Tax Treaty Suriname
A few weeks ago, I wrote in this space about the tax treaty between Curaçao and Suriname that was recently concluded. I mainly focused on the treaty policy developed by Curaçao over the past two years, which undoubtedly contributed to the realization of this treaty. With this treaty, Curaçao has made a significant step forward. Curaçao is actively engaged in concluding various treaties, which is generally a lengthy process. Most treaties that will come into effect in the near future are with regions that are relatively distant from Curaçao. While this is not an issue per se, the economic relationships with those countries are often limited. The beauty of the treaty with Suriname is that it is a country in the region with which a lot of business is already conducted, and where the tax treaty can play a role in stimulating economic relations. Additionally, it sends a signal to other countries in the region that Curaçao is an interesting treaty partner. Hopefully, more treaties in the Caribbean region can be concluded in the near future.
What does the treaty regulate? Essentially, it aims to prevent double taxation on cross-border activities between the two countries. Most countries follow the model treaty established by the OECD. This also applies to Curaçao and Suriname, although both countries have introduced their own provisions in certain areas. The treaty not only prevents double taxation but also aims to prevent schemes to evade taxes. This is already stated in the preamble – the introduction, one could say – of the treaty, which states that the treaty is not intended to “create opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty shopping arrangements aimed at obtaining benefits provided for in this Treaty for the indirect benefit of residents of third jurisdictions)”. This is not meant to be threatening, but it is good to keep this provision in mind. There are often taxpayers who try to abuse a treaty. This provision guards against that. Additionally, Article 28 of the treaty contains a general anti-abuse provision, which essentially means that in cases of unintended use, the treaty will not apply. Thus, the prevention of double taxation will not take place.
A very different kind of provision is the somewhat unique provision in Article 29 of the treaty: it allows other countries of the Kingdom to also fall under the treaty if they wish. For the Netherlands, this is not relevant as it already has a treaty with Suriname, but for Aruba and St. Maarten, this could be an interesting option.
Besides some general provisions of various kinds, the two most important components are always the determination of which country is allowed to tax, or is limited in taxing, and how the prevention of double taxation should occur in that country. To start with the latter: there are two methods. One is the so-called exemption method, which means that the country that is not allowed to tax must exempt the income. The other method is the credit method. In this case, the tax levied by the taxing country is credited against the tax owed in the non-taxing country. Usually, the taxing country must reduce its tax somewhat. I will not delve into the techniques of both methods. However, as a general rule, it can be assumed that for active income such as profits and wages, the exemption method applies, and for passive income such as dividends, the credit method applies.
In general, under treaties, the most important categories of income are profits, benefits from shares, and salaries. When it comes to profit income, one should think of a company based in one country with a branch in another country. The branch in these cases is not a legal entity but, for example, a factory, office, or store. Such a branch is referred to as a permanent establishment (PE). According to Article 7 of the treaty, the profit earned by the PE is taxable only in the country where the PE is located. The country where the company to which the PE belongs – the so-called head office – may not tax the profit of the PE. An important point in the relationship between the head office and the PE is the pricing of goods and services: this must be done on an arm's length basis. Otherwise, it could easily happen that profit is shifted from a high-tax to a low-tax country. This is regulated in Article 9 of the treaty. An important point is the determination of whether there is a PE. This is regulated in Article 5 of the treaty. In general, this occurs quite quickly. Limited activities in another country can already lead to a PE.
Another important provision is the employment article (Article 14). This article applies to employees. However, there are other provisions for special groups. A well-known example is the director of a company. For this person, it is stipulated that their salary is always taxed in the country where the company is established (Article 15). Additionally, there are special provisions for civil servants, artists, and athletes. There is also a specific rule for pensions. As mentioned, the employment article is the most important. Essentially, the provision is very simple: if someone lives in one country and works in another, the salary is taxed exclusively in the work country. There is a significant exception to this: if the work is of relatively short duration – a maximum of 183 days in a 12-month period – the residence state retains taxing authority. However, this does not apply if the salary costs are passed on to the temporary work state.
Peter Kavelaars is a Professor of Tax Economics at Erasmus University Rotterdam and Of Counsel at Deloitte Dutch Caribbean.
