Belgium: Draft law proposes changes to Cayman tax

A recently published draft law proposes changes to the Cayman tax—a “look-through tax” designed to tax income obtained through a legal structure on the part of founders or beneficiaries as if they had directly received the income:

• Intermediate structure: The current Cayman tax allows for the inclusion of “chain structures,” limited to cases where legal structures are placed on top of each other. As such, a chain structure can be interrupted by interposing a normally taxed entity that is not a legal structure. The current term “chain structure” would be replaced by “intermediate structure.” Consequently, the Cayman tax may apply to chains of legal structures in which not all entities in the chain are legal structures. Moreover, the definition of “founder” would also be amended, broadening the scope to those who are a holder “directly or indirectly” through a chain of intermediate structures of the legal or economic rights of the shares.
• Tax-free capital gain: The condition for application of Article 21, 12° BITC92 would be tightened by no longer allowing the exemption for income distributions that have undergone their Belgian tax regime if the income from the legal structure is not taxed according to the provisions of BITC92 or the double tax treaties or is exempt from tax. This mainly pertains to a capital gain on shares that can be realized tax-free if it falls within the scope of the normal management of private assets. Under the amended Cayman tax, this tax-free capital gain would be subject to tax as a dividend (at a 30% withholding tax) due to the distribution by the legal structure.
• Consequences of a seat transfer and exit tax: To properly classify the income resulting from the seat transfer of a legal structure to Belgium, this part would be moved to Article 18 BITC92. Consequently, this income must be considered as a (fictional) dividend. Additionally, an exit tax would be provided in cases when the founder moves his/her tax residence abroad. Consequently, the founder would be taxed on a fictitious liquidation dividend.
• Distribution in the same year: The law also would be amended to clarify that income obtained by the legal structure is always transparently taxed, even if it is redistributed in the same calendar year.
• 1-in-3 rule: The Cayman tax would also apply to structures that have been classified as a legal structure in at least one of the three previous tax periods. This is to prevent a taxpayer from waiting to make a distribution until the taxable period in which the legal structure loses its qualification.
• Substance exclusion: Similar to the current Cayman tax provisions, the founder can always prove that the legal structure has sufficient substance and thus engages in substantial economic activity. To avoid misinterpretation of the words “economic activity,” the meaning of these words would be clarified.
• Declaration obligation: The declaration obligation of a legal structure in the personal income tax and legal entities tax returns would be extended. In addition to the tax return itself, a separate annex must now be added, the model of which is determined by Royal Decree.

If the draft law is enacted, the amended Cayman tax would be effective for distributions and income obtained from legal structures from 1 January 2024. The annexes to the individual (personal) income tax return would apply from assessment year 2024.

Read a December 2023 report prepared by the KPMG member firm in Belgium