Treaty with Suriname

In August, I highlighted in this newspaper the recent tax treaty established between Curaçao and Suriname. At that time, I discussed some of its provisions. However, there are several other interesting treaty articles worth examining, especially since a seminar on the treaty is being held in Curaçao on October 22.

One simple but notable provision is the pension article (Art. 17). According to the OECD Model Convention, pension payments are always taxed in the country of residence of the beneficiary. This also applies to lump-sum pension payments. However, Curaçao's treaty policy does not align with this: Curaçao advocates for shared taxing rights. This means the country where the pension was accrued has a capped taxing right, for example, 25%. The country of residence can fully tax the pension payments but must credit the tax levied by the source country. I find this a balanced solution. It makes sense for the country of residence to tax, as the pensioner uses public services there. Simultaneously, the pension accrual is usually tax-facilitated, giving the source country a fiscal claim on the payments. This shared taxing right addresses both arguments. The Netherlands applies a similar approach in practice, also reflected in the BRNC. Remarkably, however, the treaty with Suriname includes a pure source taxation. This is rare. It typically occurs only when the pension is not taxed in the country of residence under its system, usually when the source country does not tax-facilitate pension accrual. However, this is not the case in either Curaçao or Suriname. The explanatory note indicates that the pure source taxation was included at Suriname's request. The rule aligns with the UN Model Convention, which generally grants more taxing rights to the source country. The pension article also applies to annuity payments and social security payments. It remains to be seen whether the article will have much practical significance. To my knowledge, relatively few Surinamese receive their pensions in Curaçao, and vice versa. It might also apply to people who worked in the other country for some time and accrued a pension there, but this is likely a very small group.

Of a very different nature is the dividend article, namely Article 10. In general terms, this article aligns with the OECD-MC and Curaçao's treaty policy, but it is notably more extensive in terms of paragraphs. I will focus on a single point. The main rule is ‘standard’: the country of residence may tax dividends received from the other country. The other country—the source country—may levy a capped tax, which must then be credited in the country of residence. The source country’s tax is typically a dividend tax. For Curaçao as a source country, this is straightforward because the country does not have a dividend tax. Formally, there is legislation regulating the tax, but it has never been enacted and is intended to be repealed. Moreover, the source country’s tax must also be a withholding tax; the treaty simply states it involves a capped source country tax. Suriname does have a 25% dividend tax. However, there are calls to lower or even abolish this tax. The usual reason for not applying a dividend tax is that it hinders foreign investment in the country. This is certainly the reason why Curaçao's dividend tax has never been implemented. I find this unfortunate. In combating abuse and preventing undesirable international financial flows, such source country taxes are very useful tools. Not only concerning dividends but also regarding interest and royalties. I believe that a 25% tax should always be levied on these in the source country. This ensures adequate taxation of these incomes. If it can then be proven that adequate taxation occurs in the recipient's country of residence, the source country can reduce the tax, for example, to 10%.

Nevertheless, this is not how it is arranged in the present treaty. In principle, there is a divided taxing authority, but since Curaçao does not have a dividend tax, dividends flowing to Suriname are effectively subject to exclusive residence-based taxation.

In any case, the source country has a taxing right of 5% if the shareholder is an entity holding at least 10% of the shares in the subsidiary. In other cases, the source country tax is 10%. The 5% rule is then further breached, leading to no source country tax being due, and thus only a residence-based tax applies. This is the case if the shareholder is a pension fund or if the shareholder is an entity holding at least 10% of the shares in the subsidiary for at least 365 days. This 365-day requirement is an anti-abuse provision included in the OECD Model Convention in 2017.

Finally, an interesting provision should be read in conjunction with the capital gains article (Article 13) concerning shares that, in short, represent a substantial interest. If the shareholder emigrates, the departure state retains the right to tax the capital gains for ten years. The dividend article stipulates that this also applies to dividends distributed by such a company. This is a fair provision, as otherwise, the capital gains rule could easily be undermined by distributing dividends within the ten-year period.

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

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