New Tightening Measures in the Cayman Tax

The recently published draft law proposes several additional constraints to the Cayman Tax. For clarity, the draft law has not yet been voted on.

For your reference: The Cayman Tax is a 'look-through tax' designed to tax income obtained through a legal structure on the part of founders or beneficiaries, as if they had directly received that income themselves.

Below is a brief overview of the main changes that would be introduced:

The current Cayman Tax allows for the inclusion of 'chain structures', limited to cases where legal structures are placed on top of each other. As such, a chain structure can be interrupted by interposing a normally taxed entity that is not a legal structure.

The current term 'chain structure' is replaced by 'intermediate structure'. Consequently, it would allow, in our view entirely unjustified, targeting chains of legal structures where not all entities in the chain are legal structures.

Moreover, the definition of 'founder' is also amended, broadening the scope to those who are a holder 'directly or indirectly' through a chain of intermediate structures of the legal or economic rights of the shares.

The condition for application of Article 21, 12° BITC92 is tightened by no longer allowing the exemption for income distributions that have undergone their Belgian tax regime if the income from the legal structure is not taxed according to the provisions of BITC92 or the double tax treaties or is exempt from tax. This mainly pertains to a capital gain on shares that can be realized tax-free if it falls within the scope of the normal management of private assets.

Under the Cayman Tax 2.1, this tax-free capital gain would be subject to tax as a dividend (at a 30% withholding tax) due to the distribution by the legal structure. This, of course, is entirely illogical.

To properly classify the income resulting from the seat transfer of a legal structure to Belgium, this part is moved to Article 18 BITC92. Consequently, this income must be considered as a (fictional) dividend.

Additionally, an exit tax is provided for in cases where the founder moves his/her tax residence abroad. Consequently, the founder will be taxed on a fictitious liquidation dividend.

The law is also amended to clarify that income obtained by the legal structure is always transparently taxed, even if it is redistributed in the same calendar year.

The Cayman Tax will also apply to structures that have been classified as a legal structure in at least 1 of the 3 previous taxable periods. This is to prevent a taxpayer from waiting to make a distribution until the taxable period in which the legal structure loses its qualification.

Similar to the current Cayman Tax provisions, the founder can always prove that the legal structure has sufficient substance and thus engages in substantial economic activity. To avoid misinterpretation of the words 'economic activity', the meaning of these words is clarified.

The declaration obligation of a legal structure in the personal income tax and legal entities tax returns is extended. In addition to the tax return itself, a separate annex must now be added, the model of which is determined by Royal Decree.

This amended Cayman Tax 2.1 would come into effect for distributions from January 1, 2024, on one hand, and for income obtained by legal structures from January 1, 2024, on the other hand. Regarding the annexes to the personal income tax return, this would apply from assessment year 2024.