As from 1 January 2018, the Cayman tax (or look-through tax) has been substantially modified and now also targets multilayer structures as well as certain life insurance contracts. One of the objectives of the Government was to target taxpayers having recently contributed their offshore entity into a branch 23 life insurance contract to fall outside the scope of the Cayman tax.
The interaction of these new measures has however extended the scope of the Cayman tax beyond this objective. As a result, taxpayers holding a life insurance contract and who would legitimately consider themselves as being outside the scope of the new Cayman tax might nevertheless be affected.
Extension of the Cayman tax as from 1 January 2018
The Cayman tax aims at taxing Belgian taxpayers (individuals and non-profit entities) holding an interest in a foreign legal structure (LS) on a look-through basis on all the income earned by said LS, as if the LS did not exist (prorata the interest of the taxpayer in the LS). Until 31 December 2017, targeted LS included mainly:
- “A-type” LS, being all types of trusts,
- “B-type” LS, being mainly:
- all non-EU based legal entities paying no or little income tax (including a.o. offshore investment funds or hedge funds), and
- Certain dedicated (compartments of) EU-based investment companies.
The Cayman tax used to only target a direct interest held by a taxpayer in a LS (“single tier approach”).
As of 1 January 2018, the Cayman tax has been extended to also cover multi-layer structures, provided there is an uninterrupted chain of LS. A new anti-abuse measure has also been inserted in order to target abusive interpositions of ordinary-taxed legal entities (“blockers”).
In addition, the Cayman tax has also been extended to a new category of LS, being a.o. life insurance contracts (so-called “C-type” LS). Life insurance contracts will be treated as C-type LS, to the extent that :
- in exchange for the contribution of economic rights, shares or assets in an A-type or B-type LS, the life insurance contract provides for the payment (during the term of the policy or at the termination of the policy) of the contributed rights, shares, assets or a counter value thereof.
- in exchange for the payment of one or more premiums, the life insurance contract provides for:
- the payment (during the term of the policy or at the termination of the policy) of income that has been received from an A-type or B-type LS; or
- the payment of economic rights, shares or assets of an A-type or B-type LS.
In practice, this extension mainly aims at targeting Belgian taxpayers having contributed their interest in an A or B type LS into a dedicated branch 23 life insurance contract.
Moreover, all payments made by a LS (A, B or C-type) are considered as taxable dividend distributions (at 30%) at the level of the taxpayer, except if he can demonstrate that such payments have reduced the estate of the LS below the value of the assets he initially contributed into it.
Unexpected consequences for holders of a life insurance contract
The cumulative extension of the Cayman tax to multi-layer structures and life insurance contracts has unexpected (and disputable) consequences.
Coming back to the specific case of a taxpayer having contributed his interest in a B-type LS (e.g. a privately-owned interest in the British Virgin Islands (BVI) company or a Cayman Island hedge fund) into a dedicated branch 23 life insurance contract (Contract), the consequences would be as follows:
- The taxpayer (as policyholder of the Contract) is taxable on a look-through basis on all the income earned each year by the B-type LS (“multilayer approach”).
- Dividend distributions made within the Contract, i.e. by the B-type LS to the life insurance company, are also taxable on a look-through basis in the hands of the taxpayer, unless he can demonstrate that the income so distributed has already been subject to tax in Belgium (i.e. based on the above multilayer approach). This means that former profits of the B-type LS (even realized before the entry into force of the former Cayman tax in 2015), will become taxable on a look-through basis at the level of the taxpayer, as soon as they are distributed at any level within the chain of LS.
- All (partial) repayments of the Contract to the taxpayer will, as a rule, qualify as taxable dividend distributions, to the extent he cannot demonstrate that such repayments are reducing the value of the Contract below the value of the B-type LS at the time it has been contributed into the Contract. A fiction is introduced whereby the oldest income earned by the LS (which have likely not been subject to the Cayman tax yet) are deemed to be distributed first.
- The taxpayer will have to report information on the Contract in his personal income tax return.
As the assessment as to whether a life insurance contract qualifies as a C-type LS is made at the time of the contribution into said contract, the Cayman tax will in principle continue to apply even if the underlying B-type LS has in the meantime ceased to exist (because it would have been liquidated or because it would have been disqualified, as a result of its transfer of seat within the EU for example).
More surprisingly, according to a literal reading of the law, a life insurance contract could also qualify as a C-type LS when the underlying B-type LS has ceased to exist even before the entry into force of the new measures (i.e. before 1 January 2018).
This creates a disputable difference between taxpayers holding a B-type LS and the ones holding a C-type LS:
- As it was already the case under the former Cayman tax, taxpayers holding a B-type LS have the possibility to avoid the Cayman tax by onshoring the LS (transfer of seat to an EU country). Provided certain conditions are met, the transfer of seat would remain, as such, tax free at the level of the taxpayer (it would not be treated as a deemed liquidation of the LS).
- Taxpayers holding a C-type LS (i.e. because at a certain point in time, they have contributed their interest in a B-type LS into a life insurance contract) would remain “forever” subject to the Cayman tax, unless they decide to entirely redeem the life insurance contract. In such a case however, all payments received by the taxpayer will be treated as dividend income (taxable at 30%), to the extent he cannot demonstrate that such payments are reducing the value of his life insurance contract below the value of the B-type LS at the time of the contribution.
Taking into account these developments, taxpayers holding a dedicated life insurance contract should carefully review their contract, in particular as to the type of assets contributed into it.