On November 3rd, 2023, the Minister of Finance announced the abolishment of the tax regime facilitating the use of the so-called Tax-Exempt Company.
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This announcement was published in the National Gazette dated November 3rd, 2023, and includes the motives for the abolishment of this tax incentive, citing findings of the Forum on Harmful Tax Practices commissioned by the Organization for Economic Co-operation and Development (OECD), and the OECD international collaboration project to end tax avoidance “Addressing Base Erosion and Profit Shifting”, also referred to as BEPS.
The tax regime explained
In the Profit tax Ordinance and the Income tax Ordinance, reference is made to the Tax-Exempt Company (in Dutch: “Vrijgestelde vennootschap”). The legislation allows for a company to apply for the Tax-Exempt status for Profit tax purposes, provided that it exclusively engages in shareholding, financing, and licensing activities.
Qualifying companies would submit a formal written request to the Tax Administration and obtain the Tax-Exempt status.
The Tax-Exempt companies would still be required to submit Profit tax declarations annually, but would remain exempted from Profit tax (currently at 34.5%), if all conditions are met.
For personal income tax purposes, the actual dividends received by shareholders of a Tax-Exempt Company may be disregarded, as long as a deemed income of 4% is declared.
Per findings of the (international) Forum on Harmful Tax Practices the tax regime for Tax-Exempt Companies in its current form allowed for harmful tax practices when used by foreigners. Countries that would allow such harmful tax practices are blacklisted by the OECD.
Announcement
Per decree published on November 3rd, 2023, the Minister of Finance, announced that following commitments made by the Government of Sint Maarten towards the OECD, the tax regime for Tax-Exempt companies will be abolished. The legislation including the required amendments will be submitted to parliament soon.
In anticipation of the new legislation, requests for the Tax-Exempt status shall not be processed by the Tax Administration with immediate effect.
The new legislation would include a transition period for companies that have obtained the Tax-Exempt status prior to November 3rd, 2023. These companies will be granted a transition period up to December 31st, 2024. Further details of the transition rules were not included in the announcement.
Alternative structuring
The abolishment of this tax regime can have significant impact for dividend income declared by shareholders of Tax-Exempt Companies. Furthermore, it should be verified if the assets currently held by the Tax-Exempt Company can be held by another legal entity without unnecessary tax exposure.
Key Contact
Quincy Lont