BRNC Revised

In recent times, I have frequently focused on the tax treaty policy of Curaçao and on the tax treaties established in recent years. Besides these treaties, there is also the Tax Arrangement for the Netherlands Curaçao (BRNC). Although not a treaty in formal terms, it is a so-called Kingdom Act: de facto, it functions as treaty. As I assume is known, there is a similar arrangement between the Netherlands and St. Maarten (BRNS), and a BRNA has been on the agenda since 2010(!), which is a 'treaty' between the Netherlands and Aruba. Why the BRNA has been delayed for so long is puzzling. Regarding the BRNC and the BRNS, the BES islands are considered part of the Netherlands, so a regulation to prevent double taxation applies between the BES and Curaçao, and St. Maarten, respectively.

The BRNC and the BRNS are virtually identical and came into effect in 2015 and 2016, respectively. They have thus replaced the well-known Tax Arrangement for the Kingdom (BRK) to some extent. As of 2025, a revised BRNC will apply. This is not the case with the BRNS, at least not for the time being. The background of the adjustments, which are happening after just ten years, is attributed to the well-known BEPS project aimed at preventing tax avoidance. One of the components of BEPS was the amendment of the OECD Model Tax Convention, which is the basis for tax treaties worldwide and essentially also for the BRNC and the BRNS. Most tax treaties that countries had concluded prior to the OECD Model Convention amendment have been automatically adjusted to the revised model via the so-called Multilateral Instrument (MLI). However, this does not apply to the BRNC and the BNRS as these are not treaties in the traditional sense but Kingdom Laws. The MLI does not apply to them.

To still comply with OECD standards, separate adjustments are necessary. These adjustments have now been implemented and will apply from 2025 onwards. Additionally, some amendments have been made in connection with changes in the Dutch and Curaçao tax systems. For example, the Dutch Source Tax Act 2021 is now included under the BRNC. There are enough reasons to consider some of the changes.

As mentioned, the adjustments primarily focus on combating tax avoidance. In this context, two general anti-abuse provisions have been included. The preamble contains a passage indicating that the treaty is not intended to be used for tax avoidance, particularly through treaty shopping. If this occurs, the BRNC cannot be invoked. Additionally, a general anti-abuse provision, also known as a principal purpose test, has been included. The BRNC does not apply to situations aimed at tax avoidance and contrary to the purpose and intent of the BRNC; therefore, a reduction to avoid double taxation cannot be provided.

A key focus of the BEPS project is combating the improper use of transparent entities, i.e., entities considered transparent in one country and non-transparent in another. This situation occasionally leads to so-called non-taxation. In this regard, it has been determined that the Curaçao mutual fund, the Curaçao limited partnership, or the Dutch closed mutual fund, provided these entities are considered fiscally transparent in both countries, can invoke the BRNC on behalf of the underlying participants, under certain conditions. This is done in accordance with the entitlement the participants would have had if they were investing directly.

Another significant adjustment concerns the provision on dividends. Generally, dividends are taxed in the residence state of the beneficiary, and the source state may apply a capped tax creditable in the residence state. For Curaçao, withholding tax does not apply as it does not impose a dividend tax, but it does for the Netherlands. Under the BRNC, dividend tax is reduced under conditions and, in parent-subsidiary relationships, even to 0% in principle. This is particularly the case when there is a shareholding of at least 10% of a parent company in a subsidiary. Until now, this interest only needed to apply at the time the dividend was paid. Since this could encourage abuse, the OECD has added a so-called 365-day rule to the OECD Model Convention, which has been adopted in the BRNC. This means that dividend tax can only be reduced to nil if the interest exists for at least the specified period. Not all 365 days need to be before the dividend is paid.

Finally, it's worth pointing out the regulation for mutual agreement and arbitration. This provision has also been aligned with the new design in the OECD Model Convention. Under this rule, a resident of the countries can request a mutual agreement procedure if they believe the arrangements of one or both countries lead to taxation that is inconsistent with the intent of the BRNC. Additionally, the provision also provides for the possibility of arbitration if the consultation procedure does not lead to the desired outcome. The result of the arbitration is binding. To prevent delays, various deadlines have been included.

Peter Kavelaars is a professor of Fiscal Economics at Erasmus University Rotterdam and of counsel at Deloitte Dutch Caribbean.