Islamic Finance and the Curacao Private Foundation

By Priscilla Lotman, Front Shore and Tamara Stienstra, Spigt Dutch Caribbean, Curacao (01/07/2013)

The growing importance of social responsibility and ethics within the financial world are shedding new light on, and confirming, the importance of Islamic Finance and how this alternative financial segment is changing the traditional ways of finance. The growth of this market segment is mainly due to increasing preference for Sharia’a compliant financial products, proactive measures from governments and many offshore jurisdictions promoting the development of Islamic finance.

There are changes occurring in the financial world where people are looking for sustainable and ethical means of investing, banking and wealth management. Also, countries such as Indonesia are transforming their financial and economic industry by introducing and promoting the concepts of Islamic Finance.

Indonesia is pushing its efforts to expand Islamic finance, especially in banking. The country is confident that this could contribute greatly to economic growth, financial system stability and social well-being. And though Islamic Finance holds only about 4.5 per cent of the financial market segment at the moment, the government is aiming for a market share of 10 per cent by 2015. In terms of its population this is of course tremendous and the opportunities boundless. Indonesia has a strong Islamic finance base on a broad spectrum, including fully-fledged Islamic banks, Sharia’a compliant banking windows, compliant multi-finance institution and of course the Indonesia Sharia Stock Index (ISSI). With the growth of this sector investors will look for Sharia’a compliant asset protection and investment vehicles for their structures.

There is of course an indirect historic link between Indonesia and Curaçao due to the Netherlands. Now there is an opportunity for these two jurisdictions to reconnect on a financial basis – more precisely with Islamic Finance. Curaçao is renowned for its financially friendly environment, its innovation in offshore fiscal products and its robust legislative and regulatory framework. In the process of continuous development the island is looking towards Islamic Finance and how its existing financial products can cater to the Sharia’a compliant investor. Investors in Indonesia are also expanding their horizons when it comes to asset protection, wealth management and their investment structures. The growth of the Islamic wealth management industry is primarily driven by the growing sophistication of Islamic financial products and institutions and the increase of the Sharia’a compliant investors seeking out these products who previously lacked the options to manage their wealth accordingly. It is within this context that the use of the Curaçao Private Foundation (Stichting Particulier Fonds, SPF) as a wealth management vehicle for Sharia’a compliant investors was brought forward.

The Curaçao Private Foundation

Since its introduction in 1998, the Private Foundation has become a widely used vehicle for private individuals and international companies. Generally the Private Foundation may be of use in almost any situation that a common-law trust is used for, such as asset protection and estate planning, however, as it is a legal entity the use of the Private Foundation is a bit broader. It is often used as a passive holding or passive investment company for charitable purposes, estate planning and capital preservation. In addition the Private Foundation can be used to separate legal and beneficial ownership. In each case it must be determined whether the Private Foundation is considered an operating enterprise or not, as this will undoubtedly affect its tax rate. The Private Foundation is a special form of the entity foundation. The founder enjoys a great deal of flexibility in the establishment of a Private Foundation with any specific requirements that are needed for the particular structure. It is within this flexibility that the concepts of Islamic Finance can be added to the bylaws of the Private Foundation. Though this is completely left to the founder it could add depth for those wanting detailed aspects of Sharia’a compliance or to ensure the Foundation is used for ethical and sustainable purposes only.

For Indonesia it is the civil law link that is of most interest. The legal systems of many offshore jurisdictions specialising in the structuring of Sharia’a compliant investment products are based on the Common Law system.Curaçao offers a flexible Civil Law option for companies and individuals working and living in other civil law nations.

On the Tax Side

According to the law, a Private Foundation is subject to profit tax. The current profit tax rate is 27.5 per cent. However, a Private Foundation is exempt from profit tax as long as such profit is not the result of running or carrying out a business.

A Private Foundation can apply for taxation at a profit tax rate of 10 Per cent. Such a Private Foundation can make use of the facilities of the profit tax laws, like participation exemption, investment allowance, depreciation and loss compensation.

The main tax incentive is, when applying for taxation at a rate of 10 per cent, the participation exemption under which dividend income received from and capital gains realised upon the disposal of qualifying shareholdings are fully tax exempt. If the NV holds at least five per cent of the paid up capital or owns at least five per cent voting rights in a company with a capital divided into shares, the participation exemption applies. A shareholding with a cost price of at least ANG 1 million qualifies as well.

Contributions of assets made by non-residents of Curaçao are not subject to Curaçao gift tax.

Curaçao does not levy dividend withholding tax on dividend distributions made by a Curaçao holding company. Distributions made by the Private Foundation to foreign beneficiaries are fully exempt from Curaçao tax. Curaçao transfer tax might be due on the transfer of, for instance, real estate situated in Curaçao or ships registered in Curaçao to or by the Private Foundation.