Alert Belgium 2/2021 Repeal of Cayman for Trust distributions subject to taxation

Geneva, 10.02.2021

References

1.1 Decision

On 28 January 2021, the Belgian Constitutional Court ruled that the Cayman Tax provision applicable to distributions from trusts (which have no legal personality) violates the constitutional principle of equality and non-discrimination, considering that in case of trusts, such distributions are considered as deemed-dividends subject to Belgian at the rate of 30% without tax burden threshold fixing the application of Cayman Tax, whereas distributions made by legal structures with legal personality are only taxable if these legal structures are not taxed above a certain threshold.

1.2 Addressees of this Alert

CM PB CM EAM CM CTF CM Products CM Tax CM Credits

- - - - YES -

1.3 Impact on Tax Country Manuals

 Country Manual Tax Belgium  Tax Investment Manual Belgium

1.4 Reference Texts

 Ruling n° 12/2021 of 28 January 2021 of the Constitutional Court (Cour Constitutionnelle) of Belgium on the question of the constitutionality of article 89, 1 of the Program Law (Loi-programme) of 25 December 2017 modifying the tax regime of certain legal constructions (Cayman Tax)  Articles 10 and 11 of the Belgian Constitution  Program Law 25 December 2017, M.B. 29 December 2017  Royal Decree of 18 December 2015, implementing Article 2, § 1, 13°, b, paragraph 3, of the CIR 1992, M.B. 29 December 2015  Income Tax Code of 10 April 1992, M.B. 30 July 1992 (Code des Impôts sur les Revenus CIR 1992)

Context

The so-called "Cayman Tax" was introduced in Belgium by the Program Law of 10 August 2015. It provides, as of 1 January 2015, the taxation in transparency of income from foreign legal arrangements directly in the hands of the founder, his/her heirs, third party beneficiaries or shareholders.

The tax applies mainly to two types of legal structures:

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 type a): trusts and fiduciary structures without separate legal personality (art. 2, § 1, 13°, a) CIR 1992);  type b): all legal persons (companies, partnerships, associations, foundations, etc.) which, under the provisions of the law of the State or jurisdiction in which they are established, are subject to an income tax of less than 15%. The calculation of such tax is determined in accordance with the rules applicable for establishing the corresponding income tax in Belgium. These entities are mostly "Anstalt", "company", "Foundation", "limited" as well as companies established in tax havens. The 15% rate is determined in relation with the tax base as defined by Belgian as well as the rules on deductions (Article 2, § 1, 13°, b) CIR 1992).

Based on these provisions, the founder of a legal structure was taxed on the income received by the legal structure (look-through taxation taxation par transparence) during the taxable year and third party beneficiaries were taxed on the income distributed to them during the same year. A of the same income could therefore happen.

Article 21, al.1er, 12° CIR 1992 specifically exempts the distributions of income allocated or paid for by a legal structure, insofar as it has been demonstrated that this income consists of income received by the legal structure which has already been subject to their tax regime in Belgium on behalf of a natural person as per Article 5/1 CIR 1992 or a legal person aimed by article 220 CIR 1992. The objective of this provision was to avoid any double taxation of the same income.

However, in principle, distributions from trusts to were not taxed as such by a provision of the Income Tax Code of Belgium.

On 25 December 2017, the application of the Cayman Tax was extended through a new Program Law. This Program Law also introduced specific measures to improve the Cayman Tax and to avoid the abovementioned double taxation. Notably, the purpose of Article 89, 1° of the Program Law was to align the tax treatment in article 18 CIR 1992 of distributions from trust entities (not having legal personality) with distributions made by legal structures of the second category, with legal personality, such as tax-haven companies.

These distributions were then taxable as deemed-dividend and subject to income tax at a 30% rate for anything in excess of what was contributed by the Settlor, as it would be for dividends distributed by legal structures of the second category.

This provision however maintained a discrimination: for the legal structures of the second category, Cayman tax is only applicable to legal persons that are subject to an income tax of less than 15%. For trusts, no such threshold exists, which implied that any distribution of a trust, even heavily taxed locally, could be taxed in Belgium.

Content

The case which has been submitted to the Belgian Constitutional Court concerns a Belgian tax resident, who was settlor and beneficiary of a Canadian discretionary trust.

This Canadian discretionary trust is owner of an investment portfolio and is directly subject to taxation on its income in Canada. The Belgian taxpayer has not declared the legal structure under the Cayman Tax regime and therefore the structure was not transparent for tax purposes

2/4 Alert Belgium 2/2021 Repeal of Cayman Tax for Trust distributions subject to taxation in Belgium. The distributions of the trust were taxed as deemed-dividend at the income of 30%.

In Canada, the undistributed income of a discretionary trust is subject to a tax rate of 53.31% in the hands of the trust. Consequently, with an additional taxation of 30% in Belgium on distributions, the final taxation amounted more than 80%.

According to the Belgian taxpayer, such treatment was unfair given the fact that shareholders of legal structures of the second category subject to tax at 15% or more under the law of the jurisdiction in which it is established -and calculated in accordance with Belgian rules- escaped from taxation in Belgium. It is therefore discriminatory that there is no such threshold for trusts.

The Constitutional Court ruled in favour of the taxpayer. This double taxation was totally disproportionate and far from the main goal of the Cayman tax, which was to combat . The fact that an entity may or may not have legal personality to set a tax burden threshold was not enough reason to justify a different treatment. The Constitutional Court concludes that the difference in treatment introduced by the contested provision is based on a criterion without justification, and that it therefore violates the principle of equality and non- discrimination.

Article 89, 1° of the Program Law of 25 December 2017 was, therefore, null and void to the extent that it did not provide for a tax burden threshold equal to or higher than 15% as it was the case for tax-haven companies. Conversely, the unconstitutionality does not affect the tax treatment of trusts which are not subject to a tax burden exceeding 15%.

In other words, taxation of distributions remains valid when the Trust is located in a or in a country where the tax rate applicable to the trust income is below the threshold of 15%. The Court asked to the Belgian legislator to adapt the legal provision, but did not exclude the fact that the Belgian legislator could maintain the difference of treatment between trusts and legal structures of the second category (depending of a reasonable justification though).

Comments

In the recent years, many jurisdictions have implemented anti-avoidance rules to combat tax evasion such as tax transparency rules for controlled foreign companies or foreign transparent legal entities. As a result, passive income generated by these offshore structures without economic substances may be taxed at the level of the investors and involve administrative burden in reporting obligations with a potential risk of double taxation as in the exposed case.

Practical implications for banks and financial intermediaries

Banks and financial intermediaries should be aware of the tax transparency rules in place in the respective jurisdictions of the ultimate Beneficial Owners of structures.

This Alert was prepared in collaboration with:

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Emanuele Ceci and Gilles de Foy, tax partners at the law firm Bazacle & Solon (www.bazacle- solon.eu) that you can reach directly by mail or by phone

([email protected], +32 496 91 65 37; [email protected], +32 479 94 80 30).

For further information, do not hesitate to contact us at [email protected] or by calling us directly at +41 22 718 90 90.

Best Regards,

BRP TAX SA

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