Tax Alert 28 August 2015 For more information, please contact Alain Huyghe Partner firstname.lastname@example.org Matthias Doornaert Associate email@example.com Baker & McKenzie CVBA/SCRL Louizalaan 149 Avenue Louise Eleventh Floor Brussels 1050 New "Cayman Tax" published In 2013, the previousBelgian government introduced a new reporting obligation for individual foundersand beneficiariesof so-called "legal arrangements" (i.e.,trusts, foundationsand certain tax haven companies). At the same time, the previousgovernment also internally discussed a draft bill seeking to further discourage the use of such legal arrangementsfor tax purposes by introducing a regime of tax transparency.Thisbill waseventually not submitted to Parliament. On 9 October 2014, the new Belgian federal government announced, in its coalition agreement for the coming term, itsintention to introduce a regime of tax transparency for the income of trustsand other foreign legal arrangements (the so-called "Cayman Tax"). The draftbill containing the Cayman Tax was approved by Parliament on 24 July 2015 and the final bill of 10 August 2015 (the "Bill") waspublished in the Belgian official Gazette on 18 August 2015. The Cayman Tax issimilar to the tax transparency regime provided for in the previousdraft bill.Under the Cayman Tax,income received by a legal arrangement will generally be taxed either in the handsof itsindividual Belgian resident founders(in the absence of any distribution) or, upon distribution, in the handsof Belgian resident beneficiaries. Moreover, distributionsmade upon liquidation of certain legal arrangements(legal entities) will also be treated asa taxable dividend. The Cayman Tax,and consequently the aforementioned reporting obligation, will also apply to Belgian not-for-profit entitiesacting asfounder or beneficiary of legal arrangements. The Cayman Tax will notapply to Belgian resident companiesacting assuch. The Bill providesthat the Cayman Tax will apply to income received, attributed or made payable by legal arrangementsas of 1stJanuary 2015, so with a retroactive effect. Targeted "legal arrangements" The Bill providesfor two typesof legal arrangements: (i) Trusts (ii) Foreign legal entities (i.e. foundations and companies), which are either not subject to an income tax or are subject to an income tax that representsless than 15 percent of their taxable income as determined under Belgian tax law Foreign legal entitiesestablished in the European Economic Area (EEA) will not be regarded as“legal arrangements,” unlessthey are included in a list of legal arrangements, which isyet to be published. A second (non-exhaustive) list, also to be published, would contain entitiesestablished outside the EEA that are deemed to be legal arrangements(unlessit can be proven that they are subject to an effective income tax rate of 15 percent, asindicated above). 2. Tax Alert - 28 August 2015 - New "Cayman Tax" published It is likely that many of the foreign entitiesthat are included in the current blacklist for reporting purposeswill be included again in the new lists. Public and institutional undertakingsfor collective investment and pension fundsas well aslisted companieswill not be viewed aslegal arrangements under certain conditions. Moreover, a foreign trust or legal entity will not be considered a legal arrangement ifit can be proven that (i) it carriesout genuine economic activitiesin connection with the exercise of a businessactivity at the place where it is established or where it hasa permanent establishment, and (ii) there is a proportionate correlation between the activitiescarried on by it and the extent to which it physically existsin termsof premises, staff and equipment. Thiscounterproof will only be possible for legal arrangementsthat are established in the EEA or in a country that, pursuant to a tax treaty, agreement or other bilateral or multilateral legal instrument, can exchange with Belgium information relating to tax matters. The explanatory statement on the Bill notesthat thisexception will not apply to activitiesthat fit in the managementof a private estate. Targeted Belgian taxpayers The Cayman Tax will apply to Belgian resident "founders" and "third party beneficiaries." A “founder” is defined asany of the following: Any individual or Belgian not-for-profit entity who hasset up the legal arrangement or hassettled assets and rightstherein Upon decease of the aforementioned individual founders, their direct or indirect heirsor the individualswho will directly or indirectly inherit from the latter, unlessthey or their heirscan demonstrate that they will never obtain any benefitfrom the legal arrangement A third-party beneficiary isany Belgian resident individual or not-for-profit entity that receives, at any time or in any way, a financial benefit or a benefit in kind from a legal arrangement. An individual