A tropical intruder
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”), are within the scope of the Cayman tax.
Whereas type b) entities established outside the EEA can (potentially) all be within the scope of the Cayman tax (click here to read more), type b) entities established within the EEA are only targeted when they are blacklisted in a Royal Decree.
Initially the blacklist included only a few specifically named types of entities, namely the Liechtenstein Stiftung and Anstalt and the Luxembourg Société Patrimonial Familial (“SPF”) and Fondation Patrimoniale.
Since income year 2018 that limited list has been replaced by broad-brush categories of blacklisted entities, expanding even further the reach of our predator’s jaws.
When exploring the EEA, Belgian residents need to brace themselves, as they are now far more likely to fall foul of a cayman on their own continent.
As for other targeted entities, Belgian residents are subject to the Cayman tax if they are the founders and / or beneficiaries of targeted entities established within the EEA.
Instructions for interaction
Belgian residents subject to the Cayman tax must comply with a reporting obligation, a transparency measure and a tax on distributions. Read more about these obligations here.
New species of prey
One of the three newly defined categories of targeted type b) entities established within the EEA are entities (not being an undertaking for collective investments or a hybrid entity) that are either not subject to income tax at all, or subject to income tax of less than 1%.
The 1% threshold is assessed on the basis of a Belgian taxable basis. This Belgian taxable basis is calculated considering the Belgian corporate income tax rules for EEA companies and considering the Belgian tax for legal entities for e.g. EEA foundations. Just as for targeted type b) entities established outside the EEA, the assessment must be made on an annual basis.
Only income tax levied in the jurisdiction of establishment can be taken into account, other taxes are disregarded.
Certain undertakings for collective investments and hybrid entities established within the EEA can also be counted among the cayman’s prey, but will be dissected later this summer.
A rare curiosity: not a species of prey
Type b) entities that do not meet the 1% threshold can nevertheless avoid the application of the Cayman tax where their main purpose is an activity that generates income that would be exempted from Belgian income tax on the basis of a double tax treaty in the hands of the natural or legal person subject to the tax for legal entities, if this natural or legal person had received the income directly.
This means that type b) entities in the EEA that limit their activities to holding foreign immovable property, are in principle not within the scope of the Cayman tax if they do not meet the 1% threshold, since immovable income is generally exempted in the hands of the Belgian resident shareholder on the basis of the double tax treaties.
A cayman in Luxembourg City
Jean and his family moved from Luxembourg City to Brussels when he started working for his new employer. A couple of years earlier, Jean inherited the shares of a Luxembourg SPF from his parents.
The SPF is only subject to a subscription tax in Luxembourg, not to the corporate income tax.
As only income tax can be considered to assess the 1% threshold, Jean will be subject to the Cayman tax in respect of the SPF.
Vigilance is a virtue
Explorers may find themselves in the cayman’s jaws without ever having realised he was anywhere in the area. On the rare occasions when the cayman has the courtesy to hiss before launching an attack, explorers are advised to back away slowly to avoid the most serious injuries.
Ignoring or trying to walk away from the Cayman tax in your income tax return is however not recommended. Vigilance and close adherence to the instructions for interaction are the only safe means to avoid bite marks.
Next week, we analyse the anatomy of foreign entities with economic substance.