The present Belgian Government has been working for several months on the introduction of a tax transparent taxation of private wealth structures in Belgium. This so-called “look-through” or “Cayman” Tax is conceived as a domestic variant of the Dutch specific tax rules for separated private assets (“afgezonderd particulier vermogen” or “APV”) such as trusts, family foundations and other comparable (foreign) entities which was introduced in the Netherlands with effect from 1 January 2010. In Belgium, the 2014-2019 Federal Coalition Agreement included the “look-through” taxation, but until now there is still no formal approval of the preliminary draft of the bill by the Cabinet.
Obligation for taxpayers to report foreign bank accounts, life assurances and legal structures in their income tax return
After the reporting duty regarding the existence of foreign bank accounts, the Belgian legislator introduced for the 2012 income year a new reporting duty regarding foreign life assurance policies. Since the 2013 tax assessment year, Belgian fiscal residents have to declare foreign life assurance policies in their personal income tax return. It is now a requirement that individual life assurance policies subscribed abroad by themselves, their spouse or their minor children (e.g. after an insurance gift), are declared in Box XIII of part I of their personal income tax return, together with the country in which they were subscribed. Until now there is no obligation to declare the policy number, the insurance premiums, the surrender value etc. Furthermore, this reporting duty did not provide for a modified tax regime. Branch 23 unit-linked life assurance without any guaranteed return remains exempt from Withholding Tax (or Capital Gains Tax). Meanwhile, a number of initiatives have been undertaken at the EU, G20 and OECD level, resulting in different models of automatic exchange with different implications on the data exchanged.
Subsequent to the above-mentioned reporting duties, the previous Belgian legislature introduced the obligation for taxpayers to report foreign legal structures, i.e. private wealth structures, in their personal income tax return as from tax assessment year 2014 (see art. 2 §1 13° & 14° Belgian Income Tax Code 1992). Belgian individual resident tax payers that are founders, settlors or beneficiaries of trusts & fiduciary structures, wherever located, or of any of the targeted foundations and companies published by Royal Decree on 2 April 2014, fall within the scope of this declaration obligation. Belgium does not have the concept of a trust, but a foreign trust can be recognised under Belgian international private law. A trust settlement is, however, only valid insofar it does not violate the forced heirship rules. In principle the definition of a trusts or fiduciary structure should be understood as follows: “A legal relationship, the origin of which is to be found in a legal document or deed, executed by the founder, or by virtue of a court decision, where goods or rights come under the power of an administrator for the purpose of managing them on behalf of one or more beneficiaries for a specific purpose.”. The second category as listed by the afore-mentioned Royal Decree consists of foreign legal entities not subject to income tax under the provisions of the country or jurisdiction of residence, or subject to a significantly more favourable income tax regime on their capital and movable goods in the jurisdiction of residence, than in Belgium. For this category, either the legal rights to the shares have to be wholly or partly held by a Belgian fiscal resident or the beneficiary of the economic rights to the capital and goods has to be a Belgian fiscal resident. The Royal Decree listed the 67 legal forms of entities and legal arrangements of annex 1 to the E.U. Savings Directive 2003/48/EC plus the Luxembourgish SPF (“Société de Gestion de Patrimoine Familial”) and the Dutch Antilles Foundation (“Stichting Particulier Fonds”).
Introduction of a tax transparency for the 2015 income year via the concept of a property fiction
Although foreign legal constructions have to be reported in the personal income tax return, the income from such constructions is often not taxable in Belgium. The previous Belgian Government already tried to introduce a tax transparency for the founders and third party beneficiaries of these foreign legal structures, but didn’t achieve. The 2014-2019 Federal Coalition Agreement included the “look-through” taxation as one of the shifts from tax on labour which is amongst the highest in the world (marginal tax rate of 53%-54%). Taxation will be achieved by considering the above-mentioned private wealth structures as tax transparent, so that the income will be taxable directly in the hands of the resident individual who is the founder or third party beneficiary of the construction. This tax transparency regime will allow the Belgian fiscal administration to levy tax in those cases where the interposition of a legal construction frustrates a normal taxation.
