For many years, Belgian resident tax payers have been hiding their private investments abroad from the Belgian tax authorities. By doing so, they have been underpaying income taxes on interest and dividend income from foreign sources as well as gift and inheritance taxes.
In recent years, tax authorities around the globe have been stepping up their measures to ensure proper tax compliance on world-wide assets and income of their resident tax payers. In line with this trend, Belgium has introduced numerous rules to achieve this objective. The latest measure is the introduction of fiscal transparency rules for foreign investment structures. In the Belgian press, these measures are also known as the ‘Cayman tax’, thereby referring to the Caribbean island that has in the past been a popular location for tax evading individuals.
While these rules may be discomforting to a limited group of Belgian tax payers, they may be very agressive towards expatriates, who move to Belgium to work and live here, and who will be hit by the new taxes. Some estate planning structures, that are common and fully legal in their home country (most often in common law jurisdictions), will suddenly become subject to far-reaching Belgian tax measures.
The current law was already preceded by an obligation to disclose the existence of certain foreign legal structures for estate planning in the Belgian resident income tax return. This obligation was first introduced in the tax return on 2013 income, that was filed in 2014. It concerned only a disclosure obligation without immediate tax consequences.
Under the new law, taxation will actually take place in Belgium on behalf of the Belgian resident tax payer, who realizes taxable income through a foreign legal investment structure. To this purpose, the legal structure is treated as a transparent entity for income tax purposes, which implies that all income, earned by the structure as from 1 January 2015 onwards is directly taxed in Belgium on behalf of either the person, who set up the structure or of the beneficiaries or potential beneficiaries of income from the structure.
Determining tax residency now becomes an extremely important issue for foreign individuals, who decide to move to Belgium for a limited or for a prolonged period of time. Only Belgian resident tax payers are subject to the new taxation. Individuals, who qualify as non-resident tax payers of Belgium, are not subject to these taxes. It may be of the highest importance of foreign immigrants to Belgium to ensure that their Belgian tax matters will be treated under non-resident rules and not under resident rules.
One can immediately raise the question whether the new rules are in line with the free movement of persons within the European Economic Area, as the Belgian taxes, may constitute a significant barrier for individuals, who want to come to Belgium to work and live here. This is especially relevant to the extent that the legal structures, that would be taxed in Belgium, are fully legal and tax compliant in the home country of the tax payer.
A second issue that comes to my mind results from the complexity of international double taxation of income in the structure. The tax payer may be taxed in Belgium a first time when the income is earned by the legal structure and a second time after he moved back to his home country when income is actually distributed. This will be a new challenge for the international tax treaties, that are aimed at avoiding international double taxation of income.
It may be more important than ever before for tax payers to apply for the special tax status for expatriates in Belgium (tax circular of 8/8/1983 as this status offers protection against the new tax by treating the tax payer as a non-resident of Belgium (while the new tax only applies to tax residents of Belgium).
Two categories of foreign legal structures are subject to the new taxes:
Group 1 – trusts
The law imposes taxation when income is earned by legal structures that are trusts (or a similar to a trust). The settlor or (potential) beneficiary of the trust must disclose the existence of the trust in his Belgian income tax return and in addition becomes taxable on all income, earned by the trust, irrespective of the following elements:
Group 2 – Lowly taxed foreign investment entities
The second group of entities, that triggers the new Belgian taxes are foreign legal entities that are lowly taxed abroad. As the overall definition of this group of entities is rather vague, the Belgian tax authorities have made up a list of entities that fall under the new rules.
One can note that most of these legal entities are located outside the European Economic Area (EU countries, Iceland, Norway and Liechtenstein). Within the EEA only the following entities are covered:
The EEA list is limitative and no other legal structures within the EEA are subject to the new tax.
There is also a list of legal structures outside the EEA, but this list is not all-inclusive. It is therefore possible that a foreign legal entity will be affected by the Belgian taxes even if the entity is not mentioned specifically on the list. One can note that also certain US company formats are affected (Delaware Company and Whyoming Company) and also the Swiss Foundation.
Entities on the list are presumed to be lowly taxed, which means that the tax on their earnings (calculated or re-calculated under Belgian tax rules) does not exceed 15%. It is clear that the calculation of the Belgian taxable base for evaluating the 15% tax norm may give rise to a number of challenging questions. The tax payer may, however, prove that the foreign entity is actually higher taxed and in this way obtain exemption from the Belgian taxes on the income of the foreign entity.
The Belgian taxes are specifically aimed at avoiding international tax planning on ‘passive’ income or income from investments. The Belgian taxes should not be calculated on the income of companies with regular commercial activities. The tax payer can claim exemption from the tax on income from regular commercial operations, provided that the entity is located in a country that exchanges tax information with Belgium.
The so-called ‘Cayman’ tax opens a wholly new dimension in Belgian tax law. The law was quickly introduced under considerable political pressure (to fight potential tax evasion by all means) and is likely to include many legal imperfections. As time goes on, these imperfections will surface and give rise to new legislation to correct and refine the rules, interpretations and unfortunately also disputes, that may result in European case law or other decisions by supreme jurisdictions (on non-discrimination issues). Challenging times lie ahead…..
Appendix – Lowly taxed foreign investment entities outside the European Economic Area
|US Virgin Islands:||Exempt Company|
|Anjouan (Comores) :||International Business Company|
|Antigua and Barbuda :||International Business Company|
|Anguilla:||International Business Company|
|Aruba:||Stichting Particulier Fonds|
|Bahamas :||International Business Company|
|Barbados :||International Business Company|
|Barbados :||International Society with Restricted Liability|
|Belize:||International Business Company|
|Bermuda :||Exempt Company|
|British Virgin Islands:||Company|
|Brunei:||International Business Company|
|Cayman Islands||Exempt Company|
|Cook Islands:||International Company|
|Costa Rica :||Company|
|Djibouti :||Exempt Company|
|Dominica :||International Business Company|
|Isle of Man:||Company|
|Grenada:||International Business Company|
|Hong Kong :||Private Limited Company|
|Labuan (Maleisia) :||Offshore Company|
|Libanon :||Ondernemingen die in aanmerking komen voor het “offshore company regime”|
|Marshall Islands:||International Business Company|
|Mauritius:||Global Business Company category 1|
|Mauritius:||Global Business Company category 2|
|Montserrat:||International Business Company|
|Nauru :||Andere met de overheid onderhandelde ondernemingsvormen|
|Dutch Antilles:||Stichting Particulier Fonds|
|Niue :||International business company|
|Northern Marianas:||Foreign sales corporation|
|Panama:||Fundación de interés privado|
|Panama:||International Business Company|
|Saint Kitts and Nevis:||Foundation|
|Saint Kitts and Nevis:||Exempt Company|
|Saint Lucia:||International Business Company|
|Saint Vincent and Grenadines:||International Business Company|
|Samoa :||International company|
|San Marlno :||Fondazione|
|Sao Tomé and Principe:||International Business Company|
|Seychelles :||International business company|
|US State of Delaware:||Limited Liability Company|
|US State of Whyoming:||Limited Liability Company|
|Turks and Caicos Islands:||Exempt Company|
|Uruguay :||Sociedad Anónima Financiera de Inversión|
|Vanuatu :||Exempt Company|
|Vanuatu :||International company|
|United Arab Emirates:||Offshore Company|