The so-called ‘Cayman Tax’, introduced as from 1 January 2015, is a taxation regime in the Belgian income tax code that introduces a tax transparency of certain legal constructions that have been set up by Belgian private individual tax residents. The income of certain qualifying entities will be taxed directly in the hands of these individuals if they are to be considered as founder and/or beneficiary, as if they would have received the income directly. In this respect, a distinction is made between 3 categories of legal structures: (i) trusts and other structures without legal personality (type 1), (ii) foreign entities with legal personality that are subject to an effective tax rate of less than 15% calculated according the rules of Belgian income tax law (type 2) and (iii) a legal construction type 1 or type 2 wrapped up in an agreement will be considered as a type 3 legal construction (type 3). In this respect, the legal structures type 2 are listed in two Royal decrees dated 18 December 2015 (exhaustive list of entities within the European Economic Area – EEA) and 23 August 2015 (non-exhaustive list of entities outside the EEA).
New Royal Decree
On 3 December 2018, a new Royal Decree was published in the Belgian Official Gazette, amending the existing Royal decree of 18 December 2015. The Royal decree of 18 December 2015 targeted certain public or institutional undertakings for collective investments (UCI) or alternative investments funds (AIF) if these entities where held by one person or several related individuals, and foreign hybrid companies with Belgian source income. It also included an exhaustive list of four types of entities within the EEA, that where irrefutably considered to be legal constructions: the Liechtenstein “Stiftung”, the Liechtenstein “Anstalt”, the Luxembourg “Société de gestion de Patrimoine Familiale” and Luxembourg “Fondation Patrimoniale”.
Three categories of legal constructions
The new Royal Decree of 21 November 2018, published in the Belgian Official Gazette on 3 December 2018, now introduces three categories of legal constructions within the EEA that will be considered as legal constructions, potentially in scope of Cayman Tax, going forward:
- Investment vehicles (private UCI’s and AIF’s) that are held by one individual or several individuals who are related to each other, including SICAV-SIF’s;
- The so-called hybrid entities, i.e. legal structures that are not transparent for Belgian income tax purposes, but that are tax transparent in the jurisdiction within the EEA where they are established. However, are excluded, hybrid entities where the shareholders pay a minimal of 1% income tax – compared to the income tax that would be due in Belgium – in the country of establishment. Also the so-called ‘translucent companies’, for example the French ‘Société Civile Immobilière’, that have legal personality but where income tax is levied in the hands of the shareholders, are excluded;
- Entities with legal personality established in the EEA, that are not subject to income tax or that are subject to an income tax that is less than 1% of the taxable income as determined in accordance with the rules applicable under Belgian income tax law. This 1% threshold will only be applicable to entities that do not fall in the scope of category 1 or 2 (priority rule).
The entities as defined under 2 and 3 are not considered to be legal constructions if the income derived by the legal construction would be exempted from Belgian income tax under the applicable double tax treaty, if the Belgian tax resident founder of the legal construction would have received the income directly.
Please bear in mind that the Royal Decree will be applicable for income received, granted or made payable by legal constructions as from 1 January 2018. Taken the above in consideration, it is clear that the proposed amendments to the Royal Decree concerning the scope of the Cayman Tax may have a significant impact. If you would like to discuss this further into detail, please contact your regular PwC advisor.