The tax system that has been effective since the first of January 2011 in Bonaire, Sint Eustatius and Saba can be called exceptional in international terms. This is mainly due to the fact that under certain circumstances no corporate or income tax is levied, though that’s not exceptional in the Caribbean region itself. What is exceptional, is that this was realized within the fiscal world of a very reputable country like the Netherlands, in a way that it can stand the test of increasing criticism on tax competition.
Caribbean Netherlands therefore has a unique trump card to attract internationally oriented activity. Even though this has not yet led directly to tangible results for the people of the Caribbean Netherlands. The challenge is to remove the unfamiliarity and cold feet among potential companies to set up in the Caribbean Netherlands. It is expected that within five years the first multinational opens a basis for high-quality services in Bonaire. Provided of course that no adverse tax system changes will be implemented following the evaluation by the Commission-Spies.
Encompassing more than just “no corporation tax ‘
As mentioned, the lack of a corporate income tax itself is not unique. This is also found in nearby places such as the British Virgin Islands, Anguilla and the Cayman Islands. These so-called “zero tax’ jurisdictions had a chance to build a decent financial sector. However, these jurisdictions are increasingly cornered by the industrialized countries, including the Member States of the European Union, including the Netherlands.
One wants to prevent companies from ‘dropping’ (paper) profit in tax havens which in practice are carried out with little or no real activities. That, according to the critics, goes at the expense of tax revenue in other countries, where the added value is actually realized. That of all countries the Netherlands has introduced a zero tax’ tax regime within its own borders since 2011, is therefore remarkable at first sight. But when taking a better look at the matter, we will find that the manner in which and the conditions under which the corporate tax is omitted, it remains fundamentally different from the typical zero tax’ countries.
Sufficient realistic economic ties
In the Caribbean Netherlands the lack of corporation tax may only be used by companies that have a sufficient realistic economic tie to one or more of the islands of Bonaire, Sint Eustatius and Saba.
For this, an ingenious set of conditions is included in the law. However, due to their technical nature, these conditions are not covered here. The fact is that a taxpayer can only remain outside the scope of the corporation tax upon request, if he or she meets these conditions. If this is not, or insufficiently, the case, tax is still levied in accordance with the European-Dutch regulatory. By embedding this, it is secured that companies that do not have enough local employees or any other relevant tie with the Caribbean Netherlands cannot use the absence of corporate taxes. This was implemented in order to prevent that companies that hardly contribute to local economic development can benefit from the tax system. The tax regime of the Caribbean Netherlands thus has a fundamentally different and more sympathetic character than the typical ‘zero tax’ jurisdiction.
Access to newly negotiated Dutch tax treaties
A definite advantage of this special form of ‘zero tax’ that the Netherlands can shamelessly take the islands of the Caribbean Netherlands into the negotiations with other countries on tax treaties. These treaties are agreements between states, in which agreements are made on how the tax proceeds in cross-border situations. This is often crucial for companies operating internationally.
These companies, after all, do not benefit from a subsidiary in the Caribbean Netherlands not paying corporate taxes, while the headquarters in the country of origin pays the full price of charges on the profits in the Caribbean Netherlands. The treaties allow better control in these types of situations. Normally states are reluctant to close full tax treaties with zero tax’ jurisdictions. It often remains a mini-treaty, or none at all. However, since the negotiations launched on 10-10-10 for new and revised tax treaties, the Caribbean Netherlands is included by default. Although this happens in a particular way, because of the special features of the tax system, it is no less attractive. This, for example, means that the major tax treaty between the Netherlands and China also applies to the Caribbean Netherlands since January 1, 2015.
What are we waiting for?
Despite this positive picture, it is honest to say that very few international companies have established themselves in the Caribbean Netherlands since January 1, 2011. However, this is nothing more than a matter of patience and perseverance. They will come.
Firstly, the expansion of the existing Dutch tax treaties need time, because consent is required by all the treaty partners. These are time-consuming and costly processes, causing the Dutch government to wait with renegotiating until there are changes on several fronts. Nevertheless, the new tax treaties are now starting to trickle in and the treaty with China is definitively not the least!
Secondly, companies will not simply replace activity across borders. Due to the nature of the tax system of the Caribbean Netherlands with realistic economic tie requirements, it does not concern paper structures. It concerns employees, people, and optionally entire families, that need to be transferred to the Caribbean Netherlands and/or that have to be recruited locally. It concerns employees who may need to be let go elsewhere. It is therefore logical that one first looks in which way the wind blows. And in that context, fiscal stability is important.
Finally, the tax system must be sold. To give the system more publicity, an international network is essential. Meijburg & Co Caribbean, a member of the KPMG network, is currently the only specialized tax consultancy with a daily Dutch Caribbean practice and local tax specialist employees. After all, only with daily practice of the fiscal profession and experience, a new tax system can be truly fathomed. With local employees, it is possible to then make the transition to the international arena.