The assessment system for legal structures was introduced in 2015. It soon acquired a nickname: the Cayman Tax. This new form of taxation was supposed to allow income of certain legal structures – such as trusts, foreign foundations and low-taxed foreign entities – to be subject to tax on the part of the Belgian founders. Over the years, these regulations have been through several thorough revisions. The House of Representatives recently approved a bill that once again sharpens the Cayman’s teeth.
We briefly discuss the most important changes.
As you may recall, the Cayman Tax makes the income of certain legal structures taxable on the part of the Belgian founder. If a Belgian resident is the founder of a legal structure, he/she will be taxed on that structure’s income as if the income had been received directly. This is the so-called look-through tax, or Cayman Tax. In addition, all distributions to the founder are taxed as dividends at a rate of 30%.
From now on, the full definition of a legal structure is in the Income Tax Code 1992 (‘WIB92’) and no longer in two Royal Decrees (those of 23 August 2015 and 18 December 2015). The opportunity has been taken to broaden the definition. For instance, in the new rules, ‘fonds dédiés’ are targeted as soon as more than 50% of their rights are held by one person or by several persons connected to each other. It will therefore no longer be possible to escape the Cayman Tax by using ‘front men’ as unrelated persons.
In addition, the scope for hybrid entities has also modified. These are entities that have legal personality, but that are fiscally transparent in the state where they are incorporated. Such entities were already legal structures under the old Cayman Tax, but were able to escape application of the tax in two situations: (i) where the hybrid entity’s income is subject to income tax of at least 1% on the part of the Belgian shareholders and (ii) where the hybrid entity’s activity generates income that would be exempt from Belgian tax under a double tax treaty if that activity were carried on directly by the Belgian founder.
Only the first exception is now included in WIB92. This adjustment may appear innocent at first glance, but it could have significant consequences for a French Société Civile Immobilière (SCI). If a French SCI only owned French real estate that was not rented out (e.g. a second home), its Belgian shareholders were able to invoke this exclusion. This will not always be the case in future, meaning that Belgian shareholders of a French SCI will at least need to reassess the impact of the expanded Cayman Tax on their personal tax situation.
Finally, it should be mentioned that the Minister of Finance confirmed during the discussion of the adjustments in the House that a Dutch Stichting Administratiekantoor should be regarded as a legal structure. This is especially important in the context of expanded reporting obligations in personal tax returns with regard to legal structures (see below).
Under the old rules, the application of the Cayman Tax was often avoided by interposing a normally taxed entity between the Belgian resident and the legal structure in question. As this meant that the Belgian shareholder did not hold any rights in a legal structure, this shareholder was not considered to be the founder of a legal structure and the application of the Cayman Tax was therefore avoided.
In future, this will no longer be possible, as the new rules extend the concept of ‘founder’ to natural persons who directly or indirectly own rights to legal structures through a chain of ‘intermediate structures’. Interposing a normally taxed entity will therefore no longer prevent someone from being classified as the founder of a legal structure.
The extension of the concept of ‘founder’ is also worth mentioning. From now on, persons who are listed in the UBO register as the ultimate beneficiaries of a legal structure will be deemed to be its founders. It is up to the taxpayer to provide proof to the contrary if necessary. This provides an extra weapon for the Belgian tax administration.
If a legal structure makes a distribution to a Belgian founder, this distribution may be exempt from taxation if the founder can demonstrate that the distribution relates to income that has already been subject to tax in Belgium. If this cannot be shown, the distribution is taxable as a dividend at a rate of 30%.
This exemption has been tightened up in the reformed Cayman Tax. From now on, the exemption will be refused if the distributed income derives from income that falls outside the scope of WIB92 or that is exempt under WIB92 or a treaty. In this way the situation is avoided where the application of the Cayman Tax is sometimes more advantageous – for example in the case of distribution through a legal structure of a capital gain on shares that has already been subject to tax in Belgium (i.e. which is exempt as the gain was realised within the scope of normal private asset management).
A welcome and fair clarification is that WIB92 now states in so many words that counterevidence can be provided by an entity that has been classified as a legal structure for at least one of the three past taxable periods. Under the old rules, this counterevidence was only possible if the entity in question was still a legal structure at the time of the distribution. If the entity was no longer a legal structure at the time of distribution, its founder could no longer rely on this exclusion (and was therefore taxed a second time on the same income).
Under the existing rules, any transfer abroad of a legal structure’s assets gives rise to the payment of a fictitious dividend. The new legislation retains this principle, but clarifies that the transfer of a legal structure’s assets from abroad to Belgium does not give rise to the payment of a fictitious dividend.
The introduction of an exit tax when the founder moves his/her domicile or base of wealth (zetel van fortuin/ siège de fortune) abroad is revolutionary. Under the new rules, such a relocation is regarded as a new case of fictitious liquidation, and the legal structure’s assets are (fictitiously) distributed at a rate of 30% personal tax, as if they were a dividend.
The payment of the exit tax can be spread over time if the legal structure is established in the European Economic Area. If this is not the case, then payment must be immediate.
If a legal structure carries out an actual economic activity, the Cayman Tax does not apply. This is defined in WIB92 as a substantial economic activity, supported by personnel, equipment, assets and buildings, from which it mainly derives its income. Moreover, this economic activity is limited to the provision of goods and services in a particular market.
The law provides for a significant extension of the reporting obligation in the personal tax return. From 1 January 2024, a schedule must be appended to the personal tax return, stating the income that each legal structure has separately obtained, the amount of its assets at the end of the taxable period, the share of these assets contributed by the founder, distributions made by the legal structure, etc.
This measure should make administrative follow-up easier for the tax administration, but it goes without saying that it will create a lot of additional administrative work for the taxpayer. Moreover, it will be important to analyse very thoroughly what information needs to be included and how it can best be provided, in order to avoid unnecessary questions from the tax administration.
It is clear that the Cayman’s teeth have once again been sharpened. If the matter was previously in any doubt, it is now abundantly clear that the legislators want to encourage taxpayers to move legal structures of which they are the founders to Belgium. This will bring the legal structure’s assets back within the scope of Belgian income tax.
If you are in any doubt as to whether or not you are the founder of a legal structure, it is recommended that you have this thoroughly checked. Even if you already report a legal structure in your personal tax return, it is important to check the impact of the new rules on your personal situation. The preparation of the personal tax return for assessment year 2024 is the ideal opportunity for this, as the extended reporting obligation comes into effect from assessment year 2024 (relating to income for 2023).
Grant Thornton’s Private Client Services team is ready to offer you assistance and guidance in this complex area.
If you would like to know more, simply contact your Grant Thornton advisor.