can qualify both asa founder and asa third-party beneficiary. Tax transparencyin respectof income received by legal arrangements The Bill providesfor a tax fiction pursuantto which Belgian residentfounders of legal arrangementswill be deemed, for Belgian tax purposes, the beneficiariesof the income received by such legal arrangementsand therefore, will become taxable thereon. Founderswill not be taxable based on the income of their legal arrangements if they can prove that such income hasbeen paid to a third-party beneficiary that isresident in a country that, pursuant to a tax treaty, agreement or other bilateral or multilateral legal instrument, can exchange with Belgium information relating to tax matters. Individuals(other than the initial founder) who can demonstrate that they will never obtain any benefit from the legal arrangement will not be deemed as founders. According to the explanatory statement on the Bill,individualscan prove thisby (i) renouncing any benefitfrom a legal arrangement to which they may be entitled; and (ii) providing a letter from the relevant body of the 3. Tax Alert - 28 August 2015 - New "Cayman Tax" published legal arrangement that confirmsthat the individual can never obtain any benefit from such legal arrangement. Tax treatmentof income distributed bylegal arrangements (other than upon liquidation) The Cayman Tax also providesfor a tax fiction at the level of a third-party beneficiary who isresident in Belgium. When income received by a legal arrangement isdistributed in the same year to said third-party beneficiary, the latter will be deemed the beneficiary of such income for Belgian tax purposes and will become taxable thereon. On the basis of the explanatory statement to the Bill, the following distinction can be made with respect to distributionsby legal arrangementsto third party beneficiariesresident in Belgium: (i) Distributionsby foreign companies(other than upon liquidation) Dividend distributionsby foreign companiesare currently already taxable at the level of Belgian shareholdersat 25% (normally 27% asof 1 January 2017). Under the Cayman Tax,dividend distributionsfrom current year earningsand from earningsaccumulated during prior yearsto third party beneficiarieswould remain taxable at the level of third party beneficiaries, unless the income that isdistributed hasalready been subject to the application of the tax transparency regime in Belgium. (ii) Distributionsby trusts (other than upon liquidation) Under the new tax fiction, distributionsby a trust would only be taxable at the level of third party beneficiaries, to the extentthey relate to income which the trust has received in the same year. Distributionsof earningsaccumulated during prior yearsto third party beneficiarieswould not be taxable on the basis of the explanatory statement to the Bill. (iii) Distributionsby foundations(other than upon liquidation) The same tax treatment applicable to distributionsby trusts should arguably apply to distributionsby foundations, asthe latter are not companiesand can in principle notdistribute dividends. However, the Bill and itsexplanatory statement are not clear in thisrespect. Liquidation oflegal arrangements Distributionsmade by a foreign legal entity that qualifiesasa legal arrangement asa result of itsliquidation or the total or partial transfer of its assets for which no equivalent consideration isreceived will be considered a taxable dividend for the part that exceedsthe amount of contributed assets that have been subject to their tax regime in Belgium. The exactmeaning of "having been subject to their tax regime Belgium" isnot yet entirely clear. According to the explanatory statementon the Bill, the abovementioned taxation would also apply in case of a transfer of seat of a legal entity. However, there seems to be no legal basisfor such taxation in the law, asthe relevant holder doesnot receive any paymentand he continuesto hold the rightsin the entity whose legal seat hasbeen transferred. On the basis of the explanatory statement to the Bill, the following distinction can be made with respect to distributionsby legal arrangementsupon liquidation to third party beneficiariesresident in Belgium: (i) Distributionsby foreign companiesand foundationsupon liquidation 4. Tax Alert - 28 August 2015 - New "Cayman Tax" published Currently, the liquidation bonus(i.e. the liquidation proceedsexceeding the paid-up capital) distributed by foreign companiesisalready taxable at the level of Belgian shareholdersat 25% (normally 27% asof 1 January 2017). Under the Cayman Tax, distributionsfrom earningsaccumulated during prior years (prior to the entry into force of the Cayman Tax) will remain subjectto tax upon liquidation. Note thatthistax will apply not only in case of liquidation of foreign companiesbut also in case of liquidation of foreign foundations. (ii) Distributionsby