Constitutional Court clips the wings of the Belgian Cayman Tax 2.1

On 18 September 2025, the Belgian Constitutional Court issued judgment No. 117/2025, in which it annulled several elements of the recently reformed Cayman Tax 2.1, which had been in force since 1 January 2024. The Cayman Tax brings within the scope of Belgian personal income tax and legal entities tax earnings generated by assets that have been artificially separated from a Belgian taxpayer’s estate through a “legal construction,” such as a foreign trust or foundation or a foreign low-taxed company. Under the regime, income earned by such a legal construction is taxed transparently in the hands of its founder as if the founder had earned the income directly (look-through approach). Moreover, any payments or distributions made by the legal construction are automatically reclassified as dividends and are therefore taxable, unless the founder can demonstrate that the distribution is composed of income that has been taxed before based on the look-through approach, or consists of the reimbursement of capital that has previously been contributed to the legal construction. The Court’s decision narrows that approach on four important fronts.

To ensure that the Cayman Tax complies with EU law, the Belgian legislator created an exception that the look-through taxation does not apply if the legal construction carries out a genuine economic activity. The activity must go beyond managing the founder’s private wealth and must involve offering goods or services on a particular market. According to the Constitutional Court, this definition is too restrictive. A legal structure is not necessarily “wholly artificial” simply because it only holds or manages assets. Taxpayers must be given a fair opportunity to prove to the tax authorities that their legal construction has substance and is connected to economic reality even if it does not trade in goods or services.

The exit levy is triggered when the legal construction is transferred abroad or when the founder moves his or her tax residence outside of Belgium. In those circumstances, the Cayman Tax deems the legal construction’s undistributed profit to have been paid out to the founder and taxes that notional amount. During the parliamentary debates, the Minister of Finance explained that the term “dividend” covers “any reserve that increases the assets of the legal structure beyond the capital contributed by the founder,” meaning that it includes not only realized profits but also any latent capital gains. The Constitutional Court has now rejected that extension. Only income that has actually been realized and not yet distributed can be taxed as undistributed profit. Moreover, Belgium’s taxing power is limited to the “Belgian period”, i.e. the time during which the founder  falls within Belgian tax jurisdiction.

The judgment also addresses the overlap with the controlled foreign corporation (CFC) rules. Where a legal construction is held through a normally taxed company, the look-through taxation under the Cayman Tax originally did not apply only when, under the CFC rules, the income of the legal construction was attributed to a Belgian company. The Court has found that limiting this exemption to Belgian companies is not reasonably justified. Whether the normally taxed company is established in Belgium or in another EU Member State, if the income from the legal construction is in fact taxable under Belgian CFC rules or foreign CFC rules that are similar to the Belgian rules, it no longer represents the untaxed, “floating” capital that the Cayman regime is meant to target. Therefore, the exemption should also apply when the income is taxed at the level of a foreign company under CFC rules that are similar to those under Belgian law.

Finally, the Court looked at collective investment funds (CIFs). In principle, CIFs are exempt from the Cayman Tax. To counter the practice whereby a minimal share is granted to a straw man in order to disguise a CIF that is in fact a “fonds dédié” and thus avoid the Cayman Tax, the Belgian legislator stipulated that any CIF whose shares are held for more than 50% by one person or by several related persons, is not exempted. While the Court accepted that an ownership cap is appropriate, it held that the 50% threshold is disproportionate. Not every CIF in which more than half the shares are held by the same person or by related persons necessarily constitutes abuse. Taxpayers must be able to demonstrate that a third-party participation of less than 50% is not motivated solely by tax considerations.

The judgment of the Constitutional Court strengthens the taxpayers’ legal certainty. The annulment of the above-mentioned elements has retroactive effect. We are currently awaiting the Belgian legislator’s response to this decision and will continue to update you on all relevant developments. Should you have Cayman Tax–related questions, your KPMG adviser remains at your disposal.