Non Traditional Manufacturing: These companies are exempt from corporate income tax for a period of 10 years provided that the initial investment is not less than 100,000 Aruba florins, and the following additional benefits apply:
- exemption from income tax on dividends paid out to shareholders, provided the dividends are paid within two years after the year the profit has been made;
- exemption from import duties on building supplies for premises;
- exemption from import duties on packing materials, machinery and equipment, raw materials, semimanufactured products and components, to be used in the production process;
- exemption from real estate tax.
Companies Located in the Free Zones: The Free Zone was created to boost exports and increase foreign exchange earnings. Characteristics of the Free Zone are as follows:
- The major attraction of operating in the Free Zone is the regime of special fiscal incentives which are granted for a maximum period of 10 years to companies operating within the zone and which include a corporate income tax rate of 2% on profits generated from all export sales and a waiver of import duties on all goods imported into Aruba for use in a manufacturing process which will result in a finished product for export
- The regime of special fiscal incentives is heavily biased towards exports with the consequence that although a company operating within the Free Zone can sell a maximum of 25% of its goods in Aruba, goods sold locally attract normal corporate income tax rates as well as import duty;
- There are a number of international agreements in place which increase the attractiveness of the Free Zone as a location in which to site a manufacturing operation. Under the Generalised System of Preferences primary, semi-manufactured and manufactured goods originating in Aruba gain either full free entry or entry at reduced import rates to the USA, EU, Australia, Canada, Japan, New Zealand and Norway;
- Since Holland is a member of the EU and Aruba is a part of Holland goods originating in Aruba which have been substantially transformed from imported materials and components can be exported free of any import duties and quotas to the single market. The European Union offers greater possibilities than those available under the Generalised System of Preferences;
- Aruba has been designated a beneficiary territory of the Caribbean Basin Economic Recovery Act 1983 the centerpiece of which program is duty free entry into the USA of a wide range of products grown, manufactured and directly imported from a beneficiary territory provided that at least 35% of the article's customs value is attributable to the beneficiary territory. Where the components originate in the USA the 35% criteria is even easier to satisfy and has led to a situation where goods which were once excluded (e.g. footwear, handbags and luggage) are now included..

Aruba Taxation of Foreign Employees of Offshore Operations

This section refers to the taxation of foreign employees of offshore operations, see Domestic Personal Taxes for the general principles of individual taxation in Aruba, which also apply to the resident employees of offshore entities.

Residence (and not nationality) is the criteria for determining when and how much personal income tax is to be levied. Although there is no difference in the rates of personal income tax payable by residents and non-residents alike, there is a substantial difference in the categories of income which are assessed to personal income tax with non-residents receiving considerably more favorable treatment. Thus although residents pay personal income tax on employment income received from an Aruba entity irrespective of whether the employment income relates to work done in Aruba or abroad, non-residents only pay personal income tax on that portion of the employment income which relates to work done in Aruba (unless by way of exception the employer is an Aruba public company).

Residents are assessed on all dividends received irrespective of their source whereas non-residents are only assessed to personal income tax on dividends received from Aruba onshore companies.

Aruba Exchange Control

There are no foreign exchange controls as such in Aruba, however foreign exchange transactions are reported to the Central Bank, and there a number of regulations concerning transfers of foreign exchange, plus a tax of 1.3% on many transfers (see Import of Foreign Capital).

Offshore NVs, Aruba Exempt Corporations, and Free Zone companies are all exempt from these regulations and the tax.

Aruba Offshore Activities

Under the NFR, the distinction between 'onshore' and 'offshore' activities is largely abolished, although until 2006 there was a statutory exemption for the Aruba Exempt Corporation, which is not allowed to trade in Aruba and must be wholly owned by non-residents. The prohibition on trading in Aruba does not mean that these entities cannot have their center of operations in the island or direct activities from there but it does mean that they can neither trade with locally based companies (except with other offshore entities) or individuals nor own real estate in Aruba.

Aruba Employment and Residence

A non-citizen who wishes to work in Aruba must obtain a work permit from the Directorate of Alien Integration, Policy and Admission (DIMAS), which will only be granted if no suitable local applicant is available. Applications must be filed by the potential employer who will bear the costs. The principal documents to be attached to the application include an official certificate from the police authorities in the country of origin certifying that the applicant has no serious criminal convictions, a medical certificate certifying that the applicant carries no contagious disease and has no mental illness, copies of job advertisements placed in local newspapers to which no suitable local applicants replied, certificates verifying the employee's qualifications and the contract of employment which must be in accordance with Aruba labor laws.

An application for a residence permit will normally be submitted at the same time as an application for a work permit and includes many of the same requirements. However where the applicant wants a residence permit without a work permit the chief requirement will be to prove that he will not become a burden to the state and that he has sufficient funds to support his stay. In order to satisfy this criteria the applicant will be required to provide satisfactory bank references.

Aruba The Netherlands Tax Treaty

Provisions under the NFR and a revised 'BRK' (tax treaty with the Netherlands) came into effect from July 1, 2003. They include:

dividends from a Dutch corporation to Aruba corporate shareholders, who own at least 25% of the shares in the Dutch corporation, will be exempted from Dutch dividend withholding tax, provided that the dividend is subject to Aruban tax at a rate of at least 8.3%.
the Dutch corporation will have to withhold 8.3% dividend withholding tax from the gross dividend. The 8.3% which has been withheld upon the dividend distribution in the Netherlands can be credited against tax in Aruba.
dividends and capital gains derived from shareholdings in a Netherlands corporation will be exempted from additional profit tax in Aruba provided that the shareholding amounts to at least 25% and that 8.3% Aruba tax is paid on the gross amount of dividends received.
dividends paid by Dutch corporations to Aruban corporations unable to take advantage of the participation exemption will be subject to 15% Dutch dividend withholding tax. Existing Aruban offshore corporations may elect for the new dividend treatment.
the activities of an exempted company (AEC) will be restricted to investments in debt instruments, securities and deposits
for Aruban coporations incorporated before June 30, 1999, subject to profit tax and having a book year which ends before 1st July 2002, the grandfathering rules with respect to the offshore regime will remain applicable until 2007 as long as the company continues to have substantial business.

ARUBA: OFFSHORE LEGAL AND TAX REGIMES