De facto associations: Also on the menu of the Cayman tax?
Cayman (ˈkeɪ mən) n., pl. -mans, any of several tropical American crocodilians of the genus Caiman and allied genera
- tax: a type of tax, esp. one perceived by those subject to it as highly complex, unduly intrusive and/or difficult to avoid.
With about 800 codes, a Belgian income tax return is not for the faint-hearted. When the Cayman tax is involved, even more attention is needed. Read all about it here and avoid the Cayman tax pitfalls in your income tax planning.
The Cayman is a creature of habit. This carnivore always orders from the meat section on the menu and simply refuses to try something new.
His fiscal namesake, on the other hand, is a very adventurous dinner guest and, as you may have guessed from the previous episodes of this documentary, prefers more the exotic dishes on the menu.
Let’s find out whether the Cayman tax is also willing to take a bite out of de facto associations!
An hors d’oeuvre of salad, shrimps and about half a litre of cocktail sauce
Under Belgian law de facto associations are associations without separate legal personality that are governed by an agreement concluded between parties.
De facto associations are formed where two or more individuals pursue the same altruistic (non-commercial) purpose without incorporating a legal entity. For example, where a group of individuals organizes a series of events for charity, the group will form a de facto association. Youth associations and trades unions, for example, are often organized as a de facto association. The same goes for political parties.
As de facto associations do not have separate legal personality, they cannot hold property. Any property acquired by a de facto association is held by the participants in joint ownership, but is separated from the participants’ own property: it is a special purpose property, to be used only for the purpose of the de facto association.
Tomato soup with meatballs
As a de facto association does not have legal personality and its property is held by the participants, it is not subject to Belgian corporate income tax nor to the Belgian tax on legal entities if it does not have a commercial activity.
Belgian residents are only subject to Belgian income tax on the net income they receive. As the property of a de facto association is a special purpose property, it is not part of the participants’ property. The income generated by this property is therefore not received by the participants.
This means that neither the de facto association nor its participants are liable in Belgium for tax in respect of the income from movable assets and capitals received by a de facto association.
Where assets are held in a Belgian bank account, the income tax due on income received must be withheld by the Belgian bank.
However, where assets are held in a foreign bank account, the foreign bank does not have a duty to withhold Belgian income tax. As neither the de facto association nor the participants are liable for Belgian income tax on this income, such income remains untaxed in Belgium.
A roast with mushroom sauce, croquettes and a hot pear with jam
In order to remedy this tax vacuum, a specific transparency measure was introduced for income received by de facto associations.
As from 1 January 2018, movable income received on a bank account held in the name of an association that does not receive profits and that is not subject to Belgian corporate income tax nor to the Belgian tax on legal entities, is taxable in the hands of the Belgian resident who is entitled to manage the account, as if he or she received the income directly.
If the account is managed by more than one person, each Belgian resident is liable for Belgian income tax account in proportion to the number of account managers.
Even though this transparency measure is similar to the look-through-tax introduced by the Cayman tax, the Cayman tax itself is not applicable to de facto associations. This means that the de facto association is not qualified as a targeted structure and that the Cayman tax obligations (reporting obligation, look-through-tax and tax on distributions) are not applicable.
A fresh fruit cake with whipped cream decorated with slices of kiwi
Ever since they delivered a lecture about crocodiles in school, Sophie, Oliver and Dexter (Belgian residents) are big fans of this carnivore. Twice a year, they organize a Crocodile Dentist tournament where they also sell crocodile cupcakes and crocodile cocktails. Needless to say, the tournaments are always a huge success.
Sophie, Oliver and Dexter want to use the proceeds of the tournaments to support crocodiles in Panama. They are saving up for a crocodile sanctuary that will be built by locals in 2025.
As the money will be used in Panama, they opened a bank account in Panama in the name of their de facto association, Sac en Croco, to which the proceeds of every tournament are transferred. Given the success of the Crocodile Dentist tournaments, the money in the account started generating interest.
Since 2018, Sophie, Oliver and Dexter must declare the interest received on the Panama account in their Belgian annual income tax return, each for 1/3 as they are all entitled to manage the account. The Belgian income tax due is payable via the Belgian tax assessment.
Although the menu presented by de facto associations might tempt the conservative cayman, it is not adventurous enough for an exotic dinner guest such as the Cayman tax. Belgian residents entitled to manage the bank account of a de facto association will therefore only be subject to the specific transparency measure, not to the Cayman tax.
Get ready for next week, when we investigate a cuckoo in the cayman nest!
Barbara AlbrechtSenior associate Attorney at Law
Barbara Albrecht, attorney at law, is a member of the Loyens & Loeff Family Owned Business & Private Wealth Practice Group in Belgium and an associate in our Brussels office. She focuses on wealth and estate planning.T: +32 2 773 23 71 E: email@example.com