Update Country Report Curaçao 06 Aug 2018

Event

Curaçao's government has approved new tax legislation designed to comply with standards set by the OECD.

Analysis

Changes to Curaçao's tax regime apply mostly to businesses already operating on the island or those that are considering entering the market. The changes include revisions to intellectual property regulations that mean companies must prove that they have developed their own intellectual property in order to benefit from tax incentives. Such income will be taxed at the preferential rate of 5%. Moreover, legal changes mean that companies themselves cannot be tax exempt-instead, only their income can be, meaning that companies must still file a tax return.

Curaçao's Export Facility, a tax-incentive regime for companies generating 90% of their profits outside of the country, has been replaced by a scheme exempting tax on income related to sales of goods or services to customers outside of Curaçao (as opposed to domestic purchases by tourists, as allowed under the previous system). In addition, the E-Zone, a special geographic economic zone established in 2001 to promote trade-oriented activity (by making it subject to only 2% net profit taxation), is now a free zone. E-commerce cannot be carried out there, although e-commerce companies can operate using the exemptions for foreign income.

These changes were required by the OECD's Base Erosion and Profit Shifting (BEPS) project, which set out standards to ensure that businesses do not engage in tax-avoidance schemes, which can erode the tax profits of the host jurisdiction. As a low-tax financial centre, Curaçao is vulnerable to such schemes, and failure to apply the BEPS standards could have led to it being placed on a tax-havens blacklist, as some of its Caribbean peers were by the EU in late 2017.

The changes will have long-term benefits for the island in terms of attracting investment and reducing the risk of the jurisdiction being placed on non-compliance blacklists. The modifications bring Curaçao further in line with OECD standards and will allow companies to invest there without concerns about potential blacklisting and non-compliance. The shift from the previous tax regime is likely to impose some short-term costs on companies and the government, but this will be outweighed by the longer-term benefits of demonstrable compliance.

Impact on the forecast

By bringing the country into line with OECD standards and thereby promoting foreign investment, new tax legislation introduces upside risk in the island's recovery, although the effects are most likely to be felt outside of the forecast period.