On the 28th of January, the Belgian Constitutional Court ruled in favour of an annulment of a modification of article 18, 3° BITC by the Program Law of 25 December 2017 which, in the context of the Cayman Tax, had aligned the tax regime of distributions made by the legal constructions without legal personality (“type A constructions” – cf. article 2, §1, 13°, subparagraph 1, a) of the BITC) with the tax regime applicable to distributions made by legal constructions with legal personality (“type B constructions” – cf. article 2, §1, 13°, subparagraph 1, b) of the BITC). The Court has indeed considered that the modification at hand was discriminatory.
As a reminder, the purpose of the Cayman tax is to tax by transparency the income arising from assets of Belgian taxpayers housed in legal constructions. These legal constructions are divided into two main categories:
- Legal constructions without legal personality (e.g. trusts);
- Legal constructions with legal personality, defined by the fact that they are subject to a tax rate of less than 15% determined in accordance with the Belgian tax rules.
According to the Cayman Tax principles, the founder of a legal construction (cf. article 2, §1, 14° of the BITC) is taxed on the income perceived by the legal constructions as received directly, by transparency, by the founder.
Before the Program Law of the 25 December 2017, distributions made by type A legal constructions were not to be considered as taxable dividends. The beneficiaries of distributions made by type A constructions were consequently not taxed on these incomes. The founder of the legal construction was however taxed, by transparency, on the income perceived by the legal construction, regardless of the tax rate applicable to the legal construction.
The Program Law of 25 December 2017 aligned the tax regime of distributions made by type A legal constructions with the tax regime applicable to distributions made by type B constructions.
However, to the contrary of type A legal constructions, entities with legal personality will only qualify as legal constructions as far as they are subject to a tax rate lower than 15% (as calculated according to Belgian tax rules). Therefore, there is a difference between type A legal constructions which will be subject to the Cayman tax without taking into account their tax regime and type B legal constructions which will only be subject to the Cayman tax in case their tax rate in their tax residence country is below 15%. As a consequence, legal constructions such as trusts, sometimes significantly taxed, will qualify as type A legal constructions, with all the resulting consequences in terms of taxation.
Thus, the case brought before the constitutional court concerned a Canadian trust which, despite the fact that the income it receives is taxed, in Canada, at a non-negligible rate of 53.31%, qualifies as a type A legal construction.
According to the Court, the legislator, by aligning the treatment of distributions made by type A legal constructions with distributions made by type B legal constructions, without providing, regarding type A legal constructions, for an exception in case the legal construction is subject to a tax rate at least equal to 15%, introduced an unfounded discrimination contrary to the principle of equality.
As a result, the Court has cancelled article 89, 1° of the Program Law of 25th December 2017.
The Constitutional Court’s annulment has a retroactive effect i.e. the distributions made by trusts taxed on the basis of the annulled provision have been taxed without any legal basis. The beneficiaries of these income will be able to claim a refund of the tax levied from the tax authorities.