Last Thursday, a Royal Decree extending the list of non-EEA entities targeted by the Belgian Cayman tax was published in the Belgian Gazette. The types of newly targeted entities were aligned with those of targeted EEA entities published earlier this year. The most important features of both lists are discussed below.
- All closely held UCITS/fonds dédiées are now explicitly targeted by the Belgian Cayman tax (both in and outside the EEA).
- Hybrid entities are targeted (both in and outside the EEA), with an escape rule for EEA entities if their shareholders/partners are subject to foreign tax on their share of income received by the entity at a rate of at least 1% of the taxable income (to be computed on the basis of the Belgian tax rules).
- Entities established in the EEA with an effective tax rate that is lower than 1% of their income (to be computed on the basis of the Belgian tax rules) are also targeted.
Brief recap of the regime
The Cayman tax legislation provides for a tax fiction pursuant to which Belgian resident founders or shareholders (individuals or not-for-profit organisations) of 'legal arrangements' are deemed, for Belgian tax purposes, to directly receive the income received by such legal arrangements and are, therefore, taxable thereon on a tax transparent basis. Note that as of 2018 multiple-tier legal arrangement structures are also explicitly targeted by the Cayman Tax.
In addition, upon distribution by a legal arrangement, the beneficiary of such distribution is deemed to receive a dividend and will hence be taxable thereon, unless the distribution relates to the legal arrangement's paid-up capital (subject to an allocation rule which provides that the (oldest) retained earnings of the legal arrangement are deemed to be distributed first) or unless it can be demonstrated that the distribution relates to income that has already been subject to the application of the tax transparency regime under the Cayman Tax in Belgium.
The notion of 'legal arrangement' consists of trusts and similar structures (type 1 legal arrangements) as well as legal entities, i.e., foundations and companies which are either not subject to income tax or are subject to income tax that represents less than 15% of their taxable income as determined under Belgian tax law (type 2 legal arrangements).
With respect to type 2 legal arrangements, a legal entity established in the European Economic Area (EEA) will only be regarded as a 'legal arrangement', and hence targeted by the Cayman tax, if it is on a list of legal arrangements, as determined by Royal Decree. A second (non-exhaustive) list, also determined by way of Royal Decree, contains entities established outside the EEA that are deemed to be legal arrangements (unless it can be proven that they are subject to an effective income tax rate of 15%).
Founders or shareholders of a legal arrangement, or persons having received a distribution or any other advantage from a legal arrangement, must also mention on their tax return the details of the underlying legal arrangement.
Entities in scope in the EEA
In November 2018, the list of legal entities established in the EEA that fall within the scope of the Cayman regime was extended (confirmed by Law of 11 February 2019 and published in the Official Gazette on 22 March 2019). This new Royal Decree applies to income received or distributed by a legal arrangement as of 1 January 2018 and significantly broadens the scope of the regime:
- All closely held funds/fonds dédiées are now explicitly targeted by the Belgian Cayman tax and hence fall within the scope thereof if they are not subject to tax or subject to tax at a rate lower than 15% of the taxable income (calculated according to the Belgian income tax rules).
Public and institutional funds were already targeted if de facto closely held, i.e., if held by one person or several related persons; the Royal Decree now adds "private" funds. The closely held character is assessed at the level of the fund or at any compartment of the fund.
- Foreign hybrid entities, which are deemed opaque from a Belgian tax perspective and deemed tax transparent under their EEA state of establishment, are also targeted, irrespective of whether such entities receive Belgian or foreign sourced income. Examples of EEA hybrid entities are the Luxembourg SCS (société en commandite simple) and the Scottish partnership, which have legal personality under their governing law and are hence considered as opaque under Belgian tax law but which are considered tax transparent from a foreign tax perspective.
An exception is provided for entities with a core activity generating income that would be exempt from Belgian income tax on the basis of the applicable double tax treaty if the Belgian resident had received such income directly, hence excluding, for example, the French SCI (Société civile immobilière).
In addition, an exception applies if the shareholders/partners are subject to tax on their share of income received by the entity at a rate of at least 1 pct. of the taxable income (to be computed on the basis of the Belgian tax rules).
- Finally and most importantly, the Royal Decree now targets any entity which is not subject to income tax in its country of residence or which is subject to income tax at a rate of less than 1% of the company's taxable income, computed based on the Belgian tax rules, with the exception of investment funds.
Before, only a limited number of EEA entities were targeted, i.e., the Stiftung and Anstalt in Lichtenstein and the Société de gestion de patrimoine familial and Fondation Patrimoniale (the latter never existed) in Luxembourg.
Today, any EEA entity that is subject to tax at a rate lower than 1% of its income, computed on the basis of the Belgian rules (taking into account any Belgian corporate income tax exemptions and deductions, e.g., the participation exemption), may trigger the Cayman tax rules in the hands of the Belgian shareholder. Whether the 1% test is met must be determined on an annual basis. It will often be difficult to determine whether the 1% test is met and this rule will therefore create a lot of uncertainty.
Entities in scope outside the EEA
The current blacklist of non-EEA entities contains 66 entities and includes, amongst others, the following entities: (i) Jersey Company and Foundation; (ii) Swiss Foundation; (iii) Monaco Foundation; (iv) Panama Fundación de Interés Privado; (v) Hong Kong Private Limited Company; (vi) Delaware and Wyoming Limited Liability Company; (vii) Stichting Particulier Fonds in the Dutch Antilles; (vii) Cayman Exempt Company; (ix) British Virgin Islands Company; (x) Bahamas International Business Company and Foundation; and (xi) Bermuda Exempt Company.
The new Royal Decree of 6 May 2019 now adds to this list: (i) all foreign UCITS if its shares or rights are held by one person or several related persons (to be determined per compartment, if applicable); and (ii) foreign hybrid entities (see above: for example, the Delaware LP).
Importantly, the exception that applies in an EEA context for hybrid entities (if the shareholders/partners are subject to tax at a rate of at least 1%) does not apply here.
This new Royal Decree applies to income received or distributed as of 1 January 2019.
These new additions to the list will prove to be burdensome for many Belgian taxpayers investing in the newly targeted entities. After all, the Royal Decree with respect to non-EEA entities establishes a presumption that the entity concerned is a legal arrangement and that its Belgian resident shareholders/founders will hence be subject to the Cayman tax, unless the Belgian investor is able to demonstrate that the entity is subject to tax at a rate of at least 15% (to be computed in accordance with the Belgian income tax rules). In such case, the income received by the foreign entity will be deemed received directly by the investor and become taxable in his/her hands (generally at a rate of 30% for dividends and interest), regardless of whether such investor actually receives the underlying income. Capital gains realised on shares by the legal arrangement will as a rule remain tax exempt in the hands of the Belgian founder or shareholder of the legal arrangement, provided that the legal arrangement can properly ventilate its different sources of income.