US Tax Advice for US Expatriate Living and Working in Curacao

Tax Guide for US Expats Living and Working in Curacao

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Who Is Liable For Income Taxes in Curacao

Residents are taxable on their worldwide income.  Nonresidents are taxable only on income derived from certain Curaçao sources. A resident individual who receives income, wherever earned, from former or current employment is subject to income tax in Curaçao.

Residence is determined based on an individual’s domicile (the availability of a permanent home) and physical presence, and on the location of an individual’s vital personal and economic interests.

Income subject to tax.  The following types of income are taxed in Curaçao:

• Employment income
• Self-employment and business income
• Income from immovable property (rental income)
• Income from movable assets (dividend and interest income)
• Income from periodical allowances

Employment income.  Taxable employment income consists of employment income, including directors’ fees, less itemized and standard deductions and allowances, pension premiums and social security contributions, whether paid or withheld.

Directors’ fees are treated in the same manner as ordinary employment income and are taxed with other income at the rates.  Directors’ fees paid by Curaçao companies are subject to withholding for wage tax and for social security insurance contributions.

A nonresident individual receiving income from current or former employment carried on in Curaçao is subject to income tax and social security contributions in Curaçao. Wage tax and social security contributions are withheld from an individual’s earnings.  However, if the individual’s stay does not exceed three months, the individual may request an exemption from the withholding requirement.

A nonresident who is employed by a Curaçao public entity is subject to tax on income, even if the employment is carried on outside Curaçao.

A nonresident individual receiving income as a managing or supervisory director of a company established in Curaçao is subject to income tax and, in principle, social security contributions in Curaçao.

Self-employment and business income.  Residents are subject to tax on their worldwide self-employment and business income, as well as on income derived from a profession. Nonresidents are taxed on income derived from a profession practiced in Curaçao.  However, if the profession practiced in Curaçao does not exceed three months, full or partial exemption from income tax may be requested.

Annual profits derived from a business must be calculated in accordance with sound business practices that are applied consistently. Taxable income is determined by subtracting the deductions and personal allowances specified in deductions from annual profits.

A nonresident individual earning income from activities carried on in Curaçao through a permanent establishment or a permanent representative is subject to income tax in Curaçao. Profits of a permanent establishment are calculated in the same manner as profits of resident taxpayers.

Income from periodic allowances.  Resident individuals are subject to tax on their worldwide periodic allowances, including old-age pensions (not related to previous employment), alimony payments and disability allowances. In general, periodic allowances are taxable if the allowances exceed their purchase price and if the purchase price has not (nor could have) been deducted from Curaçao income or was considered to be a component of Curaçao income.

Income from immovable property.  Sixty-five percent of the income from real estate (rental income), grounds, mines and waters is taxed at the income tax rates. Income derived from a person’s residence is not taxed as income from immovable property. Interest paid on mortgage loans for the acquisition or the restoration of immovable property can be deducted from taxable income.

Nonresident individuals are taxed on rental income derived from real estate located in Curaçao or from the rights to such property.

Income from movable assets (dividend and interest income).   Dividend and interest income derived from domestic and foreign sources, less deductions, are generally subject to income tax at the rate.  For investments in foreign portfolio investment companies and investments in Curaçao exempt companies, a fictitious yield at a rate of 4% must be reported annually based on the fair market value of the investments at the beginning of the calendar year. Interest income received from local bank accounts is taxed at a rate of 6.5% (including surtaxes).

Nonresident individuals are taxed on dividends received from resident companies. They are also taxed on interest income derived from debt obligations if the principal amount of the obligation is secured by mortgaged real estate located in Curaçao.

No withholding taxes are levied on dividends, interest and royalties earned by nonresidents. In general, a withholding tax applies to interest payments made by paying agents established in Curaçao to individuals resident in one of the member states of the European Union (EU). This withholding tax applies for the duration of a transitional period. The withholding tax rate was 15% for the first three years beginning in 2005, and will be increased ultimately to a rate of 35%. Effective from 1 July 2011, the withholding tax rate is 35%. However, the recipient may request exchange of information instead of the withholding on interest payments.

