Newly incorporated Aruba limited liability companies (LLC) and Aruba Exempt Corporations (AEC) can opt to be considered transparent for Aruba profit tax, income tax and dividend withholding tax purposes. As a result hereof, the Aruba tax authorities will disregard the existence of the entity for tax purposes in Aruba. The sources of income of the LLC an AEC are allocated to the shareholders of the entity (like a partnership). In the absence of Aruba sources of income, i.e. the recognition of a permanent establishment or permanent representative, there should be no taxable basis in Aruba.

In order to obtain the transparent status, the company should file a notification with the Aruba tax authorities. The notification should meet a number of requirements.

Permanent establishment

In the case of corporate foreign shareholders, the internationally accepted regulations of the OECD on permanent establishment apply in Aruba. The OECD Model Tax Convention provides the following definition of a permanent establishment: ‘a fixed place of business through which the business of an enterprise is wholly or partly carried on’.

The OECD Model Tax Convention explicitly includes as being a permanent establishment:

•             a  place of management;

•             a  branch;

•             an office;

•             a factory;

•             a workshop, and

•             ….place(s) of extraction of natural resources.

Based on the OECD definition, a permanent establishment shall be deemed not to include activities of a preparatory or auxiliary character. According to the OECD Commentary 2003, the decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole.

Overlooking the above, it appears that if preparatory or auxiliary activities of the foreign shareholder are conducted in Aruba, the income of the transparent company should not be taxed in Aruba.

The Aruban tax authorities have provided their own interpretation on the above mentioned OECD definition of a permanent establishment, by stipulating Safe Harbour rules regarding the recognition of a permanent establishment in Aruba According to these rules the following items should not constitute a permanent establishment:

• Keeping and safeguarding the books by a trust office in Aruba;
• Keeping one or several bank accounts
• of the transparent company at a bank located in Aruba;
• Ownership of intangible assets registered in Aruba;
• Ownership of intangible assets not physically present in Aruba (e.g. airplanes, ships), even if assets are registered in Aruba ; and
• Holding of shares in a company established in Aruba;

Please note that the above mentioned should be regarded as examples to the rules issued by the Aruban tax authorities.

Transparency can be used as an international trading company, a special purpose vehicle, a leasing company, etc.etc. The applications for transparency can therefore be regarded sheer endless.

In case you are contemplating on using a tax transparent company,  please contact us in case you require in depth information on the requirements, timing and cost involved in your specific situation.