The Cayman Tax Audited
In a report presented to the federal parliament on 4 May 2023, the Court of Audit finds important bottlenecks in the application of this complex legislation on the Cayman Tax and in the audits. The government is already looking at making the Cayman Tax even more restrictive.
The Cayman Tax
The Cayman Tax is a set of rules in the Belgian income tax code that allow the Belgian tax authorities to look through some legal arrangements (such as trusts and legal entities in tax havens and even certain insurance policies). For prior coverage see our article.
- The Cayman tax is in the first place a look-through tax.
A Belgian resident settlor or founder is deemed to own the assets, rights, and funds owned by the legal arrangement and will be taxed on the income of those assets, rights, and funds. The founder must report the existence of the legal arrangement and he must report the income of the legal arrangement as if he received it himself and he is liable for tax on that income as if he received it directly — even if the income is not distributed to the founder. Fiscal transparency means that the founder may pay tax on income he never receives.
When the founder dies, her heirs become the founders, and they are liable to income tax in proportion to their share of the legal arrangement or based on their share in the inheritance of the founder.
- The Cayman Tax is also a distribution tax.
When a beneficiary receives a distribution from a trust, it is recharacterized as a dividend — just like any distribution from a legal arrangement that is a company — and income tax is due at a fixed rate of 30 percent.
The dividend tax is due on any distribution to the founder or to a beneficiary that is not a reimbursement of the trust property that the settlor had originally settled in the legal arrangement. If the distribution includes income on which the founder has already paid tax under the Cayman tax regime, the distribution tax is not due on that portion of the income. The older reserves (which have presumably not been taxed before) are deemed to be paid out first. In any event, the burden of proof is with the taxpayer.
The Court of Audit exerts an external control on the budgetary, accounting, and financial operations of the federal, regional and provincial authorities. The Court oversees the assessment and collection of state revenue and taxes. The reports it addresses to the federal Parliament are always a source of information about the way the Ministry of Finance operates.
The audit showed that the tax authorities have difficulties in identifying the founders and beneficiaries of foreign legal arrangements due to a lack of information and the use of front men and intermediary companies. There are also a number of issues in audits including poor data and burdensome procedures. The Court further notes that the Cayman tax revenue, which cannot be precisely determined, may be significantly lower than originally budgeted.
This audit focused on the taxpayer’s compliance with the Cayman tax and on whether the results of the Cayman tax are adequately monitored and evaluated?
Despite the tightened Cayman Tax rules (the so-called Cayman Tax 2.0), the audit reveals significant bottlenecks in the application of the rules.
- The Cayman tax does not apply if the Belgian taxpayer-founder given up his Belgian residence. The tax authorities noted that some 250 taxpayers who left Belgium were the beneficial owners of such legal arrangements.
The tax administration should check that such move is real and not feigned, but verifying this is very difficult and labour-intensive.
- Tax auditors do not have sufficient information on legal arrangements to determine that Belgian taxpayers are founders of such overseas legal arrangements.
The Court of Audit suggests introducing a rebuttable presumption in the law that the Belgian taxpayer who is listed in the UBO register, is also the founder. The European initiative to connect the UBO-registers via the Beneficial Ownership Registers Interconnection System (Boris) would help simplify the searches.
- The Cayman tax does not apply to legal arrangements with an actual economic activity.
A change in the law clarified and limited the effect of this ‘substance exclusion’. Nevertheless, determining what is an actual economic activity remains a difficult issue for the tax authorities, especially for legal arrangements that manage very large estates.
To determine that there is an economic activity, the law requires that the legal arrangement must have premises, staff and equipment that is proportionate to its actual economic activity. That criterion may well be incompatible with European case law such as the Olsen decision where the EFTA Court has stated that the actual substance test must take account of the actual activity. .
- The Cayman tax targets private investment vehicles that are closely held by one individual or a family.
This can easily be circumvented with some non-related front men. And when one family holds one compartment in a large investment fund, that would remain under the radar. The tax authorities did, however, confirm that unitised life insurance policies are not targeted by the Cayman Tax.
The Cayman Tax looks through ‘chain constructions’ of legal arrangements (e.g. a trust holding the shares of a company in a tax haven). The link between the founder and the legal arrangement can be broken by placing a company that is not a legal arrangement (such as a Luxembourg Soparfi) that is liable to corporate income tax but may be exempted due to a participation exemption.
The Cayman tax does not extend to inheritance tax. Due to a lack of exchange of information between the (federal) income tax authorities and the (regional) inheritance tax authorities, the latter may not be aware of the existence of a legal arrangement held by the deceased. Moreover, not all banking information exchanged under the OECD’s CRS rules is available to them.
Double tax treaties limit the scope and impact of the Cayman tax. Legal arrangements with a genuine economic activity in a “compliant” jurisdiction are out of scope. Compliant means that there Belgium has a double tax treaty or a TIEA with that jurisdiction. And some double tax treaties, with Canada, Hong Kong, Mauritius and the US are assimilated to a person resident in that country so that Belgium cannot tax the income of the trust/.
Sometimes, using a legal arrangement can be advantageous, e.g. when the legal arrangement makes a capital gain. The exemption of the capital gains tax on shares can be combined with the exemption of the Cayman tax. This combination constitutes, in a sense, an improper application of the Cayman tax.