Cayman (ˈkeɪ mən) n., pl. -mans, any of several tropical American crocodilians of the genus Caiman and allied genera
- tax: a type of tax, esp. one perceived by those subject to it as highly complex, unduly intrusive and/or difficult to avoid.
With about 800 codes, a Belgian income tax return is not for the faint-hearted. When the Cayman tax is involved, even more attention is needed. Read all about it here and avoid the Cayman tax pitfalls in your income tax planning.
Let’s have a look at the cuckoo that appears to have been dropped in the Cayman tax nest!
Call social services!
After our thorough examination over the past few months, we can confidently conclude that the cayman is not a cuddly creature. Nevertheless, it does what it must to guarantee the survival of its species. Female caymans build their nests close to water hidden between reed beds, usually in a hole excavated in the sand. Their clutch can easily include 50 eggs.
When the young are ready to hatch, their mother digs them up and carries them to the water in her mouth. In the water, the young are taught everything they need to know to become merciless meat-eaters.
Although cayman mothers do appear to have some sort of a maternal instinct, it is hard to imagine that a member of another species would want to drop its eggs among these predator-infested reed beds and leave them to the cayman’s brutal parenting skills, let alone have their young commute to a daily boot camp between this fearless predator’s jaws.
Where the cayman will not be disturbed by intruders, it appears that a cuckoo has (accidentally) been dropped in the Cayman tax nest.
The brood parasite concerned is the Dutch StAK. A StAK is a foundation with separate legal personality that is used to split the legal and beneficial ownership of assets. Upon contribution of assets, often shares, the StAK issues certificates. The StAK holds the legal ownership of the assets; the certificate holder has a claim on the StAK with respect to the economic value of the assets.
The Belgian consequences of holding assets via a StAK are laid down in the Act of 15 July 1998 on certificates issued by companies in exchange for shares ('the Act of 1998'). This Act of 1998 only concerns certificates of shares; however, the regulation is deemed to apply to certificates of other assets as well.
Under certain conditions the certificates are equated to the underlying assets. Hereto, the Act of 1998 requires income received to be immediately (within 15 days) distributed by the StAK to the certificate holder. The Belgian ruling commission has added the following two conditions:
- The StAK is not entitled to dispose of the assets without the consent of the certificate holder;
- The StAK issues certificates in proportion to the contributed assets, e.g. one certificate for one share.
If those conditions are met, the certificate holder, if a Belgian resident, is subject to Belgian income tax on the StAK’s income as and when it is earned, as if he or she had received it directly (transparency). Distributions made by such StAKs are tax neutral ('tax neutral StAKs').
Income received by StAKs that do not meet the aforesaid conditions, is not taxable in the hands of the certificate holder. Distributions made by such StAKs are however taxable in the hands of the certificate holder as dividends ('non-tax neutral StAKs').
This specific income tax regime applies not only to Belgian StAKs, but also to StAKs established elsewhere in the EEA, e.g. in the Netherlands.
The foster family
In a previous newsletter we learned that, since income year 2018, entities established within the EEA have (in principle) been targeted by the Cayman tax if they are either not subject to income tax at all, or subject to income tax of less than 1% (assessed on the Belgian taxable basis).
Belgian StAKs are not targeted by the Cayman tax, irrespective whether they are tax neutral or not.
As a foreign entity, a Dutch StAK can potentially fall under the scope of the Cayman tax.
Provided it does not have a commercial activity, a Dutch StAK is not subject to income tax in the Netherlands. Non-tax neutral Dutch StAKs are therefore targeted by the Cayman tax.
The question is however whether this is also the case for tax neutral Dutch StAKs and, if so, what the consequences would be.
When you’re under my roof, it’s my rules
Belgian residents who are the founder and / or beneficiary of an entity targeted by the Cayman tax are subject to a reporting obligation, a transparency measure (the 'look-through-tax') and a tax on distributions.
Even though the certificate holder of a tax neutral Dutch StAK, if a Belgian resident, is already liable to Belgian income tax on the StAK’s income, an upbringing in the Cayman tax nest would have an impact on the Belgian income tax position.