Income from substantial business interests.  On request, resident individuals are taxed on dividend income and capital gains derived from substantial business interests at a fixed rate of 19.5% (including surtaxes). Otherwise, such income is subject to the progressive income tax.

An interest of at least 5% in the issued share capital of a company, a right to acquire such interest and a corresponding profit-sharing right qualifies as a substantial business interest.

In principle, nonresident individuals are taxed on dividend income and capital gains derived from substantial business interests in companies that are resident in Curaçao. In the event of emigration to Curaçao, a “step-up” facility is available to determine the cost of a substantial business interest. In the event of emigration from Curaçao, the tax authorities may issue an income tax assessment on the difference between the fair market value of the shares on emigration and the fair market value on establishing residency. However, this tax need not be paid if certain conditions are met. If the taxpayer emigrates within eight years after establishing residency, this income tax on emigration may not be imposed.

Capital gains.

Capital gains are generally exempt from tax. However, in the following circumstances, residents may be subject to income tax on capital gains at normal or special rates.

Deductions

Deductible expenses.  A resident taxpayer is entitled to more deductible items than a nonresident taxpayer. A fixed deduction of ANG 500 may be deducted from employment income. Alternatively, actual employment-related expenses incurred may be fully deducted to the extent that the expenses exceed ANG 1,000 annually.

Residents may claim the following personal deductions:

• Mortgage interest paid that is related to the taxpayer’s dwelling (limited to ANG 27,500 annually)
• Maintenance expenses related to the taxpayer’s dwelling (limited to ANG 3,000 annually)
• Premiums paid for fire and natural disaster insurance related to the taxpayer’s dwelling
• Interest paid on consumer loans (limited to ANG 2,500, or ANG 5,000 if married, annually)
• Life insurance premiums that entitle taxpayers to annuity payments (up to a maximum of 5% of the income or ANG 1,000, annually)
• Pension premiums paid by an employee
• Social security premiums paid by an employee
• Qualifying donations in excess of certain threshold amounts

Residents may deduct the following extraordinary expenses (thresholds applicable):

• Alimony payments
• Medical expenses, educational expenses and support for up to second-degree relatives, if they meet certain threshold amounts

Deductions that may be claimed by nonresidents include the following:

• Employment expenses
• Qualifying donations in excess of certain threshold amounts

Business deductions.  In general, business expenses are fully deductible. However, the deduction of certain expenses is limited.

The following deductions are available for self-employed persons:

• Accelerated depreciation of fixed assets at a maximum rate of 33 ⅓%.
• An investment allowance of 8% for acquisitions of or improvements to fixed assets in the year of investment and in the immediately following year. The investment allowance is increased to 12% for acquisitions of new buildings or improvements to existing buildings. This allowance applies only if the investment amounts to more than ANG 5,000 in the year of investment.

Personal tax credits.  The following personal tax credits may be subtracted by a resident taxpayer from actual income tax due for the 2011 fiscal year:

• Standard tax credit: ANG 1,852.50 (surtaxes included)
• Sole earner tax credit: ANG 1,237.60 (surtaxes included)
• Senior tax credit: ANG 933.40 (surtaxes included)
• Child tax credit per child: varies between ANG 66.30 and ANG 659.10 (surtaxes included), depending on the children’s age, residence and education

Only the standard tax credit is available for nonresidents under certain conditions.

Pensioners and retirees. Pensioners who request and obtain the penshonado status can opt to be taxed at an income tax rate of 10% (including surtaxes) on all foreign-source income or they can declare a fixed income of ANG 500,000 per year as foreign income. This fixed income is taxed at the progressive income tax. The penshonado status can be obtained if certain conditions are met, including the following:

• The applicant must not have been a resident of Curaçao for the past 5 years.
• The applicant must at least be 50 years of age.
• The applicant must apply for the penshonado status within 2 months of his or her registration in Curaçao.
• The applicant must acquire a house for personal use with a value of at least ANG 450,000.

Expatriate facility.

Individuals that meet certain criteria can request the application of the expatriate facility. To acquire the expatriate status, an individual must meet the following conditions:

• The applicant must not have been a resident of Curaçao for the past five years.
• The applicant must have special skills at the college or university level and at least five years of relevant working experience at the required level.
• The applicant must receive remuneration from his or her employer of at least ANG 150,000.
• The applicant must possess skills that are scarce in Curaçao.

