In the beginning of 2015, a look-through tax, also known as “Cayman tax”, became applicable in Belgium. According to the Belgian tax legislation imposing the Cayman tax, certain natural or legal persons who are founders or third-party beneficiaries of offshore legal structures are obliged to pay tax on the income received through those legal structures. The offshore constructions may include, for example, trusts, foundations, and companies.
What entities are liable to Cayman tax?
The Cayman tax is applicable to two types of Belgian tax residents that are founders or third-party beneficiaries of an offshore legal structure, namely: (1) individuals that are subject to the Belgian personal income tax; and (2) legal entities which are subject to the Belgian legal entities tax.
For Cayman tax purposes, the term “founder of a legal structure” refers to an individual who has established a legal structure or sponsored the establishment of a legal structure. It is worth mentioning that companies that are subject to corporate income tax and companies that are Belgian non-residents are not subject to a Cayman tax.
Founders and third-party beneficiaries of the following two types of offshore legal arrangements are liable to pay the Cayman tax: (1) trusts and trust-like arrangements; and (2) other legal structures with legal personality. Trusts and trust-like arrangements include entities created by a legal act and controlled by an administrator for the benefit of a beneficiary. The second type of legal arrangements includes legal entities (e.g., companies and foundations) that use favorable offshore tax regime.
The two above-mentioned types of offshore legal arrangements are liable to pay the Cayman tax if, in the jurisdiction where they are established, they: (1) are not liable for income tax; or (2) the income tax they are liable to is lower than 15%. Table 1 (see at the end of this article) lists some of the jurisdictions and legal structures falling within the scope of the Cayman tax.
Which legal entities are excluded from Cayman tax?
The entities that are excluded from Cayman tax are:
1) Entities established in the European Economic Area(EEA), except for legal arrangements (e.g., Liechtenstein Foundation and Luxembourg Société de Gestion de Patrimoine Familial) specifically added in a list published by the Belgian government;
2) Pension funds;
3) Public and institutional undertakings for collective investments;
4) Alternative investment funds and their managers;
5) Legal structures that are engaged in the management of employee participation;
6) Legal entities established in a country that has concluded (1) a double taxation treaty with Belgium or (2) a tax information exchange agreement with Belgium. Such legal entities are obliged to prove that they possess staff, equipment, and premises that are proportional with the business activities performed by them.
Avoiding Cayman Tax
Growing international transparency makes it more difficult to establish enterprises worldwide that would not be subject to the Cayman tax. However, there are ways to legally circumvent the Cayman tax. For example, the person willing to avoid the Cayman tax can incorporate a company in Bulgaria where the rate of the personal and corporate income is 10%. Being established within the EEA, Bulgarian companies fall outside of the scope of the Cayman tax. Moreover, since Bulgaria is an EU member state, the founder of the Bulgarian company may utilize various tax optimization schemes provided by the EU legislation, such as the schemes allowed by the EU parent-subsidiary directive.
Table 1: Jurisdictions and legal structures falling within the scope of the Cayman tax
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