In our previous Legal Newsflash of 18 October, we announced that the Belgian federal government would strengthen the Cayman Tax as part of the 2024 Budget exercise.
A first pre-draft bill was approved by the Council of Ministers on 27 October. Subsequently, advice was sought from the Belgian Council of State due to the tight deadline, unfortunately yielding little impact. The draft Program Law was formally presented to Parliament on 23 November.
The following analysis is based on texts that are still subject to parliamentary approval, which is expected to be rendered before year-end.
Changes suggested by the Court of Audit
As mentioned in our previous newsflash, the pre-draft bill contained, amongst others. the following changes :
- Individuals or legal entities can no longer avoid the Cayman Tax by emigrating from Belgium. A fictitious dividend (gathered from the undistributed profits) of the legal arrangement will be attributed to the founder when he emigrates from Belgium.
- The current tax exemption from tax on distributions for income that has already “undergone its tax regime” in Belgium is tightened (article 21, first paragraph, 12° ITC 92). The change means that the exemption can only be invoked when tax was effectively paid on the income in Belgium. If the legal arrangement realises a capital gain that is not subject to tax in Belgium (e.g. resulting from the normal management of private assets), the realised capital gain will therefore be subject to tax on distributions at the time of subsequent distribution.
- To facilitate control by the tax administration, the rebuttable presumption that the persons listed in the Belgian UBO register or in an equivalent foreign register also qualify as "founders" of the entity will be applied.
- The disclosure of the legal arrangements in the personal income tax return (or legal entities income tax return) shall be supplemented by a mandatory annex. If a separate Cayman Tax bookkeeping was already advisable in the past to comply with complex Cayman Tax rules, it will become mandatory for the next income tax return filing (income year 2023, tax year 2024).
Recently added measures and detailed information
In addition to these previously announced measures, the draft Program Law also includes additional changes and more detailed information. We highlight some of the most notable ones:
- Distributions made by an entity that qualified as a targeted legal arrangement in at least one of the three previous taxable periods will remain taxable under the Belgian Cayman tax regime (the so-called “1 in 3” rule). This rule is designed to address situations where an entity delays making a distribution until the taxable period in which it loses its status as a legal arrangement.
- The aforementioned strengthening of article 21, first paragraph, 12° ITC 92 could heavily impact the Dutch ‘STAK’ (Nederlandse ‘Stichting Administratiekantoor’, i.e. Dutch foundation-trust office), since it would apply to distributions by Dutch STAKs (actual or fictitious, such as the transfer of seat, emigration of the UBO, …). Regarding certification and decertification (the act of exchanging certificates for shares or vice versa) within the context of 'legitimate estate planning,' it could be inferred from the Memorandum of Understanding to exclude these from the Cayman Tax, if the certificates correspond to shares of companies within the scope of the Law of 15 July 1998. The Memorandum of Understanding does not, however, expressly address the tax implications of certificates related to shares falling outside the scope of the Law of 15 July 1998. It also does not cover the tax ramifications of a liquidity event at company level, where the shares corresponding to the certificates are involved, such as a capital decrease or the sale of shares. Additionally, it does not clarify the consequences of transactions entirely beyond the scope of the Law of 15 July 1998, such as emigration. Furthermore, it remains unclear whether STAKs used for structuring private equity deals can benefit from the aforementioned 'exclusion.'
- The substance exemption is made more stringent by defining the concept of economic activity more precisely: only the provision of goods or services on a particular market would be permissible and, simultaneously, the economic activity must constitute a core function with sufficient presence of personnel, assets, equipment and buildings.
- The Royal Decrees regarding the targeted EEA entities and non-EEA entities would be incorporated (partially) into the bill. The intention of the adjustment seems to be to bring French SCIs (société civile immobilière) within the scope of Cayman Tax. Nevertheless, in our opinion, SCIs should not be classified as legal arrangements, as evidence can be provided to demonstrate their adherence to the 1 percent tax threshold (taxed in the hands of the associates).
- The concept ‘chain arrangement’ is supplemented by the notion of ‘intermediate arrangement’ which significantly expands the scope of application of the Cayman Tax. This modification allows tax authorities to target chains of legal arrangements even if not every entity within the chain is individually targeted by the Cayman Tax. This means that, contrary to the previous approach, the presence of a (Belgian) entity that does not qualify as a legal arrangement by itself will no longer break the chain, preventing it from serving as a 'blocker.' When a legal arrangement down the corporate chain receives income, the individual designated as the 'founder' will be subject to personal taxation on proceeds he may or may not receive in future years. The practical significance of this new notion cannot be underestimated: to ensure compliance and to avoid multiple taxation on the same distribution, the individual will require information (such as the tracing of reserves in a manner consistent with Belgian personal income tax) that the intermediate entities may not currently account for or even possess. Moreover, access to this information is often restricted by solid corporate governance practices. In essence, this concept can be assimilated to ‘CFC-legislation’ for individuals.
- Based on current legislation, it is sufficient for a third party to hold a minimal percentage in an investment institution or dedicated fund (e.g. a Luxembourg SICAV) for the ‘founder’ to fall outside the scope of the Belgian Cayman Tax. In other scenarios, entities will still qualify as legal arrangements, but they will not be subject to transparent taxation. For example when entities have sufficient substance (a condition that has been has been tightened, as previously mentioned). Additionally, listed companies with securities registered on a stock exchange in a member state of the European Union or in a third country with legislation that includes equivalent admission requirements are also exempt from the Cayman Tax.
- Regarding investment institutions, UCITS (ICBE’s) are required to meet the conditions laid out in the UCITS-Directive, as was the case previously), but for AIFs (AICB’s), the current stipulation is now that that their managers, in accordance with the domestic laws of an EU-member state or third country, must meet the conditions specified in the AIFM-Directive, the scope of which is limited to entities that manage investment institutions as part of their normal operations. A manager can either be (i) an external manager or (ii), in specific cases, the institution itself, which must then obtain a license to operate as a manager.
- Furthermore, and most importantly, measures have been taken to address the circumvention of the dedicated fund shareholding application (where the Cayman Tax is allegedly evaded through the use of straw men). Moving forward, a minimum shareholding for unrelated persons of 50% will be implemented, accompanied by the introduction of specific legal presumptions in this regard.
Entry into force
The draft bill would enter into force for income obtained, granted or made payable by a legal arrangement from 1 January 2024 onwards.
We wish to underscore that the legislation is currently still in draft form, and it remains possible that further amendments may be introduced. The legal text requires thorough analysis and, at this juncture, comprehensively assessing all the expected and unforeseen consequences of the proposed changes poses a challenge. Nevertheless, we are ready to support you in evaluating the potential impact of the proposed legislation on your specific situation.