The employer must file the application. In principle, the expatriate status applies with retroactive effect to the beginning of the employment if the application is filed within three months after the beginning of the employment.

An employee with the expatriate status can receive limited amounts of fringe benefits tax-free, such as wages in kind, travel expenses, hotel expenses and expenses with respect to means of transportation and relocation. The remainder of the compensation paid to the expatriate by the employer is taxed at the progressive income tax rates. In addition, a net employment contract can be entered into with the expatriate, and the wage tax should then not be grossed up as an additional benefit received from employment.

Relief for losses. Individual taxpayers may carry losses forward for five years.

B. Inheritance and gift taxes

Inheritance and gift tax is levied on all property bequeathed or donated by an individual who is a resident or deemed to be a resident of Curaçao at the time of death or donation. For individuals who are nonresidents at the time of death or donation, inheritance and gift tax is levied on real estate located in Curaçao only. The tax is payable by the heir or the recipient of the gift, regardless of his or her place of residence.  Inheritance and gift tax rates range from 2% to 24% of the value of the taxable estate or the donation, less deductions. The rates vary, depending on the applicable exemptions and the relationship of the recipient to the deceased or the donor.

C. Social security contributions

All resident individuals must pay social security contributions.  The contributions provide benefits under the General Old Age Pension Ordinance (AOV), the General Widows and Orphans Ordinance (AWW) and the General Insurance Extraordinary Sickness Ordinance (AVBZ). Contributions to the health insurance (ZV) is also due on salaries up to a certain threshold (ANG 4,873.70 per month for 2011). In addition, employers must pay a severance contribution (Cessantia) fee of ANG 40 (2011) per employee per year.

The total AOV/AWW contributions due on an annual basis are 14% of earnings (maximum of ANG 83,228 for 2011). Premiums are paid partly by the employer if an individual is employed.  

For AOV and AWW in 2011, employers contribute 7.5% of salary, up to a certain maximum amount of contributions per year (ANG 6,242.10), and employees contribute 6.5%, up to a certain maximum amount of contributions per year (ANG 5,409.82). For AOV and AWW, self-employed persons also pay a total of 14% up to a certain maximum amount of contributions per year but a sliding scale is applicable.

For AVBZ, the following are the contributions:

• Employers: 0.5% of salary
• Employees: 1.5% of salary
• Self-employed persons: 2% of earnings
• Pensioners: 1.5% of pension income
• Individuals with annual taxable income of less than ANG 27,374 and unemployed persons receiving social aid from the government: 1% of income

The rates of contributions for AVBZ are applied to taxable income, up to a certain maximum amount (for 2011, ANG 428,626). At the time of writing, the maximum amount for 2011 had not yet been announced officially.

The total rate of required health insurance contributions for employees and self-employed individuals amounts to 12.5%. The contributions are partly paid by the employer (8.3%), partly by the employee (2.1%) and partly by the government (2.1%). The rate of required disability insurance (OV) contributions for employees and self-employed individuals varies between 0.5% and 5%, depending on the applicable risk category; the contribution is fully payable by the employer. OV contributions are due on salaries up to a certain threshold (ANG 4,873.70 per month for 2011).

In general, nonresidents earning income from employment in Curaçao are subject to social insurance contributions.

We have been preparing US income tax returns for US Citizens and permanent residents living in Curacao for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.

We have scores of clients located in Curacao and know how to integrate your US taxes into the local income taxes you pay.  Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.

As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end.  (You cannot file using the Curacao tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.

There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership.   If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form.  These penalties are due regardless of whether you owe income taxes or not.

There are certain times you may wish to make elections with respect to your Curacao Corporation or Investment Company which will give you US tax benefits.  There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.

If you are self-employed while working in Curacao, you will have to pay US self-employment taxes (social security).   If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Curacao.

We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident.  You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.

Let us help you with your US tax returns, US tax planning and other US tax and legal concerns.  Download our expat tax questionnaire or request a consultation by phone, skype or email