Trustees must consider the reporting obligations of Belgium resident settlors and beneficiaries under the so-called Cayman-tax. These obligations include providing adequate and timely information as well as documentation about the trust assets and the trust income. Sometimes it will be useful to provide written statements on a person’s beneficial entitlement (or its absence) to safeguard that person from adverse tax consequences.
Since tax year 2014, Belgian resident founders, settlors, grantors, beneficiaries and shareholders of private wealth structures or so-called “legal constructions” have been obliged to report the mere existence of the legal construction in their annual income tax return.
The law distinguishes two categories of legal constructions. One concerns the “legal relationships/arrangements” such as trusts, nominee and fiduciary arrangements (Type 1). The other concerns any company or other legal entity with a separate legal personality, such as a foundation, which, according to its State of residence’s tax rules, is either not subject to income tax or is subject to an income tax regime resulting in taxation below 15% regarding its taxable income, which is determined according to the rules applying if it were subject to Belgian income tax (Type 2). These Type 2 legal entities are specified in two Royal Decrees, respectively for entities inside and outside the EEA.
From tax year 2016 onwards, the law has introduced a “Cayman Tax”. This is a look-through taxation in the hands of the “founders” and “third party beneficiaries” (as defined in the Belgian Income Tax Code) of income received by a legal construction that comes within the scope of the legislation.
Even though the “Cayman Tax” is not addressed to trustees, fiduciary managers, directors or members of the board, they should all carefully consider the obligations applying to Belgian resident “founders” and “third beneficiaries”.
Reporting requirements
The “Cayman Tax” provisions impose an obligation to report the existence of the legal construction in the annual tax return, as well as the income received by it. The following information about the legal construction must be reported: • The full name of the entity; • Its legal character; • The address; • The name and address of the administrator of a Type 1 legal construction; and • Whether the legal construction qualifies under the so-called “substance exemption”.
To the extent that the legal construction received income that is subject to look-through taxation, the Belgian taxpayer needs to declare such income in his income tax return. Obviously, he does not always have full access to the necessary information on such income received to comply with his reporting obligations.
Trustees and the like should keep this fiscal obligation of the “founder” and “third party beneficiary” in mind when requested to provide the information needed for the Belgian taxpayer to file a correct income tax return.
Fine for non-compliance
Non-compliance by the Belgian resident “founder” and “third party beneficiary” with this reporting obligation results for each “founder” or “third party beneficiary” in a fine of EUR 6,250 per legal construction per tax year.
Hence, trustees and the like should verify their legal position relating to such a fine if such a fine is imposed on the “founder” or “third party beneficiary” in case of the trustee’s undue failure to provide the necessary information.
Statement on the absence of any (potential) interest
The Income Tax Code provides for an exclusion of the qualification as “founder” for the so-called founder through heirship (category 3 founder). This refers to any heirs and consecutive heirs of a “founder” of a legal construction, who either established the legal construction him/herself (settlor - category 1 founder) or, if established by a third party, who transferred any assets to the legal construction (grantor - category 2 founder). If such a founder through heirship is able to prove that neither he/she nor any of his/her heirs can ever, at any point in time, receive in any form or way any benefit from the legal construction, then he/she no longer qualifies as a founder and, hence, is no longer subject to the reporting obligation.
Further, it can be argued based on the Parliamentary Explanatory Memorandum that a Belgian resident taxpayer may escape from being qualified as a “founder” of a legal construction by irrevocably renouncing any benefit from the legal construction and providing a letter of the legal construction’s representative or manager, which states that neither that person nor his/her heirs can ever, at any point in time, receive in any form or way any benefit from the legal construction. The Explanatory Memorandum specifies that the tax authorities will, in principle, accept such a letter as proof. If it appears, however, that such letter does not correspond with reality, then the tax authorities may invoke the offence of forgery of fiscal documents against the founder who used that letter as well as against the legal construction that issued it.
A statement of the trustee, fiduciary manager, director or member of the board of the legal construction may be helpful for that purpose. Trustees of a discretionary trust should, in particular, consider in how far they are able to provide such a statement.
In collaboration with Karen Moser- Senior Associate
