On the 1st of June 2015, the Government submitted a bill on Program Law (click here to view the text) to the Belgian Parliament. It contains several tax measures. The “Cayman Tax” or look-through tax (Kaaimantaks or Doorkijkbelasting) is the most notorious one. The Cayman Tax will introduce a look-through taxation of the income received by targeted foreign “legal structures” in the hands of its founders or beneficiaries who are Belgian resident individuals or Belgian legal entities that are subject to the Belgian Legal Entities Income Tax. As will appear from the summary description below, this measure may have unexpected far reaching effects.
Please note that the following summary description is based on the current version of the Program Bill which is not final yet and may thus be subject to further changes.
The Program Bill forms the second leg of the Belgian legislators’ action against foreign legal structures set up by Belgian taxpayers to avoid Belgian income tax. Before, the Program Law of 30 July 2013 already introduced an obligation for Belgian individuals to report in their personal income tax return the existence of certain foreign legal structures (i.e. a reporting obligation with no corresponding specific taxation consequences).
If the Program Bill is adopted it will complete this reporting obligation by re-defining the targeted foreign legal structures and by introducing an actual look-through taxation on the income received by such foreign legal structure in the hands of its founder(s) or beneficiary(ies). In this respect the term founder ("oprichter/fondateur") of a legal structure includes its legal founder(s), the settlor(s) or other persons having transferred assets to it, the heirs of a predeceased founder, as well as its legal or economic owner(s). In addition, the reporting obligation and look-through taxation are no longer limited to Belgian resident individuals but are extended to legal entities that are subject to the Legal Entities Income Tax as well.
Scope of the Cayman Tax
The Cayman Tax targets two categories of foreign legal structures:
- Trust-like structures without legal personality such as foreign trusts, foundations (if not incorporated), etc.
- Non-taxed or low-taxed entities with legal personality. The test for qualifying as non- or low-taxed is set at an effective income tax rate of at least 15%. In order to determine whether or not this 15% effective tax rate threshold is reached one has to compare the foreign income tax effectively due to a taxable basis re-computed in accordance with the Belgian corporate income tax rules. This means that one can take into account any specific Belgian tax rules which deviate from the mere accounting profits, either giving rise to a lower taxable base (e.g. the dividend received deduction, the deduction for patent income, the notional interest deduction, etc.) or increasing the taxable base (e.g. limitations on the deductibility of interest payments under the thin cap rules). This taxation test is to be applied on an annual basis, which means that with regard to the same foreign legal entity the reporting and look-through taxation may be applicable for some years and not be applicable for other years.
With regard to legal entities established in the European Economic Area ("EEA"), an exhaustive list of the targeted forms of entities will be provided by Royal Decree. Entities which are not included on the list will be out of scope of the Cayman Tax. This list may be changed periodically but frequent changes are not expected (and no major changes from the current existing list are expected either). With regard to legal structures established outside the EEA, a list of targeted forms of entities will also be provided by Royal Decree but this list will not be an exhaustive one and will thus not be decisive. Whether or not a non-EEA legal entity is within the scope of the Cayman Tax will have to be determined on the basis of the 15% effective tax rate test mentioned above.
There is an exclusion from the scope of the Cayman Tax for 'active companies' located in a member state of the EEA or in a (tax treaty) country having an appropriate bilateral or multilateral exchange of information arrangement with Belgium. In order to qualify for this exclusion, the founder(s) or beneficiary (ies) concerned should demonstrate that:
- The entity performs a real economic activity in the framework of its business in the country where the entity (or permanent establishment) is located; and
- The entity disposes of premises, personnel and equipment which are commensurate to its actual economic activity.
Certain types of financial investment entities (including public or institutional undertakings for collective investment or for investments in receivables), certain pension funds and pension management entities are excluded from the scope of the Cayman Tax. Listed companies (i.e. listed on qualifying EU or foreign stock exchanges) are excluded from the scope of the Cayman Tax as well.
