No hiding from the Cayman tax via contracts
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.
This week, contracts play hide-and-seek with the Cayman tax!
As you will have learned during the previous episodes of this documentary, the cayman is excellent at hide-and-seek. As a seeker, the cayman truly exceeds expectations. With its transparent third eyelids, it can spot prey under water. Its hiding skills are on point as well. With its dark greenish scaly skin, it can even hide in plain sight. Hungry caymans plotting an attack are therefore very difficult for their prey to spot.
The Cayman tax on the other hand prefers games where all participants remain in sight and identifiable at all times. Belgian residents interacting with the Cayman tax should therefore refrain from playing hide-and-seek as well as from dressing up.
Am I a banana?
As we have seen earlier in this documentary, trusts (“type a) entities”) and companies, associations, institutions and any other entities with separate legal personality that are not subject to (sufficient) income tax (“type b) entities”) are targeted by the Cayman tax.
Today, we will examine the contracts that qualify as “type c) entities”.
Such contracts are not targeted on an eeny, meeny, miny, moe basis but are defined. Contracts will be targeted by the Cayman tax as a type c) entity to the extent that:
- In exchange for the payment of one or more premiums, the contract provides for the distribution of income generated by type a) or b) entities or provides for the distribution of the economic rights, shares or assets of a type a) or b) entity (either during the term of the contract or upon termination); OR
- In exchange for the contribution of economic rights, shares or assets of a type a) or b) entity, the contract provides for the distribution of the contributed rights, shares or assets or the countervalue thereof (either during the term of the contract or upon termination).
That means that (assets from) type a) and b) entities cannot avoid the application of the Cayman tax by dressing up as a contract.
In principle, all kinds of contracts can be in scope. As a premium is required, type c) entities will mainly (if not only) concern (life) insurance contracts.
Tag, you’re it!
The founders of a type c) entity are the natural or legal persons subject to the tax for legal entities who concluded a type c) entity contract and in whose name the contract premiums have been paid.
Such founders have an ongoing obligation to comply with the rules of the game, whereas the beneficiaries of the type c) entity are only subject to the Cayman tax as and when they receive a distribution.
What’s the time, Mr Wolf?
Type c) entities have been targeted by the Cayman tax since income year 2018 and their founders / beneficiaries must comply with the rules of the Cayman tax game:
- Reporting obligation: the existence of the type c) entity, as well as additional information about it, must be reported in the annual income tax return;
- The look-through-tax: a transparency measure on the basis of which the founder is taxable on the income of the type c) entity, as if the founder received the income directly and as if the entity did not exist.
As we have learned from the previous episode, the number of players is unlimited, meaning that the look-through-tax is applicable to all the targeted entities in the structure;
- The tax on distributions: Beneficiaries will be subject to a 30% tax on the distribution, to the extent they cannot demonstrate that the distribution concerns the initial contributions (deemed to be distributed last) or income that has already been subject to its appropriate Belgian tax regime (distributed on a FIFO basis).
Truth or dare?
Luiz was born and raised in Rio de Janeiro and Ana grew up in Venice. They met when backpacking in Asia 25 years ago and have been sharing their daredevil ideas ever since. They joined a famous travelling circus as clowns, organized treasure hunts in the Caribbean dressed up as pirates, … As long as it involved a certain level of craziness and costumes, Luiz and Ana went all in.
Their investments had been structured as eclectically as their careers. After 25 years, they ended up with a BVI Company, a French Polynesian Société and an International Company in the Cook Islands, all entities not subject to (sufficient) income tax from a Belgian perspective.
During their most recent adventure in Africa, Luiz nearly lost an arm to a lion. Ana decided to settle for a safer existence and found them a job at an event planning company in Belgium. Luiz knew better than to argue with his wife and agreed (mainly because he had heard of the famous carnival in Aalst and was already running a Prince Carnival campaign in his head).
Before their move to Belgium, they contributed their companies into a Luxembourg life insurance, Ana because it seemed a sensible way to structure investments, Luiz because he believed his daredevil heart could never be fully tamed and he wanted to look after Ana, just in case.
Although Luiz and Ana left their adventurous life behind them, they will be stuck between the jaws of the Cayman tax, as they will qualify as founders of a targeted type c) entity when becoming Belgian residents.
1, 2, … - 10 – Ready or not, here I come!
Daring dentists pulling down a crocodile’s sore tooth in the popular children’s game can get their finger stuck between its jaws.
Belgian residents interacting with the Cayman tax must likewise remain vigilant if they want to keep all fingers. As with cheating children, Belgian residents not complying with the Cayman tax rules can expect a serious telling off!