Also floating down the Cayman tax river: Funds
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.
With its fatal jaws and ruthless claws, the cayman is absolutely unbeaten at the top of the food chain. Its scaly skin and ferocious features do not, however, make it the world’s classiest creature.
Dolphins, on the other hand, are friendly, intelligent and famous for their refined elegance.
One might think adopting the cayman’s features improves the chances of a safe coexistence. However, funds caught in the cross-currents of the Cayman tax river are better advised to swim like a dolphin if they want to avoid the most painful bites.
This week, we teach founders and beneficiaries of targeted funds how to swim in the Cayman tax river!
Not all funds are forced to navigate the Cayman tax river, but those that are should adopt a specific swimming style.
In real-life swimming, especially competitions, height and muscles are often important factors. In contrast, the criteria to cope with the Cayman’s currents are extremely complex and not necessarily assessed on the basis of the fund’s posture.
To avoid swamping our readers, we summarise only the main features, as applicable for income year 2019.
General instructions for swimming
First, for a fund to be in scope of the Cayman tax, it must qualify as a targeted structure. A fund is targeted if it is a trust (“type a) entity”) or – far more likely – meets the definition of “a company, association, institution or any other type of entity with separate legal personality that is either not subject to income tax or not subject to an income tax of at least 15%, to be calculated on a Belgian taxable basis.” (“type b) entities”).
Secondly, a fund that qualifies as a targeted entity is nevertheless excluded from the scope of the Cayman tax if it is one of the following:
- a public or institutional (alternative) undertaking for collective investments (UCITS or AIF);
- an undertaking for collective investments investing in debt securities;
- certain pension funds;
- companies listed within the EU or outside the EU in a jurisdiction with equivalent standards
Thirdly, the exception under rule 2 does not apply if the rights of such entities are held either by one person or by several related persons. For Cayman tax purposes, persons will be related to each other if:
- one or more natural or legal persons control another legal person within the meaning of Article 1:14 of the Belgian Code for Companies and Associations; OR
- these persons are relatives or in-laws up to the fourth degree; OR
- these persons are married, are officially cohabitating or have their residence or seat of fortune at the same address.
Specific instructions for swimming in the EEA
As discussed in a previous newsflash, type b) entities established within the EEA can only be targeted if they are specifically listed in a Royal Decree.
Funds established within the EEA that are targeted on the basis of the general instructions for swimming will therefore only be in scope of the Cayman tax if they also meet the specific EEA requirements.
The EEA Royal Decree only targets undertakings for collective investments in which the rights are held either by one person or by several related persons, to be assessed for each separate compartment, as the case may be.
For Cayman tax purposes, the EEA Royal Decree defines undertakings for collective investments as:
- an undertaking for collective investments established within the EEA that meets the conditions of Directive 2009/65/EG;
- an alternative investment fund that meets the requirements of Directive 2011/61/EU; and
- an investment institution that has only one participant, but that would be in scope of one of the aforesaid two directives if it had more than one participant.
All undertakings for collective investments can potentially be in scope of the Cayman tax, including private alternative investment funds.
Specific instructions for swimming outside the EEA?
A Royal Decree regarding targeted entities established outside the EEA takes over the instructions for swimming inside the EEA. It is however important to note that the non-EEA Royal Decree is not exhaustive, i.e. funds established outside the EEA that do not meet the non-EEA requirements are not necessarily excluded from the scope of the Cayman tax (see general instructions for swimming).
In practice, all funds can be in scope of the Cayman tax even if they are not family-owned.
Place both your arms over your head simultaneously, push them into the water like a propeller and repeat
For Cayman tax purposes, the founders of targeted funds are the natural or legal persons subject to the tax for legal entities who hold the shares or economic rights in the fund.
As with other targeted entities, founders have an ongoing obligation to comply with the instructions for swimming, whereas beneficiaries are only subject to the Cayman tax as and when they receive a distribution. With respect to targeted funds, the beneficiaries will often (if not always) be the founders.
Perform the dolphin kick with both legs simultaneously
Belgian residents who are the founders / beneficiaries of a targeted fund are subject to the Cayman tax. This involves:
- a reporting obligation: the existence of the targeted fund must be reported in the annual income tax return, together with additional information about the fund;
- a look-through-tax: a transparency measure on the basis of which the founder is taxed on the income as if the founder received the income directly (see also our previous newsflash);
- a tax on distributions: distributions are subject to a 30% tax, to the extent it cannot be proven that the distribution is the initial contribution (deemed to be distributed last) or income that has already been subject to its appropriate Belgian tax regime (distributed on a FIFO basis).
Move in a fluid wave-like motion
Tom is a Belgian resident and is the most indecisive person you will ever meet. In the mornings, it takes him several hours to get ready for work. Red socks, blue socks, ties with dots, ties with stripes… It drives his partners completely crazy. Luckily for Tom, he also has a FOMO when it comes to his partners so usually, he replaces them before they can complain.
When his previous investment matured and his investment advisor advised him to reinvest the proceeds, Tom was completely lost, not knowing what to do next. Preferably, he would invest in 1.000 different new things. Fortunately, Tom’s investment advisor knows him well and recommended his own compartment in SICAF-SIF Z that collects all sort of investments.
As choosing is losing, Tom not only invested in his own compartment in SICAF-SIF Z, but also took a certain investment in SICAF-SIFs A, B and C.
The SICAF-SIFs are all established in Luxembourg and are not subject to Luxembourg income tax.
As the SICAF-SIFs are established within the EEA, Tom can only be subject to the Cayman tax with respect to SICAV-SIFs if they (or a compartment thereof) are either held by one person or by several related persons.
As Tom holds an entire compartment in SICAV-SIF Z, Tom will be subject to the Cayman tax in respect of his compartment in SICAV-SIF Z. As Tom is not the sole investor in the other SICAV-SIFs and is not related to the other investors, he will not be subject to the Cayman tax in respect of the other SICAV-SIFs.
Do not forget to breathe
Nothing more relaxing than spending your summer holidays floating on water on an inflatable crocodile. Belgian residents who are the founder and / or beneficiary of funds and find themselves in the Cayman tax river must however learn to swim like a dolphin if they want to save themselves from the worst bites. A speed course is advisable if you want to get your swimming certificate before the income tax return deadline expires!