Investing in Real Estate on the BES I
In recent years the media has been focusing on the economic crisis and the measures to be taken in order to soften the consequences hereof. One of the measures taken by the financial institutions is the reduction of the interest rate on savings. Consequently saving has become less profitable over the years whereas the cost of living has increased.
In order to maintain the accustomed life-style, people became more critical on their spending habits and their investment. The return on investment has taken center stage. As a result the traditional savings options have been traded in for more profitable investments opportunities.
Nowadays people are more inclined to invest in real estate. The idea is based on the promise that the investment in real estate has a higher return on investment due to the potential rental income and the possible increase of the value of the property.
Once the decision is made to invest in real estate, the investor faces several questions such as: What is the most optimal way to structure my investment? Should I incorporate an entity? Which taxes will be applicable? Etc.
As you may expect there is no general answer to these questions. In this edition we have chosen to elaborate on the fiscal implication of investing in real estate located on the BES-islands through an entity established on one of the BES-islands. In the next edition we will elaborate on the fiscal implications for investing in real estate located on the BES-islands in private or through a sole proprietorship.
Investing in real estate on the BES-islands through an entity
When investing in a real estate on one of the BES-islands through an entity, the entity should buy the real estate and exploit this to receive rental income. The idea is for the entity to receive all the profits from the real estate and carry all the expenses related hereto. Should additional financing be needed to buy, restore or develop the real estate, the entity can take a mortgage on the property.
Profit tax (winstbelasting)
The tax legislation for the BES-islands does not include a profit tax regulation. Therefor instead several other taxes are levied from entities operating on the BES-islands.
Turnover tax (Algemene Bestedingsbelasting)
The tax legislation for the BES-islands includes amongst others turnover tax regulation. The lease of a real estate is in principle subject turnover tax (hereinafter referred to as “ABB”). The lease of real estate, which qualifies, as the main residence for the lessee, is exempt from the ABB if the lessee is a resident of one of the BES-islands. Should the entity lease its property to tourists, no ABB is due if the entity complies with the tourist tax legislation.
The ABB is charged over the rent. The lessor charges the due ABB to the lessee. The applicable tax rate in Bonaire is 6%, while the applicable tax rate for Saba and Statia is 4%.
The ABB tax return should be prepared and filed quarterly. On the ABB tax return form the lessor must report the realized turnover and pay the due ABB.
Tourist tax (toeristenbelasting)
The tourist tax is levied from the tourist by the person who is providing him with a place to stay (room/apartment etc.). In this scenario, the entity. The tourist tax is a fixed amount per night spent on one of the BES-islands. Exemptions are made amongst other for tourists that have not yet reached the age of 13 years and are sharing their room with their chaperon (for example parent) and tourist that can prove that they reside on one of the islands of the former Netherlands Antilles or Aruba.
The tourist tax returns must be prepared and filed monthly within 20 days of the ending of a month. The due tourist tax must also be paid within these 20 days.
Real estate tax (Vastgoedbelasting)
Based on the real estate tax regulation the benefits realized with a real estate located on one of the BES-islands is subject to tax. The benefit realized with a real estate located on one of the BES-islands is set at 4% of the economic value of the real estate.
The economic value of the real estate will be determined by the Tax Inspectorate and registered in a disposition. The value stipulated in the disposition is set for 5 year. Exceptions are made amongst other in case the real estate is sold, the value of the real estate has increased due to renovations or the value of the real estate has decreased due to destruction to the property.
In case the value of the real estate has increased due to for instance renovations, the new value of the real estate will first be taken into account in the 6th year following the renovations. This incentive is known as the investors’ incentive. The investors’ incentive is also applicable for the development of a property. Based on the proposed amendments for the real estate tax regulation the investors’ incentive could be applicable for a period of 10 years. Consequently the new value of the real estate will first be taken into account in the 11th year following the upgrade of the real estate.
In case the value of the real estate has decreased due to destruction of the property or the real estate has been sold, the new value of the real estate will be taken into account in the year following the sale of the real estate or the destruction here of.
The real estate tax rate for real estate not qualifying as a hotel is 20%. Based on the proposed amendments for the real estate tax regulation its tax rate could be reduced to 15% for the years 2013 en 2014 and set at 17.5% as for the year 2015. With the proposed amendments the real estate tax burden will be reduced from 0.8% of the economic value of the real estate to 0.6% for the years 2013 and 2014 and 0.7% starting 2015.
The real estate tax rate for real estate qualifying as hotel is currently 10%. Based on the proposed amendments for the real estate tax regulation this rate could be reduced to 5% for the years 2013 and 2014. The proposed tax rate for the year 2015 is 10%. Should the proposed amendments be accepted, the real estate tax burden on real estate qualifying as a hotel will temporarily be reduced from
0.4% of the economic value of the real estate to 0.2%.
Additionally to the already addressed proposed amendments for the real estate tax regulation, there is one more amendment that is relevant in this scenario. Currently real estate owned by entities do not qualify for the tax-free base of USD 50.000. Should the proposed amendments be accepted, the new tax-free base of USD 70.000 would also be applicable for real estate owned by entities.
Withholding tax (Opbrengstbelasting)
Distribution made by entities established on one of the BES-islands is subject to withholding tax. The term “distribution” should be interpreted in the broadest sense of the word. For example, the due capital on shares that were not paid up in full, qualifies as a distribution.
When determining the location of an entity for withholding tax purposes, special regulations apply. The fiscal location of an entity is confirmed in disposition from the Tax Inspectorate. Taking into account the fact that the entity will mostly only own a real estate that qualifies as an asset (not investment), there should not be a problem for the Tax Inspectorate to confirm that the entity is located on one of the BES-islands.
The applicable tax rate on the distributions is 5%.
Wage tax (loonbelasting) and income tax (inkomstenbelasting)
The shareholder of at least 5% of the issued shares of an entity established on one of the BES-islands that is considered an employee of the entity should receive a notional wage of at least USD 14.000. Exceptions can be made for example in the case that the entity is recently incorporated and no profit is expected. In these cases a request can be filed with the Tax Inspectorate to set the notional wage of the employee/shareholder in accordance with the profit realized by the entity. This option is only available for the first three years following the year of incorporation of the entity. The applicable tax rate over the notional wage is 30.4%. Next to the notional wage, the received distribution is also subject to income taxation. Assuming that the investor will hold at least 5% of the issued shares in the real estate entity, no additional income tax should be due over the received distribution on the BES-islands.
For the sake of completeness, we state that this article is based on current BES tax legislation
at the time this article was written.
Source: Tax Office / Caribbean Netherlands
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