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10. INCENTIVES AND SPECIAL REGIMES

Free Zone Companies

A free zone company can be established by a limited liability company. In order to claim benefits, it is mandatory to perform certain qualifying activities in a free zone, but it is not necessary to be established in a free zone area. The following benefits /incentives are available to a free zone company:

  • Reduced corporate income tax at a rate of 2% on profits derived from qualifying activities;
  • No turnover tax on goods and services exported outside Aruba;
  • No import duties on goods imported for qualifying activities; and
  • No withholding tax on dividends paid by free zone companies.

Effective 1 January 2020, income from services provided from a free zone to the local Aruba market is eligible for the reduced corporate tax rate of 2%. However, the following services have been excluded from the free zone regime:

  • Financial services;
  • Services provided by accountants, tax advisors, notaries, and lawyers;
  • Services involving the disposal or licensing of intellectual and industrial property rights; and
  • Other services that are to be specified by decree.

Grandfathering is provided until 30 June 2021 for intellectual property service activities that already existed on 1 September 2018 or for service providers existing prior to 15 November 2018 that are not engaged in intellectual property activities.

Effective 1 January 2020, free zone companies are also required to comply with the economic substance requirements (see Sec. 13.1.). Failure to comply with the requirements will result in the termination of free zone status.

Special Zone in San Nicolas

Effective 1 February 2018, the San Nicolas special zone tax regime has been repealed. However, companies that qualified for the regime prior to 1 February 2018 are eligible for the incentives until 31 December 2020.

The special zone was established in San Nicolas, Aruba. The regime provided certain tax incentives for qualifying companies, including:

  • 15% corporate income tax for activities for the local market;
  • 10% corporate income tax for activities related to exports and hotels (more than 75%);
  • 2% corporate income tax for reinsurance companies;
  • 2% corporate income tax for activities related to sustainable development, green energy, and agriculture, provided that at least 75% of the sales revenue was local;
  • Exemption from dividend withholding tax; and
  • 50% discount on the property tax payable for a period of five years.

The Imputation Payment Company / Special Purpose Companies (IPC/ SPC)

The old imputation payment company (IPC) regime was reformed in December 2015. However, existing IPCs can continue under the old regime until 2026. Under the old IPC regime, part of the corporate income tax paid by a company was remitted to its shareholders in the form of an imputation payment. The IPC regime was available to all companies conducting qualifying activities such as hotel, financing, licensing, or investment activities.

From 2016, a new regime is introduced for special purpose companies (SPCs), which are required to conduct qualifying activities like hotel operations, aviation, shipping, generation of sustainable energy, scientific activities, etc. to claim tax incentives (subject to certain additional conditions).

Some of the benefits/incentives available to an SPC are as below:

  • Reduced corporate income tax rate of 10%;
  • Exemption from dividend withholding tax; and
  • Investment allowance of 6%.

Aruba Exempt Companies (AVV)

The Aruba exempt company is a particular form of an NV which is used for international tax planning purposes. The profit of the AVV is exempted from corporate income tax and dividend withholding tax if its activities are limited to qualified activities such as holding of shares, financing of other companies, investing of funds (except in real estate), licensing of intellectual and industrial ownership rights, etc.

The AVV may opt for the fiscal transparency regime (subject to fulfilment of certain conditions) and will not be subject to corporate income tax and dividend withholding tax. In such a case, the AVV is not required to perform the qualified activities for maintaining fiscal transparency status.

Effective 1 January 2021, the AVV is phased out, with existing AVVs treated as a limited liability company (VBA). An AVV can be converted to any other legal entity type within three years of 1 January 2021, i.e. by 2 January 2024.

Fiscal Transparency

An NV, VBA, or AVV (AVV is phased out effective 1 January 2021) can opt, if certain conditions are met, to be treated as a partnership (fiscally transparent company). If fiscal transparency is granted, the VBA is treated as a partnership for Aruba income tax, corporate income tax, and dividend withholding tax purposes; that is, only the partners are taxed in Aruba on Aruban-source income.

The fiscally transparent company is not subject to corporate income tax, except if it carries on a business in Aruba. In that case, the shareholder is subject to corporate income tax in relation to the business carried through a permanent establishment.

Dividends distributed by the fiscally transparent company to its shareholders are not subject to dividend withholding tax.

Investment Allowance

It is applicable from the tax year 2015. The investment allowance is 6% of qualifying investments and is subject to certain conditions, including that the minimum investment of AWG 5,000 is made in business assets purchased locally.

COVID-19 Emergency Measures

In response to the COVID-19 pandemic, Aruba has announced the following tax relief measures:

  • The investment allowance is increased from 6% to 10% for tax years 2020, 2021, and 2022. Further, the scope of eligible investments is extended to cover all investments made in business assets in tax years 2020, 2021, and 2022, regardless of whether these business assets are purchased locally, i.e., purchases from a domestic or foreign supplier with or without a permanent establishment in Aruba are allowed;
  • Qualifying start-ups in specified sectors are granted a deduction equal to 50% of loans obtained in tax years 2020, 2021, and 2022, up to a maximum of AWG 30,000 per tax year. This includes registered start-ups established from 1 January 2017 engaged in tourism, the knowledge economy, logistics, agriculture, the circular economy, and creative industries sectors;
  • An additional deduction of 200% (i.e., 300% total deduction) is granted on the training costs for tax years 2020, 2021, and 2022, subject to certain exceptions; and
  • An additional deduction of 100% (i.e., 200% total deduction) is granted on marketing and promotional costs for tax years 2020, 2021, and 2022, subject to maximum additional deduction in respect of expenses up to AWG 30,000 (i.e., expenses exceeding AWG 30,000 will be fully deductible (100%) but not eligible for additional deduction).