The Cayman tax was introduced to combat tax evasion by Belgian residents who hold “legal structures” abroad. A series of changes to this regime are embedded in the programme law of 22 December 2023. Read on for a summary of the reform measures.
This article is intended for Belgian residents
Broader concept of “dedicated undertaking for collective investment” (UCI): introduction of a minimum 50% shareholding threshold
As it previously stood, Belgian taxpayers could avoid the tax by allowing a few third-party investors to invest in the fund or dedicated compartment of a foreign UCI (so that it would no longer be “dedicated”), but with no requirement for a minimum shareholding threshold. The programme law of 22 December 2023 tightens the provisions by introducing a 50% minimum shareholding threshold between related parties to remain outside the scope of the Cayman tax. In other words, from that 50% threshold a fund or a dedicated compartment would be subject to the Cayman tax.
If the related parties’ shareholding is less than 50%, a fund or a dedicated compartment could also be considered to be a legal structure if the independent asset manager receives instructions directly from one of the investors, or if there is no independent asset manager.
Creation of an exit tax
In a bid to avoid triggering an exodus of taxpayers from Belgium in response to the tighter measures, the reform introduces an exit tax. This means the undistributed earnings of the legal structure will be taxed as dividends at a rate of 30% on exit. The exit tax applies if the founder moves their tax domicile abroad or if the economic rights, shares, units or assets of the fund are contributed or transferred to another legal structure outside Belgium.
Change to look-through taxation methods: taxation of capital gains exempt on distribution
One of the main consequences of the Cayman tax regime was to usher in the principle of taxation of income on distribution. This means that the founder is taxed directly, on a look-through basis, on the income earned by the legal structure, and therefore independently of the effective receipt of income by the founder. In principle, however, such a system of tax on distribution excludes any form of exit tax.
The initial text expressly provided that distributions from a legal structure were exempt, insofar as they had been taxed under their normal tax regime in Belgium as part of the founder’s income tax.
According to this principle, the founder was taxed on a look-through basis on the capital gains on securities realized by a legal structure; therefore the capital gains were exempt from tax as per the principles applicable to personal income tax, These capital gains could then be distributed to the founder as tax-exempt dividends, while an identical capital gain realized by an ordinary company a) would have been liable for corporation tax and b) would only have been eligible for distribution as dividends to the shareholders subject to tax at 30%.
The amendments introduced by the legislator set out to correct this unwanted effect so that, in the case of distributions of income earned by a legal structure, the exemption applies only to income on which the founder is effectively taxed. The new Article 21.2 of the Belgian income tax code (CIR) specifies that income exempt from tax under the CIR is not considered as taxed in the hands of the founder.
Concept of “intermediate structure” introduced
Before the reform, the simple fact of a taxable entity interposed between the founder and the legal structure was sufficient to remain outside the scope of the Cayman tax. The changes extend the scope of the Cayman tax to those who hold, directly or indirectly, shares in legal structures via a chain of intermediate structures. Under the new rules, a founder who holds a legal structure through the intermediary of a normally taxed company could still be taxed on a look-through basis on the income collected from the legal structure.
Main takeaways
Financial assets held via a dedicated compartment for related investors or a securities portfolio held through a Luxembourg private wealth management company (SPF) are no longer solutions recommended for Belgian residents. Why? One of the main reasons is that distributions of income that has not been effectively taxed on a look-through basis are now subject to tax at a rate of 30%.
Taken together, points 3 and 4 above could significantly broaden the scope of the Cayman tax, since the simple fact of having an entity that is similar to a legal structure within a complex structure for holding private or professional assets could render the founder of this intermediate structure liable for tax on a look-through basis on the income received at the level of this entity.
On the other hand, the consequences of these new provisions for taxpayers who own property in France through a real estate investment trust are less clear. While these taxpayers could become liable for tax on the estimated cadastral income (also sometimes called the estimated rental value) attributed in Belgium to the asset, the risk of incurring an exit tax on the unrealized capital gains on the properties located in France seem lower.
All in all, the reformed Cayman tax could also have repercussions on the annual tax on securities accounts.
To assess the impact of the new provisions on your tax and estate planning strategies, please speak to your advisor or one of our experts in the field.