Effect of the Cayman Tax: immediate look-through taxation in the hands of the founder(s)
The Cayman Tax achieves its intended look-through taxation by providing that the income earned by a legal structure in scope is taxed as if it were perceived directly by its Belgian founder(s). This implies that all types of income earned by the foreign legal structure will be taxed in the hands of the Belgian founder(s), irrespective of whether or not the income is actually passed on to the Belgian founder(s). Another implication is that the income earned by the foreign legal structure maintains its nature and fiscal qualification when taxed in the hands of the founder(s). E.g., real estate income earned by the legal structure will be taxed in the hands of the founder(s) under the taxation rules for real estate income. The same goes for interest, dividends, royalties, (tax-exempt) capital gains on shares, miscellaneous income and professional income earned by the legal structure. If the legal structure has more than one founder, then the founders will each be liable for their share in the structure or for equal shares if the precise share in the structure cannot be proven.
Avoiding double taxation
Obviously, the look-through taxation in the hands of the founder(s) may give rise to double taxation if the income earned by the legal structure is in fact attributed to a beneficiary which is not the founder.
To avoid such effect the founder can avoid look through taxation in his hands if, and to the extent that, he can demonstrate that the income earned by the legal structure has been effectively paid or attributed to one or more other beneficiaries who are established in a member state of the EEA or in a (tax treaty) country having an appropriate bilateral or multilateral exchange of information arrangement with Belgium. In such case, the income paid or attributed to another beneficiary is taxable in the hands of this beneficiary if the latter is a tax resident of Belgium.
The founders bear the risk of not being able to provide appropriate evidence of the payment or attribution to another qualifying beneficiary.
In order to avoid successive double taxation over time in the hands of the founder (s) or beneficiary (ies) (first at the time the income is earned by the legal construction on the basis of the look-through taxation rules and a second time when the income is actually passed on to the founder or beneficiary), an exemption from taxation is provided for any income paid or attributed that was already taxed under the Cayman Tax rules.
The current version of the Program Bill is still in need of further clarification as it might be interpreted differently with regard to distributions made upon the winding-up of a targeted foreign legal entity or a transfer of its assets without due compensation.
The draft Program Law contains several anti-abuse clauses that are aimed to deter taxpayers from working their way around the scope of application of the Cayman Tax. Firstly, any changes made to the articles of incorporation of a legal structure after 9 October 2014 in order to change the nature of the structure as such cannot be opposed to the tax authorities. Furthermore, any change made to the articles of incorporation of a non-taxed or low-taxed entity (mentioned sub (b) above) in order to transform the legal entity into a trust-like structure so as to avoid the taxation upon liquidation or winding-up or transfer of assets without due compensation, will also be considered non-opposable to the tax authorities. Finally, and more generally, any legal act (or a series of legal acts) of the foreign legal structure is not opposable to the tax authorities in respect of the application of the Cayman Tax in the hands of the founder(s) or the beneficiary(ies).
Entry into effect
If the Program Bill is adopted as planned, the Cayman Tax will apply to income earned, distributed or paid by a foreign legal structure from 1 January 2015 onwards.
The Cayman Tax may have a significant impact on Belgian resident individuals, and legal entities subject to Belgium’s Legal Entities Income Tax, who qualify as founder (including successors to a predeceased founder) , or beneficiary of a targeted foreign legal structure.
On top of the intended immediate look-through taxation, it may have unexpected and unfair additional effects. By providing a legal presumption that the founder of a legal structure is immediately taxable on income earned by the legal structure, the proposed measure allows the tax administration in some cases to tax the founders on income which they have not received and will never receive. Furthermore, if income is passed on by the legal structure to another beneficiary but insufficient evidence is available to prove this, the founder can still be taxed on that income (regardless of the taxation in the hands of the beneficiary once the legal structure effectively distributes the income).
It remains to be seen which legal structures will be included in the two lists of targeted structures. However, it should be kept in mind that the list comprising the non-taxed and low-taxed foreign legal entities located outside the EEA is non-exhaustive. Thus, if a non EEA entity is not mentioned on the list, it should still be examined whether that company is actually subject to an effective tax rate of 15% (calculated on a taxable base determined following the Belgian tax rules). If not, then the Cayman Tax could apply unless the Belgian taxpayer can demonstrate the real economic substance and activity of the legal structure. For many bona fide taxpayers this may be a burdensome analysis to make.