The Council of Ministers has approved a draft law which introduces a transparency tax on the founder and/or beneficiary of legal constructions such as trusts, foundations and foreign low-taxed entities. The draft is part of the new program law and is now sent to the Council of State for advice.
The previous government had already introduced the obligation that individuals must report in their tax return whether they are the founder or the beneficiary of such legal constructions, which is applicable since assessment year 2014. The government has now gone one step further and will introduce the “Cayman tax”.
Extension reporting obligation
The draft law extends the reporting obligation to legal entities subject to legal entities tax.
The draft law also changes the definitions of legal construction and founder, and adds a definition of beneficiary.As before, trusts, foundations, and similar legal relationships are considered legal constructions.
Regarding the legal constructions consisting of (foreign) low-taxed entities, they are now defined as any company, association, establishment or institution having legal personality. Two lists of legal constructions will be foreseen instead of one (limitative) now. The first one (limitative) will contain entities within the EEA and the second one (not limitative) entities outside the EEA (both lists are still to be determined by Royal Decree). The Royal Decrees will no longer apply after two years unless confirmed by law. Collective investment vehicles, entities managing pension funds and employee participation, and companies listed on a stock exchange will not be considered legal constructions.
The draft law also extends the definition of “founder” from individuals to legal entities subject to legal entities tax. The regime finally introduces a definition of “beneficiary” which can be any individual or legal entity subject to legal entities tax, which at any moment, or in any way, gets any advantage from a legal construction.
Transparency tax (“Cayman tax”)
The draft law creates a fiction whereby the income received by the legal construction will be taxed in the hands of the resident individual/legal entity which is the founder of the legal construction, as if the founder would have received the income directly. The income will be taxed in the hands of an individual/legal entity according to the normal regime which depends on the nature of the income as an immovable, movable, professional, or miscellaneous income.
This principle does not apply if the founder can demonstrate that the income received by the legal construction is paid or attributed to a beneficiary which is a resident of a Member State of the EEA or of a tax treaty or tax information exchange agreement country. If the beneficiary is a Belgian resident, the income will be taxed in Belgium in the hands of the beneficiary, as if he had received the income directly.
As an example, if Belgian residents, parents of 2 adult children, are the founders of a Jersey trust, they will be taxable on the income the trust receives, unless they can demonstrate that the income is paid or attributed to the beneficiaries, their children, then the latter, if Belgian residents, will be taxable on the income in Belgium.
However, the transparency tax will not be applicable for the assessment year where the founder or beneficiary can demonstrate that the low-taxed entity is subject to an effective income tax rate of at least 15 %. To determine the effective tax rate, the fraction must be calculated between the foreign tax paid (numerator) and the taxable base calculated as if the entity was subject to Belgian income tax (denominator).
In order to avoid double taxation, upon liquidation of the low-taxed entity or upon the transfer of its assets for no equivalent return, only the part exceeding the amount of the contributed assets which have already been subject to their tax regime in Belgium will be taxable in the hands of the founder at the rate of 25% (applicable to liquidation gains).
The draft law introduces an anti-abuse measure whereby the tax authorities can disregard a legal act by a low-taxed entity if the transparency tax applies (new art. 344/1 BITC). Any changes to the incorporation act of a low-taxed entity which aims to convert it to a trust or foundation in order to escape the liquidation tax will also be disregarded by the tax authorities.
Entry into force
The new regime will be applicable to income received or paid/attributed by a legal construction as from 1 January 2015 and, regarding the application of the movable and wage withholding tax rules, on the income paid/attributed as from the first day of the month following the publication of the law in the Belgian Official Gazette.
Any changes to the incorporation act of a low-taxed entity which aims to convert it to a trust or foundation or the other way around, decided upon as from 9 October 2014, will be disregarded by the tax authorities.