Below are the income tax consequences of the application of the Belgian Cayman tax to Dutch StAKs. With respect to tax neutral Dutch StAKs these consequences can apply if, and only if, such StAKs would be targeted by the Belgian Cayman tax.
Eat all of your dinner!
First, the existence of the Dutch StAK is to be reported in the annual income tax return. Non-compliance is punished with a fine of €6.250.
Don’t use that tone with me!
Following the look-through-tax, founders are taxed on the income of the targeted entity. E.g. dividends and interest are taxed at a flat rate of 30%, whereas capital gains are exempted from tax.
As a principle, the look-through-tax is equal to the transparency measure included in the Act of 1998.
However, the look-through-tax does include an exception for income distributed in the same income year it is received.
Following the text of the law and the explanatory memorandum, income distributed during the year of receipt is not subject to the look-through-tax but will be fully subject to the tax on distributions.
As the articles of association of tax neutral Dutch StAKs provide for the immediate distribution of income in order to take account of the Act of 1998, the exception included in the look-through-tax has in practice become the rule. Income will generally be distributed within the income year of receipt. Such income will be fully subject to the tax on distributions, even if it includes capital gains (tax exempted when the look-through-tax applies).
The tax on distributions provides for an exemption for income that has already been subject to its appropriate Belgian tax regime.
Some legal writings argue that a tax neutral Dutch StAK’s income has already been subject to its appropriate Belgian income tax regime following the Act of 1998. That argument, however, applies two specific income tax regimes at the same time and cherry picks the best of both regimes (without legal basis).
It is clear that such an approach cannot be supported.
I’m going to count to three…
The tax transparency introduced by the Cayman tax is limited to the look-through-tax, applicable to the income received by the targeted entity during the relevant income year.
Contributions into a Dutch StAK therefore qualify as disposals for valuable consideration. Latent capital gains will be realized. Whether the capital gains realized can be exempted must be assessed on a case by case basis.
A distribution made by a Dutch StAK (in exchange for certificates) can be subject to the tax on distributions. Latent capital gains are realized upon distribution, in principle subject to the tax on distributions.
Not your ordinary day-care centre
The Cayman tax was introduced to avoid that Belgian residents can obtain a tax benefit by holding assets through low-tax legal structures.
The question therefore is whether entities that already are tax transparent, such as tax neutral Dutch StAKs can also be targeted by the Cayman tax, as such entities clearly do not result in a tax benefit.
As we know that lex specialis derogat generali, a specific tax regime (as included in the Act of 1998) should prevail over the general tax regime (Belgian Income Tax Code, including the Cayman tax). Two tax regimes should not be applied simultaneously.
We also note that the Act of 1998 has not been amended since the introduction of the new Code on Companies and Associations. The Belgian legislature clearly wanted to maintain this specific (tax) regime.
Moreover, before 2018, certificate holders, if Belgian residents, of a Belgian StAK and a tax neutral Dutch StAK were subject to the same Belgian income tax regime. Neither StAK is subject to income tax in the jurisdiction of establishment, but the certificate holders, if Belgian residents, are in both cases liable to Belgian income tax on the StAK’s income.
The application of the Cayman tax would result in a more severe income tax burden for Belgian residents who hold the certificates of a Dutch StAK (whether or not tax neutral), than Belgian residents who hold certificates of a Belgian StAK. If discrimination and an infringement on the free movement of capital and establishment must be avoided, one can only conclude that the tax neutral Dutch StAK cannot be targeted by the Cayman tax.
ATTENTION, ATTENTION - LITTLE DUTCH STAK IS WAITING FOR HIS MOMMY AND DADDY AT THE CASHIER!
Whereas the cayman scares off species that don’t belong in its nest, the Cayman tax seems to weave a web to catch as many flies as possible, even the ones it is not interested in – just to make sure all low-taxed entities can be caught.
It is regrettable that the Belgian legislature did not pay more attention to (categories of) exempted entities, in order to avoid discussions about innocent structures, such as the tax neutral Dutch StAK – a creature that clearly does not belong in the nest of the Cayman tax.