The Cayman tax: to trust or not to trust
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.
This week on the Cayman tax menu: Trusts!
The cayman’s preferred prey
When it comes to trusts, the Cayman tax does not make exceptions.
All trusts are targeted, irrespective of where they are established or managed and irrespective of their revocable or irrevocable, discretionary or non-discretionary character.
Stuck between the cayman’s jaws: settlors and beneficiaries
For Cayman tax purposes, settlors are defined as:
- The natural or legal persons subject to the tax for legal entities who set up the trust (legal settlors);
- The natural or legal persons subject to the tax for legal entities who contributed assets to the trust, where the trust was set up by a third party within his or her professional activities (economic settlors);
- The natural persons who will directly or indirectly inherit from the legal and economic settlors, unless they can demonstrate that neither they nor their heirs will ever receive any benefit from the trust (heirs of the settlor).
Belgian residents who receive a dividend or any other benefit from a trust fall under the scope of the Cayman tax as beneficiaries.
Hunting tactics used by the cayman
Like its namesake in the animal kingdom for guaranteeing himself a meal, the Cayman tax uses several hunting tactics to prevent Belgian residents from obtaining an income tax benefit by holding assets through targeted entities, such as trusts.
Chasing the prey out of its hiding-place
A first obligation imposed on Belgian residents who are settlors and / or beneficiaries is a reporting obligation. This obligation has existed since 2013 and non-compliance is punished with a fierce fine of €6.250 per non-reported entity and per income tax year.
Settlors are required to report the existence of the trust, including additional information about the trust, on an annual basis in their Belgian income tax return.
Beneficiaries are only subject to this reporting obligation as and when they receive a dividend or any other benefit from the trust.
The cayman looks right through its prey’s camouflage
Secondly, in 2015, the Cayman tax was supplemented with a transparency measure on the basis of which settlors are taxable on the income received by the trust, as if they received the income directly, as if the trust did not exist (look-through-tax).
The impact of the look-through-tax in your income tax return therefore depends on the nature of the income received and must be assessed on an annual basis. Double tax treaties can be applied where appropriate.
The taxable income must be reported by the settlor in the income tax return. The income tax due will be invoiced via the tax assessment.
If there is more than one settlor, each settlor is taxable on the income in proportion to his or her contribution to the trust, or, if this proportion cannot be demonstrated, in equal shares.
Heirs of settlors only come into the picture when the legal or economic settlor, their legal predecessor, has died. Heirs of settlors are taxable on the income in proportion to their share in the trust or, if this share cannot be proven, in proportion to their share in the estate of the settlor who is their legal predecessor.
The look-through-tax is not applicable to income that is distributed in the same income year it has been received.
In the event of a multi-layer structure, the look-through-tax is applicable to all targeted entities in the structure. Read all about it later this summer.
The sting in the cayman’s tail
The third weapon of the Cayman tax is a tax on distributions. This tax applies to distributions made by trusts as from 17 September 2017.
Read more about the tax on distributions in our previous article.
Make an excursion to the Bahamas in your income tax return
Sophie had been a South-African resident her entire life when she died on 1 January 2018. Sophie had set up a Bahamian trust in 1990 and contributed an investment portfolio to the trust with a value of 100. Between 1990 and 2018, income accrued for a total amount of 100.
Sophie’s only son and heir David is a Belgian tax resident. On Sophie’s death, David became heir of the settlor for Belgian Cayman tax purposes.
In 2018, the trust received the following income in the investment portfolio: 3 dividend, 3 interest and 4 capital gains.
In his income tax return regarding income year 2018, David not only reported the existence of trust, but also declared the taxable income received by the trust. Dividends and interests are taxable at the flat tax rate of 30%, the capital gains are not taxable. David paid 1,8 income tax via the income tax assessment.
In 2019, the trust distributed all its assets for a total value of 210 to David and was then dissolved.
In his income tax return regarding income year 2019, David must again report the existence of the trust and must declare the taxable part of the distribution in his income tax return. In order to determine this taxable dividend, the total distribution (210) can be reduced with the initial contribution (100) and the income that has already been subject to its appropriate Belgian income tax regime (10). David will pay the tax due of 30 via the income tax assessment.
Coexisting with the cayman
Like creatures sharing a habitat with their predator, Belgian residents who are the settlor and / or beneficiary of a trust must learn how to handle the hunter in their income tax return.
In the next edition of this series of articles, we will present another prey of this predator.