Belgium targets low-tax wealth structures with its new “Cayman Tax”

On Thursday 21 May 2015, the Council of Ministers approved a draft act containing a series of new tax measures including the “Cayman Tax”. Belgium has therefore decided to follow its Dutch neighbour's example and target income received from low-tax wealth structures.

According to the law of 30 July 2013 introducing an obligation to declare legal constructions in which the taxpayer owns shares, the new “Cayman Tax” aims to introduce a fiction of tax transparency to prevent tax avoidance through a wealth structure.

Therefore, income received as of 1 January 2015 from such legal constructions will be taxed as if it were received directly by its “founders”. However, only Belgian private persons and Belgian legal persons subject to Belgian income tax on legal entities will be considered “founders”. Moreover, the tax fiction will not apply when the income received by the legal construction is paid to another beneficiary, provided that he is a resident of another Member State of the EEA, of a State with which Belgium has concluded a tax treaty providing for the exchange of information relating to income tax or with which Belgium has concluded a treaty on the exchange of information on tax matters.

To determine which structures will be targeted by the new tax, we should consult article 2, §1, 13°, a) and b) of the Belgian ITC/92. Therefore, two categories can be distinguished: the first one concerning trusts without legal personality as well as foundations, the second one concerning legal persons not taxed, either at all or not enough. With the new law, the definition in the second category will be modified and will include: "Any company, association, establishment, organism or other entity which has the judicial personality and which, according to the law of the State where it is established, either is not taxed on its income or is taxed but benefits from a tax regime which is markedly more advantageous than in Belgium."

Three remarks need to be made in this regard:

• A tax regime will be considered “markedly more advantageous” once the tax rate is lower than 15%.
• All income is targeted. As a consequence, the qualification of “legal construction” might change between different tax periods.
• The tax will be due on income received and distributed by the legal construction.

However, legal structures established in a Member State of the EEA will be excluded from the qualification of “legal construction”. The following will also be excluded: listed companies, pension funds, management funds of worker’s participation and UCITS. Furthermore, a Royal Decree will set out which legal constructions will irrefutably be presumed to not be subject to income tax or subject to a markedly more advantageous regime.

Nevertheless, it will be possible for the taxpayer to avoid the Cayman Tax. Indeed, the founder will be able to demonstrate that the legal construction is subject to sufficient taxation, i.e. 15% (this proof will have to be renewed each year). To do so, the explanatory statement provides that the taxpayer will first have to determine whether the legal construction would have been subject to corporate income tax or income tax on legal entities if the legal construction was a Belgian resident. After that, the tax base will have to be determined according to Belgian law. In that regard, when it comes to corporate income tax, deductible business expenses, DTI’s deduction, patent income deduction, deferred losses, etc. will have to be taken into account. Finally, the ratio between the tax effectively due and the tax base under Belgian rules will have to be calculated. If the ratio exceeds 15%, the “Cayman Tax” will not apply.

Therefore, even though we are only at the draft stage, the main guidelines are already fixed and it is reasonable to assume that this new tax will, as in the Netherlands, lead to massive dismantling of private wealth structures.