Cayman tax: look-through taxation for legal constructions. Marc Verbeek 3 oktober 2015

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1 Cayman tax: look-through taxation for legal constructions Marc Verbeek 3 oktober 2015

2 Background In 2013 the government introduced an obligation to report in the personal income tax return the existence of a legal construction of which one is the founder or beneficiary. The transparency tax is the next step. Legal constructions would not be prohibited per se, but the tax authorities look through in assessing the income tax due.

3 Which legal constructions are targeted? Category 1: Trusts and trust-like structures without legal personality Category 2: Non-taxed or low-taxed entities with legal personality An effective income tax rate of at least 15% One has to compare the foreign income tax effectively due to a taxable basis re-computed in accordance with the Belgian corporate income tax rules This taxation test is to be applied on an annual basis

4 Which legal constructions are targeted? A Royal Decree lists the qualifying entities of Category 2 Within the European Economic Area (EEA): Stiftung and Anstalt (Liechtenstein) and Société de gestion Patrimoine Familiale (SPF). This list is limitative but, according to the Minister of Finance, irrefutable. Outside the EEA: Foundation (Switzerland), Foundation and Company (Jersey and Guernsey), etc. This list is refutable but not limitative.

5 Which legal constructions are targeted? There is an exclusion for 'active companies' located in a member state of the EEA or in a (tax treaty) country having an appropriate bilateral or multilateral exchange of information arrangement with Belgium. In order to qualify for this exclusion, the founder(s) or beneficiary (ies) concerned should demonstrate that: The entity performs a real economic activity in the framework of its business in the country where the entity (or permanent establishment) is located; and The entity disposes of premises, personnel and equipment which are commensurate to its actual economic activity.

6 Which tax subjects are targeted? The definition of founder is very broad: The person who actually founded the construction The person who has transferred assets or rights to a construction set up by a third party Heirs, unless they can prove that they will never gain any benefit from the construction The holder of the legal rights to the shares or of the economic rights to the assets held by the category 2 legal constructions. A "third party beneficiary" is anyone acquiring any benefit from a legal construction. These can be both natural persons and legal entities subject to the tax on legal entities.

7 Look-through taxation of the founder The income earned by the legal construction is taxed as if it were received directly by its Belgian founder. All types of income earned by the foreign legal structure will be taxed in the hands of the Belgian founder(s), irrespective of whether or not the income is actually passed on to the Belgian founder. The income earned by the foreign legal structure maintains its nature and fiscal qualification when taxed in the hands of the founder(s). income from real property will be taxed at the progressive income tax rates (varying from 25 to 50 percent, with a communal surcharge) dividend and interest income will be taxed at the fixed rate of 25 percent (27 percent in the future) capital gains realized on an individual's private assets consisting of securities, tangible assets or real property are not liable to capital gains tax if realized on transactions within the limits of the "normal management of a private estate.

8 Look-through taxation of the founder The founder can avoid look through taxation in his hands if he can demonstrate that the income earned by the legal structure has been effectively paid or attributed to one or more other beneficiaries who are established in a member state of the EEA or in a (tax treaty) country having an appropriate bilateral or multilateral exchange of information arrangement with Belgium.

9 Avoiding double taxation If a legal entity (category 2) is wound up or it assigns its assets without due compensation, income tax is due on the income paid or allocated by the legal entity, after deduction of the income that had been taxed already under the Cayman tax rules with the founder or the beneficiary.

10 Anti-avoidance rules Any changes made to the articles of incorporation of a legal structure after 9 October 2014 in order to change the nature of the structure as such cannot be opposed to the tax authorities. Any change made to the articles of incorporation of a non-taxed or lowtaxed entity (category 2) in order to transform the legal entity into a trust-like structure so as to avoid the taxation upon liquidation or winding-up or transfer of assets without due compensation, will also be considered non-opposable to the tax authorities. Any legal act (or a series of legal acts) of the foreign legal structure is not opposable to the tax authorities in respect of the application of the Cayman Tax in the hands of the founder(s) or the beneficiary(ies).

11 Entry into force The Cayman tax is applicable on income obtained, attributed or paid by a legal construction as from 1 January 2015.

12 Marc Verbeek Partner BDO Belastingconsulenten Da Vincilaan 9 Box E Zaventem Tel.: + 32 (0) Fax: + 32 (0) marc.verbeek@bdo.be