Meet The Members Europe – Understanding Belgium’s ‘Cayman Tax’ rules

Over the past decade, tax authorities around the world have tightened measures to ensure proper tax compliance by resident taxpayers on their global assets and income.

In Belgium, the fiscal transparency rules for foreign investment structures that were adopted in 2015 are known as the ‘Cayman tax’ rules.

The Cayman tax can be considered quite unwelcoming to those who move to Belgium for their work, become residents, and therefore become subject to these taxes. Some estate planning structures (like trusts) which are common and fully legal in their former home country can become subject to far-reaching Belgian tax measures.

The Cayman tax applies to the following entities:

a) All trusts, known as Type 1 Structures.

b) Companies, associations, institutions, and any other entities with separate legal personalities that are not subject to income tax or which are subject to an income tax that is lower than 15%, as calculated by Belgian tax standards (Type 2 Structures).

Note: A Royal Decree includes a non-exhaustive list of entities established outside the European Economic Area that are presumed to be in scope. Entities established within the EEA are only targeted when they are blacklisted.

c) Contracts are also concerned, should the contract involve investment in Type 1 or Type 2 structures or provide for the distribution of assets of Type 1 or Type 2 structures (e.g. insurance contracts). These are known as Type 3 Structures.

The Cayman tax applies to Belgian residents who are the founders and/ or beneficiaries of these entities. Whereas beneficiaries are only subject to the Cayman tax as and when they receive a distribution from a targeted entity, the founders of the entity will be taxed directly (this is known as transparent taxation). With transparent taxation, the founders will be taxed on the income of the targeted entities as if the entity did not exist – as if they had received the income directly. Transparent taxation will not apply if the income received by the legal entity has effectively been paid or granted to the founder (or a beneficiary) in the same year that the targeted structure received it.

Distributed assets and income are taxable as dividends at a flat rate of 30%. Beneficiaries are subject to this tax if they cannot demonstrate that this represents:

• The initial contribution

• Income that has already been subject to its appropriate tax regime in Belgium.

“The Cayman tax has already been amended and contested several times during its relatively short existence.”

In this context, it should be noted that the initial contribution is deemed to have been distributed last. Income, on the other hand, is considered distributed on a FIFO basis.

Contribution of economic rights, shares or assets of Type 1 and Type 2 structures – and transfer of assets of Type 1 and Type 2 entities – to a nation with which Belgium has not concluded an agreement on the exchange of tax information will result in this tax being applied. Those responsible for paying this tax include:

• The founder of the structure

• The individual or legal entity, subject to tax for legal entities (rechtspersonenbelasting) who contributed assets to the structure, where the structure itself was founded by a third party

• Individuals who will directly or indirectly inherit from the founders, unless they can demonstrate that neither the direct heir nor the latter’s heir will ever receive any benefit from the structure

• Individuals or legal persons subject to the tax for legal entities (rechtspersonenbelasting) who hold the shares or economic rights of Type 2 structures

• Individuals or legal persons subject to the tax for legal entities (rechtspersonenbelasting) who have concluded a Type 3 contract and in whose name the premiums were paid

“Some estate planning structures (like trusts) which are common and fully legal in their former home country can become subject to far-reaching Belgian tax measures.”

Furthermore, Belgian residents that fall under the scope of the Cayman tax must report the existence of the targeted entity in their annual income tax return. Certain information about the entity, such as their name, legal form, address, identification number and details about the trustees (if applicable) must be declared.

The Cayman tax has already been amended and contested several times during its relatively short existence. On 28 January 2021, the Belgian Constitutional Court ruled to annul the taxation of distributions made by trusts without legal personality that are deemed as dividends (in the same manner as dividends distributed by offshore entities with legal personality.)

According to the Court, this taxation was discriminatory because offshore entities with legal personality were subject to the Cayman tax if their effective income tax rate is lower than 15% in their country of residence. This threshold tax burden was not similarly applied for trusts without legal personality. This meant that they would fall within the scope of the Cayman tax regardless of their effective income tax rate.

The Constitutional Court’s annulment has a retroactive effect, meaning that the distributions made by trusts without legal personality that were taxed in this way were declared illegal. Beneficiaries of this income can claim a refund of the tax levied from the tax authorities.

In this context, determining tax residency status becomes an important factor for foreign individuals who decide to move to Belgium. Only Belgian resident taxpayers are subject to the Cayman tax, whereas those who qualify as non-resident taxpayers aren’t.

It should also be noted that Belgium has a recently updated stipulation for ex-pats which states that if the ex-pat request is approved, they are considered to be a “non-resident” of Belgium. If the tax is applicable, it will be important for them to assess whether they are considered a founder or a beneficiary of the structure.