Proposed Legislation on Aruba Exempt Company

Background
Proposals on Aruba Exempt Company
Proposals on Introduction of a New Legal Entity
Check-the-Box Option

The Office of the High Commissioner of Aruba recently gave a presentation to the members of the Aruba Financial Centre Association and the Aruba Association of Tax Consultants on proposed amendments to legislation concerning the Aruba exempt company (AEC) and the proposed introduction of a new Aruba legal entity.

Background

The AEC is a particular form of limited liability company which is often used in international structures. It is exempt from Aruban profit tax and dividend distributions are not subject to the newly introduced Aruba dividend withholding tax. Certain international developments - for example discussions about harmful tax competition in forums such as the Organization for Economic Cooperation and Development (OECD) - have led the Aruba government to re-evaluate its AEC legislation. During the presentation, the high commissioner indicated that the government is considering offering an alternative legal entity to replace the AEC.

Proposals on Aruba Exempt Company

During the presentation the following proposals were made in relation to the AEC:

• abolishing the fiscal regime governing AECs by December 31 2005;(1)
  
  
• temporarily maintaining the tax-exempt status of AECs through the creation of a 'grandfathering' period for existing AECs involved in so-called 'third-party' situations. These situations would include AECs with bond issues in the market and AECs involved in aircraft leasing. The grandfathering would cover the duration of their respective obligations; and
  
  
• allowing existing AECs to elect to convert at any time either to an Aruba limited liability company or to the proposed ABV (Arubaanse besloten vennootschap). If conversion to a limited liability company is elected, the limited liability company can opt for the fiscal status of a so-called 'imputation payment company' if it meets certain conditions. No mention was made of the tax consequences for existing AECs directly related to the conversionto another legal entity.

It is also understood that existing AECs will be allowed to request to be considered transparent from an Aruban tax point of view.

Proposals on Introduction of a New Legal Entity

The creation of a new, fiscally transparent legal entity known as the ABV is being considered. This entity would combine characteristics of both the Netherlands limited liability company and the Delaware limited liability company. The ABV is intended to replace the AEC in existing structures, as well as to offer a new tax-planning vehicle for both local and foreign investors.

The ABV is intended to provide investors with a flexible legal entity that will be recognized internationally for both company law and fiscal purposes, while combating misuse by stipulating certain financial and administrative requirements. The ABV would be organized as a hybrid entity: it has been stated that the aim is to create an entity with the status of legal person that would, in principle, be fiscally transparent. However, the ABV can be set up in such a way that it is not fiscally transparent. If it is set up as a transparent entity, the profits of the ABV will be tax exempt in Aruba, unless and to the extent they are generated through a trade or business conducted in Aruba through a permanent establishment or permanent representative. If the ABV is set up as a non-transparent entity, the regular corporate taxation principles of Aruba will apply. Taxation in Aruba will be determined based on generally accepted OECD and other international taxation principles.

Check-the-Box Option

It is expected that it may take a while before the ABV legislation is formally introduced, and that this will not take place before the legislative amendments concerning the AEC. In this respect it has been suggested that before the new ABV legislation takes effect, the opportunity should be introduced for all entities subject to Aruba profit tax to request to be considered transparent (better known as the so-called 'check-the-box' option). The resulting Aruban taxation would then be similar to the tax treatment of a transparent ABV as described above (ie, the entity would in principle not be subject to profit tax in Aruba). It is the intention that this opportunity to check the box would also apply to existing AECs in the period before the tax-exemption regime is effectively abolished (ie, before January 1 2006). For example, the check-the-box option could be made as per December 31 2005 in order to avoid any potential adverse tax consequences resulting from the change in the fiscal regime.

For further information on this topic please contact Anjli Finessi at Loyens & Loeff's Aruba office by telephone (+297 5824 837) or by fax (+297 5835 214) or by email (anjli.finessi@loyensloeff.com). Alternatively, contact Angel Gomez Osorio at Loyens & Loeff's Curaçao office by telephone (+599 9 434 11 00) or by fax (+599 9 465 15 18) or by email (angel.gomez.osorio@loyensloeff.com).

Endnotes

(1) It is intended that existing AECs will maintain their current legal status after December 31 2005, irrespective of the fiscal regime applicable to each AEC after this date, unless the AEC elects to convert into another Aruban legal entity as described herein.