With this letter the Tax Authorities clarifies the positions taken in the actual decision, attended in the tax ruling decree regarding real Curaçao economic presence (substance) issued on 16 November 2023.
The Tax Authorities have been requested to confirm whether there is sufficient real economic presence in Curaçao, based on the article 1C, paragraph 2 of the Profit Tax Ordinance 1940 (hereafter: PTO). Based on mentioned article certain economic substance requirements must be met in Curaçao by entities that derive foreign income with an active business enterprise in Curaçao.
In order to elaborate on our assessment on this case, we present you the following facts and understandings of the case:
- The company X B.V. (hereafter: the company) was incorporated under the laws of and is established in Curaçao;
- The company is subject to the territorial onshore profit tax regime in Curaçao;
- The company is part of an international retail group of brokers that offers its clients the opportunity to trade in Contracts for Differences (CFDs) on various underlying assets, including currency pairs, metals, cryptocurrencies, energies and indices. The company does not provide services to residents of Curaçao and therefore only serves foreign clients;
- The shares in the company are held by two individuals residing outside of Curaçao;
- The company generates its income by charging a commission on each trade performed by its clients. The commission can be calculated as part of the trading volume or as part of the so- called spread, which is the difference between the buying and selling price at any given time;
- In connection with the aforementioned activities, the Central Bank of Curaçao and Sint Maarten (“CBCS”) issued a Securities, Intermediaries and Asset Management license to the company;
- The company is subject to the general supervision of the CBCS and obtained a foreign exchange license from the CBCS;
- The Board of Directors of the company consists of 2 local directors and 1 foreign director;
- The company leases an office space in Curaçao. The Office is approximately 60 m2 and will be used as the central area for the company’s employees and Local Directors to execute their responsibilities on behalf of the company.
In order to assess whether the company has real economic presence in Curaçao, according to the article 1C, paragraph 2, PTO, we have analyzed the following criteria:
- Having an active business enterprise in Curaçao
- Having a permanent establishment in Curaçao
- The Core Income Generating Activities of the company in Curaçao
- The management and employees of the company
- The actual local incurred operating costs (annually) of the company
We herewith elaborate on each of the above mentioned criteria separately as applicable in this case.
Having an active business enterprise
Based on article 4, paragraph 4, PTO, the taxable base for Curaçao profit tax purposes will be limited to income generated and attributable to a domestic business enterprise in Curaçao. Foreign income generated and attributable to an active business enterprise in Curaçao will be excluded from the taxable base for Curaçao profit tax purposes. Income that is not generated and attributable to an active business enterprise, the so-called passive income (royalty income, rent income), shall be deemed generated through domestic business enterprise and will therefore be included in the taxable base for Curaçao profit
tax purposes.
Guidance on the interpretation of carrying an active business enterprise can be found in the Dutch case law.
Based on the Dutch case law, the company is an active business enterprise, if the following elements are met:
- The company is an organization of capital and labor with the aim to be profitable by participating
in the course of trade; - This capital and labor can actively be used to influence the results that are achieved.
The company is considered an organization of capital and labor, due to the nature of their activities in trading, participating in the economic Marketplace with the intention to generate profits, having a local office space with management and employees in Curaçao, their overall investment having substantial risks incurred, spending significant time with their activities, with actual generated profits.
Having permanent establishment in Curaçao
Whether there is a permanent establishment in Curaçao must be assessed in this specific situation on the basis of the article 1, paragraph 5 through 11, PTO which is based on the article 5, paragraph 1 of the OECD Model Tax Convention (OECD Model). Based on aforementioned articles and the explanatory notes on the articles, the company is considered to have a permanent establishment if the following cumulative conditions are met:
- The company must have a ‘place of business’;
- The place of business must be ‘fixed’;
- The company must carry a business through this fixed place of business.
