Budget 2024: tightening the Belgian Cayman Tax?

Click to read the alert in Dutch | French

On 9 October 2023, the federal government reached an agreement on the budget for 2024. It aims to strengthen various control and anti-abuse measures in the fight against tax evasion and avoidance. The intention is to reinforce and tighten the Cayman Tax to further restrict the flight towards tax havens.

The tightening of the Cayman Tax draws inspiration from the report published earlier this year by the Belgian Court of Audit on the Cayman Tax (Dutch | French).

Background and current situation

The Cayman Tax was introduced with the aim of preventing Belgian residents from obtaining a tax advantage by holding assets in low-taxed entities. Since 2013, the Cayman Tax has evolved from a mere reporting obligation to (imperfect) fiscal transparency (the so-called look-through taxation) and a tax on distributions. The targeted entities (legal arrangements) have also significantly increased.

Founders are, in principle, taxable on the income of the legal arrangement under “the look-through taxation”, as if the founder had received the income directly. Distributions made by legal arrangements can be taxed as dividends in the hands of the recipient. When a legal arrangement holds, in turn, another legal arrangement, the look-through taxation applies to the entire chain.

Although the Cayman Tax has been adjusted repeatedly over the past ten years, the Minister of Finance still considers it to be insufficiently effective.

Changes proposed by the Court of Audit

The Court of Audit proposes a series of measures to increase the Belgian taxable base:

• The Court of Audit observes that individuals can avoid the Cayman Tax by emigrating from Belgium. The introduction of an exit tax could counter this. Such a tax could mean that a fictitious liquidation dividend of the legal arrangement is attributed to the founder when he emigrates from Belgium.
• Collective investment undertakings can qualify as legal arrangements under the current regime only if they are exclusively held by one or more linked individual(s) (considered per individual compartment, if needed). One of the Court of Audit’ suggestions aims to introduce a minimum percentage for unrelated persons to prevent the Cayman Tax from being avoided by using straw men. The burden of proof could also be reversed.
• Inserting an "ordinary" (subject to normal taxation? ) company in a chain arrangement could be countered by expanding the definition of a "chain construction."
• The Court of Audit proposes to tighten the current tax exemption from tax on distributions for income that has already “undergone its tax regime” in Belgium. The change could mean 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 exempt in Belgium (resulting from the normal management of private assets), the realised capital gain may therefore be subject to tax on distributions at the time of subsequent distribution. This measure aims to prevent obtaining an advantage through the application of the Cayman Tax.
• To facilitate control by the tax administration, the rebuttable presumption that the persons listed in the UBO register also qualify as "founders" of the entity could be applied.
• The Court of Audit also advocates for more internal data exchange between the various tax administrations in Belgium.

It is particularly unfortunate that the Court of Audit’s suggestions do not address the uncertainty surrounding the (non-)application of the Cayman Tax to situations clearly outside the intended scope of the tax (for example, the fiscally transparent Dutch trust office foundation -  stichting administratiekantoor/STAK,). The Minister of Finance has announced a circular letter to address certain uncertainties (such as clarifying the “substance exclusion”).

Impact and entry into Force?

To assess the actual fiscal impact, we await the draft text of the law.

The government’s aim is undoubtedly to submit a draft law to the federal parliament’s vote by the end of the year. We will keep you informed and remain available if you have any questions regarding the impact on your personal situation.