Although this tax transparency measure is consistent with the above-mentioned obligation for Belgian tax residents to report their foreign legal private wealth structures of which they are founders, some substantial changes will be made. With regard to the first category of trusts & fiduciary structures without legal personality, the definition remains unchanged. However, the second category of foreign legal entities not subject to income tax under the provisions of the country or jurisdiction of residence, or subject to a significantly more favourable income tax regime on their capital and movable goods in the jurisdiction of residence, than in Belgium, will be announced by new Royal Decrees in the form of a limitative (irrefutable) E.E.A.-list and a non-limitative (refutable) non-E.E.A.-list. The legal entities listed by Royal Decree on 2 April 2014 will be included as long as they still fall within the scope of art. 2 §1 13° b) Belgian Income Tax Code 1992, implying they are still subject to a considerable more favourable foreign tax regime or not taxed at all.
Widening of the concept of founders
The income of one of the above-mentioned tax transparent private wealth structures will be taxable directly in the hands of its founder. The definition of founder of the first category without legal personality also includes the heirs of the founder/settlor as well as the grantor of a grantor trust. Nevertheless, the heirs are always allowed to submit evidence in rebuttal, by showing that neither they nor their own heirs in no way will receive any benefits from the trusts or fiduciary structure at any time. This specific proof to the contrary is not foreseen for the second category of legal entities. For this category, either the legal rights to the shares have to be wholly or partly held by a Belgian fiscal resident or the beneficiary of the economic rights to the capital and goods has to be a Belgian fiscal resident. Third party beneficiaries of both categories of private wealth structures are also regarded as directly taxable founder. Private foundations and non-profit organisations subject to the Belgian tax on legal entities, in their turn, can also be taxable as founder or third party beneficiary of a private wealth structure.
Persons liable to Belgian personal income tax or entities liable to Belgian tax on legal entities are deemed to be the owners of the goods, the rights and the capital owned by the private wealth structure of which they are “founders”, and they are deemed to receive the income derived from those goods, rights and capital directly. For legal entities liable to Belgian corporate tax, the tax transparency is not applicable. The income received by third party beneficiaries living in the E.E.A. (or in a country with which Belgium ratified a double tax treaty) can be deducted by the founders. In the event of multiple founders, every founder will be taxed for an equal part, while in the event of heirs the taxation will follow the abstract dissolution of the estate according to the (statutory) devolution. However, the founder or heir can always deliver the proof that the income in reality is distributed in another proportion. The preliminary draft aims at 100% taxation in Belgium.
The tax transparency measures do not apply for foreign legal entities targeted under the second category if those structures are subjected to an actual 15% income tax rate. This raises the question if we have to take into account foreign domestic law tax exemption or reduction regimes similar to the Belgian notional interest deduction (the amount that can be deducted from the taxable base equals the fictitious interest cost on the adjusted equity capital = notional interest rate x adjusted equity) or the fiscally transferred loss deduction etc.
Lots of uncertainty
Many basic elements and details of the newly announced “look-through” taxation or “Cayman” tax are still unclear and will have to be subject to further negotiations and debate. Will the Belgian fiscal administration for example be able to prevent that certain income is subject to double taxation (between settlor and beneficiary)? At the end of 2013, the “Look-through” Tax on assets of foreign legal structures was already put under the microscope. Now that the new government proposes to actually introduce this tax, it remains to be seen how far the implementation of the above-mentioned rules will be applicable in reality. Tax transparency for complex legal structures creates immense fiscal and accounting complexities. Nevertheless, the Belgian Government has already budgeted revenues of €50 million for 2015, while the preliminary drafts have not even yet been approved by the Cabinet nor has the advice of the Council of State been provided.