The Cayman tax is a measure created in 2015 to counter tax evasion by Belgian residents owning “legal constructions” abroad. True to the principle of a look through tax, the Cayman tax taxes taxable income obtained through such constructions on behalf of its founder, ignoring as such the intermediate structure(s).
The recent changes to the scope of the Cayman tax are yet another sign that holding legal constructions entails complex tax obligations and increased tax risks, especially in combination with the growing international automatic exchange of information, making it more difficult for such constructions to remain under the radar and the 10 year assessment period the Belgian tax authorities can rely upon in the case of complex returns.
Below follows an overview of a number of amendments to the Cayman tax’ legal framework significantly expanding its impact as of 2024.
1. The use of an intermediate structure no longer prevents the application of the Cayman tax.
Initially, an entity that did not qualify as a legal construction, could break the chain structure and as such prevent the application of the Cayman tax. The legislative amendment intercepts this loophole by extending the definition of founder to all those who hold legal or economic rights of shares through intermediate constructions (which are not necessarily legal constructions).
Consequently, a natural person who indirectly owns rights in the legal construction via an intermediate construction is now also subject to the declaration obligation even if the intermediate construction is normally taxed.
2. Introduction of exit tax at the level of natural persons.
This exit tax applies when the founder of the legal construction transfers his residence or seat of fortune abroad. The Cayman tax qualifies such move as a notional distribution of the reserves of the legal structure, and taxes it as a dividend distribution at 30%. To soften the pill, the law allows a staggered payment in certain circumstances.
3. Redefinition of the substance exception.
The Cayman tax does not apply if the legal entity has a substantial, core economic activity (as opposed to an economic activity as a mere side activity) and the necessary substance (personnel, equipment, buildings, etc.) at its disposal to pursue its economic activity.
The income from the economic activity must also be proportional to the turnover of the legal entity.
4. Clarification of tax transparency.
The law clarifies that income obtained through the legal structure is always taxed transparently, even if it is redistributed in the same calendar year.
5. Introduction of a specific anti abuse "1 in 3" measure.
To avoid deferring distributions until an entity loses its qualification as a legal structure and consequently escape taxation, the law provides that the Cayman tax will apply to entities that qualify as a legal structure in at least 1 of the 3 previous taxable periods.
6. Extension of the declaration obligation.
The law also expands the declaration requirement of a legal structure. In addition to the extension of the declaration itself, a separate annex must be added as from 2024 to simplify both the administrative processing as well as the insight on revenues obtained through the Cayman tax.
The annex must establish (i) the income per legal structure, (ii) the amount of assets of the legal structure at the end of the taxable period, (iii) the portion of assets contributed by the founder, and (iv) dividends.
Entry into force.
Except with regard to the annex to the income tax return that is mandatory as of assessment year 2024, the amended Cayman tax will take effect for distributions as of 1 January 2024 and for income obtained by legal structures as of 1 January 2024.