As a place of business can be considered, a branch, an office, a factory, a workshop, premises, facilities, or installations used for carrying business, a certain space at disposal (owned or not owned) for the business activities of the company. The company has an office space in Curaçao used as the central place to conduct its business activities. As mentioned this place of business should be fixed. This means there should be a certain permanency of this place located in Curaçao. This place should not be used temporarily. The office space of the company is permanently established in Curaçao. Based on the explanatory noted, this fixed place of business should carry on the business of the company wholly of partially. The company does carry its whole business through this fixed place of business in Curaçao.
Core Income Generating Activities in Curaçao
The company should perform its core income generating activity in Curaçao (CIGA). Based on the PTO and the explanatory notes on the PTO in accordance with the OECD, the core income generating activities are those that generates the revenues and consequently the profit of the company, but also increases the value of the company. For each case, what the CIGAs actually consists of must be assessed based on the facts and circ*mstances. For these activities, the local management of the company must have its authority on the decision-making with regard to the activities. It should not be restricted in its authority or autonomy nor receive instructions to follow from (management)abroad to a large extent. Supporting activities are in overall not considered to be core income generating activities.
In this case the following CIGAs have been identified by the entity:
- Managing risk and compliance with regulations
- Setting up market risk requirements
- Setting up trading execution and pricing requirements
- Identifying products to be traded
- Competition and market research
- Responsibility for marketing activity.
In principle the CIGAs are considered to take place in Curaçao, if the business activities are managed, organized, initiated and monitored from Curaçao and that the policy related functions take place in Curaçao. It is not required that the execution of the day-to-day functions take place in Curaçao. Mentioned CIGAs are in line with the criteria and are commissioned to the two local directors and the foreign director of the company. In this respect, the foreign director should be physically present in Curaçao when management and strategic decisions related to the activities are made. In any case atleast the two local directors, thus the majority of the Managing Directors will be present at all times in Curaçao upon management and decision making. It can be concluded that the CIGAs of the company are performed in Curaçao.
Management and Employees in Curaçao
In order to comply with this criteria, the company must have a local management in place which is responsible for the relevant decisions and the policy to be made for the day-to-day execution of business. As aforementioned, the company meets these criteria. Also, the company must have an adequate number of employees with the adequate qualities and knowledge to perform in their function. The organization of the company consists of the following directors and employees:
- 2 local directors;
- 1 foreign director;
- Compliance officer;
- Junior Compliance officer;
- Finance manager;
- Trading officer;
- Complaints specialist;
- Customer support executive;
- Operational manager, which is also one of the local directors;
Mentioned directors and employees have the adequate qualities and knowledge to perform in their function. This qualification is assessed based on the employees’ training and experience and whether the employee is capable of discharging power and responsibilities appropriate to the nature and scope of the company’s activities.
Local incurred operating costs annually
It should be assessed, whether the company has an adequate amount of annual recurring local costs, that is appropriate to the nature and extent of the activities of the company. However, the PTO does not have a guidance on what should be considered ‘appropriate’ of ‘adequate.’
The following expenses are locally incurred:
- Rental expenses for office
- Salary and management expenses for employees
- Office appliance and utility expenses
- Travel expenses for foreign director
- Other general and administrative expenses
Taking the expenses incurred by the company in the last two years into consideration it should be concluded that the company has local incurred operations costs annually. These expenses are of support to the CIGAs.
To finalize, based on our assessment we hereby confirm that the company has a real economic presence (substance) in Curaçao. However, we emphasize that there is no clear description of what is seen as ‘sufficient’ or ‘adequate’ presence or substance, not in the Curaçao legislation, neither in the Curaçao case law or literature. Future Curaçao case law in this aspect or changes in Curaçao tax legislation on this specific subject may be of influence on our assessment whether there is ‘sufficient or appropriate’ substance.
Please note that the tax ruling is applicable for 5 years, unless the conditions are no longer met or there are changes in the Curaçao tax legislation that may be of influence on our assessment.
The Tax Inspector;
