The Belgian income tax return: the Cayman tax on the lurk
cayman: ('keɪ 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 tax was introduced to prevent Belgian residents from obtaining an income tax benefit by holding their assets through certain low-taxed foreign legal structures. The Cayman tax looks right through the veil of such entities and taxes their income in the hands of the Belgian founders.
Since its introduction in 2013 / 2015, the Cayman tax has been amended and extended several times. The result is a highly complex set of tax provisions with a very broad scope.
Species of prey
The Cayman tax targets the following entities:
a) All trusts (“type a) entities”);
b) Companies, associations, institutions and any other entities with separate legal personality that are either not subject to income tax or subject to an income tax that is lower than 15%, calculated on a Belgian taxable basis (“type b) entities”).
A Royal Decree includes a non-exhaustive list of entities established outside the EEA that are presumed to be in scope.
Entities established within the EEA are only targeted when they are blacklisted.
c) Contracts, to the extent the contract invests in type a) or type b) entities or provides for the distribution of assets of type a) or b) entities (e.g. insurance contracts) (“type c) contracts”).
Passing bite or lifelong quagmire
The Cayman tax targets Belgian residents who are the founders and / or beneficiaries of these targeted entities.
Whereas beneficiaries are only subject to the Cayman tax as and when they receive a distribution from a targeted entity, founders are subject to cumbersome ongoing obligations. Founders are defined as:
- The natural or legal persons subject to the tax for legal entities who founded the entity;
- The natural or legal persons subject to the tax for legal entities who contributed assets to the entity, where the latter was founded by a third party within his or her professional activities;
- The natural persons who will directly or indirectly inherit from the aforesaid founders, unless it can be demonstrated that neither the direct heir nor the latter’s heir will ever receive any benefit from the structure;
- The natural or legal persons subject to the tax for legal entities who hold shares or economic rights of type b) entities;
- The natural or legal persons subject to the tax for legal entities who have concluded a c) type contract and in whose name the premiums were paid.
The Cayman tax imposes a reporting obligation, a transparency measure (the “look-through-tax”) and a tax on distributions.
Belgian residents caught by the Cayman tax must report the existence of the targeted entity in their annual income tax return. Certain information about the entity, such as the name, legal form, address, identification number and details about the trustees (if applicable) must be declared.
On the basis of the “look-through-tax”, the income of the targeted entities is taxable in the hands of its founders, as if the entity did not exist and as if they received the income directly.
Tax on distributions
Distributions are taxable as dividends at the flat rate of 30%. Beneficiaries are subject to this tax insofar and to the extent they cannot demonstrate that the distribution represents:
- the initial contribution;
- income that has already been subject to its appropriate Belgian income tax regime.
The initial contribution is deemed to be distributed last. Income is distributed on a FIFO basis.
The contribution of economic rights, shares or assets of type a) and b) entities as well as the transfer of assets of type a) and b) entities to a state with which Belgium has not concluded an agreement on the exchange of information in tax matters are qualified as deemed distributions and are equally taxable.
Living with the cayman
Forewarned is forearmed, particularly when dealing with something as strong-jawed and sharp-toothed as a cayman, and the same is true for its fiscal namesake.
This summer, we shall publish a series of newsletters presenting prey, predator and planning for compliant coexistence with the cayman.
Do you have any questions about this article? Please contact the author(s) of this article or your trusted adviser at Loyens & Loeff.