With the Law of 30 July 2013, the Belgian government has introduced a new reporting obligation for individual resident founders and beneficiaries of legal arrangements. The concept of “legal arrangement” covers (i) trusts, foundations and similar structures; and (ii) certain tax haven companies mentioned on a black list (to be determined by Royal Decree). Please see our previous tax alert in this respect. In the meantime, a draft Royal Decree with the black list of tax haven companies has been prepared by within the government.
Over the past weeks, a new draft bill (the "Draft Bill") that seeks to further discourage the use of these legal arrangements for tax purposes has also been discussed within the government. To this end, legal arrangements would be considered as tax transparent from a Belgian tax perspective, allowing Belgian resident founders to be taxed on the income of said legal arrangements. In addition, distributions by the legal arrangements would be subject to a 25 percent tax at the level of Belgian resident beneficiaries. The Draft Bill also extends the scope of application of the reporting obligation.
Although the intent of the government was to have the Draft Bill passed into law prior to year end, this has become very unlikely from a practical point of view. However, we deem it quite likely that the same or a similar type of legislation will be passed into law in the course of 2014, taking into account the aforementioned reporting obligation for founders and beneficiaries of legal arrangements.
If a bill providing for a fiction of tax transparency (in the same or a similar form) were to be passed into law in the course of 2014, it is likely that such tax transparency would apply retroactively beginning 1 January 2014. If said bill would also provide for a 25 percent tax on distributions, it can also not be excluded that such tax would apply retroactively to distributions made as of 1 January 2014.
Draft black list of tax haven entities
The draft Royal Decree contains both EU and non-EU entities.
The listed EU entities include the Luxembourg Société de gestion de Patrimoine Familiale is included on the black list and the Cyprus Offshore Company.
The listed non-EU entities, include: (i) the Liechtenstein Anstalt and Stiftung; (ii) the Jersey Company and Foundation; (iii) the Swiss Foundation; (iv) the Monaco Fondation; (v) the Panama Fundacione de Interés Privado; (vi) the Hong Kong Private Limited Company; (vii) the Delaware Limited Liability Company; (viii) the Stichting Particulier Fonds in the Dutch Antilles; and (ix) the Cayman Exempt Company.
Changes to reporting obligation
The Draft Bill extends the scope of application of the reporting obligation by widening the concept of "founder" and introducing the notion of "third party beneficiary," as further discussed below. In addition, the reporting obligation would be extended to not-for-profit entities.
Under the Draft Bill, these changes would apply as of assessment year 2014 (income year 2013).
Tax transparency ("fiction of ownership") of legal arrangements
The Draft Bill provides for a “fiction of ownership” pursuant to which Belgian resident founders of legal arrangements would be deemed to own the assets of said legal arrangements for Belgian tax purposes and become taxable on the income of these assets.
The fiction of ownership would apply not only to the assets which have originally been settled or contributed into the legal arrangement but also to assets in which said original assets have been reinvested.
A “founder” is defined as:
- every individual who has set up the legal arrangement or settled assets and rights therein; or
- upon decease of the aforementioned founders, their direct/indirect heirs or the individuals who will directly or indirectly inherit from the latter, unless they or their heirs can demonstrate that they will never obtain any benefit from the legal arrangement.
The Draft Bill provides that the fiction of ownership would not apply with respect to tax haven companies mentioned on the black list if it can be demonstrated that they are subject to an effective income tax rate of at least 10 percent. The fiction of ownership would also not apply to certain not-for-profit entities and employee benefit trusts.
Under the Draft Bill, the fiction of ownership would become applicable to income received by legal arrangements as of 1 January 2014. Consequently, one could also expect that, as a result of the tax fiction, only income from the assets of the legal arrangement as of 1 January 2014, would become taxable in the hands of the "founders."
25% tax on distributions by legal arrangements
The Draft Bill provides that distributions by legal arrangements to a “third party beneficiary” would be subject to tax as miscellaneous income at a rate of 25%.
According to the Draft Bill, a third party beneficiary is any 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.
The distributions made by the legal arrangement to a third party beneficiary would not be deemed to be taxable income if it can be demonstrated that :
- the funds distributed have been effectively taxed in the hands of a founder in Belgium (as a result of the fiction of ownership) or abroad on the basis of a similar legislation in respect of legal arrangements; or
- the distribution constitutes a repayment of capital, to the extent that the repayment does not exceed the value of the capital of the legal arrangement upon its establishment.
The Memorandum of Explanation to the Draft Bill notes that an individual can be both a founder and a third party beneficiary with respect to the same legal arrangement.
It is unclear, however, how a distribution by a legal arrangement would have to be split up in a (non-taxable) capital part and a (taxable) income part. Most likely, the value of the assets settled into the legal arrangement upon the time of settlement will be considered capital for this purpose. This would normally mean that, as long as the value of the legal arrangement at the time of the distribution does not exceed the value of the legal arrangement at the time of settlement, there would be no actual taxation upon a distribution by the legal arrangement, and that only to the extent that the value of the legal arrangement at the time of the distribution would exceed the value of the legal arrangement at the time of settlement would a pro rata portion of the distribution become taxable.
In addition, it is not yet clear as to which income a distribution that is made as of 2014 should be allocated since such distribution can relate both to pre-2014 income (where the tax transparency would not have been applied) and income after 1 January 2014 (where tax transparency would apply).
Under the Draft Bill, the 25 percent tax would become applicable to income received by legal arrangements as of 1 January 2014.
Beginning 1 January 2014, Belgian residents who can be considered founders of foreign trusts, foundations and tax haven companies risk being subject to a tax transparency regime. This would mean that from that date, they would be considered to hold the assets of the legal arrangement for Belgian tax purposes, and they would become taxable on the income received by the foundation on such assets.
Many legal arrangements, such as trusts and foundations, hold their investments through underlying companies. If these underlying companies could also be considered as legal arrangements, the Belgian resident founders could be considered the owners of the investments held by the underlying companies and be taxed on the income received thereon, irrespective of whether or not they would receive such income.
Some scenarios could be considered to alleviate the tax burden that may arise to Belgian resident founders as a result of the proposed tax transparency rules. For instance, companies that are deemed legal arrangements because they are mentioned on the black list could be migrated to jurisdictions that are not on said list. Also, legal arrangements could consider restructuring their investments, for instance by investing in assets which generate income which is exempt from Belgian income tax (e.g., capital gains realized on shares or on certain accumulation UCITS investing not more than 25% in debt instruments), and as a result of which the tax transparency regime would not have adverse tax consequences in the hands of a Belgian resident founder.
Taxpayers are recommended to evaluate the use of foreign structures qualifying as legal arrangements in light of this expected change in tax treatment.