Aruba exempt companies (AVV), corporations (NV), and the 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 taxable presence on Aruba via either a permanent establishment or a 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 fiction does not apply, the commentary to article 5, paragraph 3, OECD model convention will be used to determine if a permanent establishment is present. If a permanent establishment or permanent representative is (deemed) present, the corporate income tax rate on the profits is 25% (2007-2015: 28%).
- Formalities. 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. Furthermore, 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. Transactions between the transparent entity and its shareholders are in principle subject to turnover taxes (refer to turnover taxes), unless the shareholder is established in Aruba and holds 100% of the shares in the transparent entity.
- Transparency and dividend withholding tax. Due to the transparency, dividend distributions by the transparent entity are not subject to Aruba dividend withholding tax, since the profits are already (by fiction) allocated to the shareholder.
- 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 yet.
- Disadvantages transparency. Changing the transparent regime to the normal regime will result in a corporate income tax rate of 37.5% (150% of the normal tax rate of 25%). The transparency regime 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 share transaction is disregarded and instead the assets of the transparent entity are deemed to have been sold. Any selling gain will be subject to corporate income tax or individual income tax against the normal rates applicable.
The above is not intended to constitute, nor should it be relied upon, to replace any professional advice. No action should be taken without first consulting your tax advisor. The above reflects the law effective July 1, 2018.