The Belgian parliament is currently debating new legislation concerning foreign private wealth structures (PWS), such as trusts, foundations and off-shore companies. This legislation, commonly referred to as the “Cayman-tax”, intends to introduce transparent tax treatment for income generated via such foreign structures. The “founder(s)”, or so-called “third party beneficiaries”, of such foreign structures would owe the tax.
This proposed “Cayman-tax” legislation can be seen as the continuation of the previously-enacted reporting obligation that was introduced for tax year 2014 (income 2013 declared in Belgian tax year 2014). Indeed, since tax year 2014, Belgian-resident founders or beneficiaries have been required to report the existence of foreign PWS in their annual income tax return.
The Belgian government, to increase the compatibility of national rules with EU and EEA regulations (and following the CJEU’s Cadbury Schweppes judgment (Case C-196/04 Cadbury Schweppes v. Commissioners of Inland Revenue) and the EFTA Court’s Olsen Case judgment of July 9, 2014 (Case E-3/13 and E-20/13)), has recommended amending the Bill of law with a so-called “substance exclusion”. This explicit exemption would be put into law in Article 2 §1 13°/1 e) ITC and allow for the founder and/or third party beneficiary to supply a specific type of evidence to avoid the transparent taxation obligation altogether. Accordingly, the founder and/or third party beneficiary would not be liable for the tax whereby the interposition of the entity for tax purposes would prevail.
In that respect, the founder and/or third party beneficiary must demonstrate that the foreign entity, be it a company, a trust or a foundation, is not a “wholly artificial arrangement” and has a “genuine economic activity” based on “objective factors which are ascertainable by third parties”; these factors include “offices, staff & equipment which stands in relation to the mentioned genuine economic activity”. This “substance exclusion” is possible for all entities that are in the EEA, and/or countries that Belgium has concluded a DTT or TIEA with. So, a large number of off-shore companies, foundations and trusts in a number of jurisdictions, such as Liechtenstein, Bermuda, Jersey, New-Zealand and the like may attempt to invoke this exclusion.
Clearly, to qualify under this “substance” test, evidence must be provided, as set out in the proposed Bill of law, that can be closely scrutinised by the tax inspector; and one should expect the highest levels of scrutiny will be applied. In that respect, the Belgian government’s comments on the proposed Bill of law disallow the “substance test” counter proof for offshore entities that ‘limit their activities solely to the management of private wealth”. It is however debatable whether this limitation on the “substance exclusion” would stand up to a challenge before the EFTA Court. In any event, the “substance exclusion” will allow various types of structured holdings, destined and set up to manage, coordinate and effectively control a group of companies, to remain beyond the grasp of the “Cayman-tax”.
Author: Gerd D. Goyvaerts, Partner Tiberghien