trusts upon liquidation Surprisingly, distributionsmade by a trust upon itsliquidation would not be considered taxable. In other words, trusts would be able to distribute their income accumulated prior to the entry into force of the Cayman Tax without taxation. Accordingly,the main difference between a trust and a foreign legal entity (companiesand foundations) qualifying asa legal arrangement isthat upon liquidation of the latter, the distribution of income accumulated in the years prior to the entry into force of the Cayman Tax istaxable, whereasupon liquidation of a trust, the distribution of such income seemsnot to be taxable according to the Bill and the examplesprovided in the explanatory statement thereto. Often a trust will hold itsassets through another company,which may also qualify asa legal arrangement for purposesfor the Cayman Tax. The distribution of the sharesof such underlying company should not be a taxable event under the Cayman Tax. However, the subsequent liquidation of the underlying company and the distribution of itsliquidation proceedswill normally be taxable at the level of a Belgian shareholder (whether or not the underling company qualifiesasa legal arrangement). Anti-abuse provisions and entryinto force The Bill providesfor a specific anti-abuse provision pursuant to which tax authoritieswould be entitled to disregard legal actsof foreign legal entities qualifying aslegal arrangements, which are aimed at circumventing the Cayman Tax. Moreover, it isprovided that any change to the deed of incorporation of a foreign legal entity (legal arrangement) in order to convert it into a trust to escape the taxation upon liquidation of the latter isnot binding upon the tax authorities. In the absence of any possibility for taxpayersto provide counterproof thatthe transaction isdriven by a valid economic or other motive (other than avoiding the application of the Cayman Tax), the legal validity of thisspecific antiabuse provision seemsdisputable. The Bill also providesthat any changesto the deed of incorporation of a trust in order to convert it into a legal entity (legal arrangement) asof 9 October 2014 isnot binding upon the tax authorities. Learnings As of 1st January 2015,Belgian residentsthat can be considered foundersof foreign trusts, foundationsand tax haven companieswill become subjectto a tax transparency regime. Thismeansthat, asof 1st January 2015, they will be considered the direct beneficiariesof income received by such legal arrangementsfor Belgian tax purposesand thuswill become taxable thereon, even if such income isnot distributed by the legal arrangementto the beneficiary. 5. Tax Alert - 28 August 2015 - New "Cayman Tax" published Many legal arrangements, such as trusts and foundations, hold their investmentsthrough underlying companies. If these underlying companies could also be considered aslegal arrangements, the Belgian resident founderscould be considered the ownersof the investmentsheld by the underlying companiesand thuscould be taxed on the income received thereon, irrespective of whether they would receive such income from the legal arrangement or not. Recommended actions Different scenarioscould be considered to alleviate the tax burden that Belgian resident foundersmay encounter asa result of the proposed tax transparency rules. For instance, one could consider having legal arrangementsholding typesof investmentswhose income istypically exempt from Belgian income tax under certain conditions(e.g., capital gainsrealized on shares or on certain accumulation UCITS investing not more than 25 percent in debt instruments) instead of investmentswhose income istaxable according to Belgian law. In such case, the tax transparency regime would not have adverse tax consequencesfor Belgian residentfounders. Moreover, liquidation of trustswith Belgian resident foundersor beneficiaries may also be considered, asitsaccumulated income seemsnot to be taxable in Belgium upon distribution to such Belgian residentsunder the Bill and its explanatory statement. In thisrespect, it should also be taken into account whether the trust holdsany companiesand what the impactwould be of the Cayman Tax on the distribution thereof. More generally, taxpayersare recommended to evaluate the use of foreign structures qualifying aslegal arrangementsin lightof thischange in tax treatment. Alain Huyghe Matthias Doornaert * * * ©2015 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein withmember law firms around theworld. In accordancewith the common terminology used in professional service organizations, reference to a“partner” means aperson whois a partner, or equivalent, insuch alaw firm. Similarly, reference to an“office” means anofficeof any such law firm. This may qualify as “Attorney Advertising” requiring noticein some jurisdictions. Prior results donot guarantee asimilar outcome.