A new law aimed at significantly tightening the Cayman tax was recently tabled in the Belgian parliament. The Cayman tax “version 2.1” reform, which is designed to remedy the shortcomings identified by the Court of Auditors in a report published in April 2023, may come into force on 1 January 2024, giving taxpayers impacted by the legislation little time to react.
How the Cayman tax works
The Cayman tax is a tax measure designed to combat tax evasion by Belgian residents who hold “legal constructions” established abroad (e.g. a trust or untaxed foreign company with legal personality).
Belgian residents considered to be the "founders" of such a legal construction (including, in certain cases, beneficiaries or heirs) will be taxed transparently on the income received by the structure as if they had received it directly and independently of any actual distribution (i.e. "tax without cash").
In addition, all distributions made by the legal constructions to its Belgian resident "founders" will be considered taxable as dividends (at the rate of 30%) unless the shareholder can prove that the distributed income has already been "taxed in Belgium" or if the distribution relates to capital initially contributed by the founder.
Main points of the reform
1. Dedicated undertakings for collective investment: 50% threshold
Under the current texts, Belgian tax residents holding shares or units in undertakings for collective investments (UCI) or dedicated compartments of foreign UCIs may be subject to the Cayman tax if these are "dedicated" to them. This refers to (compartments of) the UCI in which the rights are wholly owned by a person or persons related to each other.
To avoid the Cayman tax, some taxpayers transferred a negligible proportion of the shares or units of the UCI to a third party (i.e. a front man) as an "unrelated" person so that the UCI would no longer be "dedicated".
The reform aims to hinder such avoidance (which could presently be considered tax abuse) by providing a minimum shareholding threshold of 50% in the UCI in order to remain outside the scope of the Cayman tax. In other words, according to the reform a Belgian resident (or several related Belgian residents) owning 60% of the shares in a Luxembourg SICAV (investment company with variable capital) will fall within the scope of the Cayman tax.
Independent of the percentage held, the draft also provides for two presumptions of the "dedicated" nature of the UCI:
- if the asset manager receives specific instructions from persons holding rights of the UCI to buy or sell certain financial instruments; or
- if there is no independent manager.
2. Exit tax
The reform provides for the creation of an "exit tax" specific to the Cayman tax in two cases:
- Firstly, when the founders transfer their tax residence abroad (in or outside the EU);
- Secondly, if the economic rights, shares or units of the legal arrangement are contributed to another legal constructions or legal person, or are transferred outside Belgium.
The "undistributed earnings" of the legal constructions at the time of departure will be taxed as dividends (at a rate of 30%). This exit tax may be paid on a staggered basis over five years.
3. Dual structure and expansion of the concept of "founder”
At present, the Cayman tax is aimed at "chain constructions" in the sense that it applies where legal constructions are superimposed. However, it no longer applies when an entity that is not a legal structure (e.g. a Belgian limited liability company) is interposed at the top of the structure and 'cuts' the chain.
To counter this loophole, the reform extends the definition of "founder" to include those who own rights within legal constructions via "intermediate constructions" that are not legal constructions.
4. Presumption of founder status
Due to the lack of information on foreign entities, the tax administration is faced with the difficulty of identifying Belgian taxpayers who are founders of legal arrangements. To remedy this, the reform provides that a Belgian taxpayer listed in an UBO register as the beneficial owner of a foreign legal construction is presumed to be the founder unless there is proof to the contrary.
The explanatory memorandum specifies that this presumption should not be applied "automatically" by tax authorities and should be limited to cases where the taxpayer "does not cooperate" with the investigation or if the investigation "does not reveal the concrete facts and circumstances that explain why this taxpayer appears in the UBO register". It should be noted that the legal text is ambiguous, merely providing that the presumption applies "in the absence of proof to the contrary and having regard to all the relevant facts and circumstances".
According to the explanatory statements, an example of a case where the presumption should not apply is the independent director of a foundation who is appointed because of experience that can be plausibly demonstrated.
5. Distribution of income not effectively taxed by transparency
The reform also provides for the tax distribution of income that was exempt when the transparent taxation system was applied (e.g. capital gains on shares made as part of the normal management of private estate). Currently, it is sufficient for the income received by the legal construction to have undergone its normal tax regime in Belgium on a transparent basis (this normal tax regime may be an exemption regime) in order to avoid any taxation at the time of distribution.
Under the reform, the plan is to limit this absence of taxation on distribution to income that has actually been taxed while income that has been exempted would be taxed at the time of distribution at a rate of 30%. The stated aim is to prevent making the application of the Cayman tax more advantageous than not applying it.
6. Reinforcement and clarification of "substance exclusion"
Currently, a legal construction falls outside the scope of Cayman tax if it carries out a "real economic activity". The draft law clarifies this "substantive exclusion" by specifying that it must be a substantial economic activity in relation to the total income derived by the construction, consisting of offering goods or services on a given market. The management of a founder's private estate is thus excluded.
The economic activity must be supported by staff, equipment, goods and premises, and be credible in terms of turnover and the economic activity claimed. According to the explanatory statements, it is not enough to merely rent office space and employ a part-time employee.
7. Distribution within three years of losing legal status
Sometimes an entity loses its status as a legal construction (e.g. because it becomes taxed above the required percentage). Under the current law, the distribution made after the loss of this status is exempt from Cayman tax.
To prevent such manipulation, which consists of waiting for the tax period when the legal construction loses its qualification before making a distribution, the draft law provides that distributions made by entities qualified as legal constructions during at least one of the three previous tax periods are now taxable as dividends.
8. Compulsory declaration with specific appendix
The reform law introduces a compulsory declaration requirement with a specific appendix to the personal income tax return, which will facilitate the administrative and budgetary monitoring of the Cayman tax, listing income collected both through construction and distributions.
Entry into force
The reform is expected to come into force on 1 January 2024 for distributions and income obtained by legal constructions on and after that date. There is no mention, however, of distributions relating to income earned prior to this date, which suggests that distributions after 1 January 2024 of reserves accumulated prior to this date could be taxed at 30%. The mandatory appendix is expected to come into force during the 2024 tax year.
The validity of several points of this reform raises questions about the principles of equality, non-discrimination and European law. Furthermore, the practical feasibility of a number of elements seems doubtful.
The draft could be subject to parliamentary amendments. This could delay the legislative process and alter the content of the reform. There is no guarantee that all the measures envisaged will ultimately be adopted, but the stated intention of the government is clear and should encourage caution.
Furthermore, the many reservations expressed by the Council of State, which had only days to issue its opinion, appears to warn that the Constitutional Court could annul the law.