The Cayman tax on the hunt for hybrids

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.

This week, we go on a hunt for hybrids!

Colourful camouflage

In episodes 3 and 4 of this documentary, we discovered that companies, associations, institutions and other entities with separate legal personality that are either not subject to income tax or not sufficiently subject to income tax are within the scope of the Cayman tax.

In addition to such entities, the Cayman tax also turns its sight on hybrid companies.

Where in nature, certain animals can disguise themselves by blending in with their surroundings, this particular species of prey adopts a very colourful camouflage.

Although hybrid companies are granted separate legal personality, the income tax due on the income of the company is taxable in the hands of their shareholders in the jurisdiction of establishment. It is the mismatch between their qualification from a civil law and tax law perspective that makes them stand out from the crowd.

As the countenance of a crocodile may vary from continent to continent, the Cayman tax distinguishes hybrid companies established inside and outside the EEA.

Hybrids hiding outside the EEA

Hybrid companies established outside the EEA are like an all-you-can-eat restaurant to the Cayman tax, as all such entities are presumed to be targeted since income year 2019.

Belgian residents who are the shareholders of such companies and cannot rebut this presumption therefore must comply with the reporting obligation, the look-through-tax and the tax on (deemed) distributions.

Hybrids hiding inside the EEA

In the EEA, hybrid companies have already been on the menu since income year 2018. However, on the European continent, the Cayman tax prefers fine dining and is a lot pickier, as not all hybrid companies established within the EEA are included on the Cayman tax’ menu.

Hybrid companies established within the EEA will not be targeted under the Cayman tax where:

  • Their main purpose is an activity that generates income that would be exempted from Belgian income tax on the basis of a double tax treaty in the hands of the natural person or the legal person subject to the tax for legal entities, if this natural or legal person had received the income directly; OR
  • In the jurisdiction of establishment, the company’s income is subject to an income tax that is payable by the Belgian shareholder and that amounts to at least 1% of the Belgian shareholder’s share in the taxable income, as calculated on the basis of the Belgian corporate income tax rules.

Hybrid companies that do not qualify for the aforesaid two exemptions will be targeted by the Cayman tax. Their Belgian shareholders must therefore comply with the reporting obligation, the look-through-tax and the tax on (deemed) distributions.

The French société civile d’Immobilière

The French Société Civile d’Immobilière (‘SCI’) is a company used to hold French real estate.

On the basis of French civil law, the SCI is attributed separate legal personality. The French income tax due on the income received by the SCI is however payable by the shareholders of the SCI (provided the SCI has not opted to be subjected to the corporate income tax or does not have a commercial activity).

In its judgement of 29 September 2016, the Belgian Court of Cassation confirmed that the shares of an SCI do not qualify as immovable property. Belgian resident shareholders are taxed in Belgium on the dividend distributions of the SCI at the flat rate of 30%.

Given the mismatch from a French civil law and tax law perspective, in principle, the French SCI qualifies as a hybrid company under the Cayman tax since 2018. Take a trip to Cannes to find out how the French SCI escapes from the claws of the Cayman.

A Cayman in Cannes?

Marcel and Irene wouldn’t want to trade their home country Belgium for any other country in the world, but when it comes to their holidays, they have always been fond of the Côte d’Azur. When they retired a couple of years ago, they bought a holiday home via an SCI. The SCI’s only activity consists of the management of the holiday home.

As discussed earlier, in principle, the SCI is in scope of the Belgian Cayman tax.

However, since the SCI’s activity is limited to the management of the holiday home, the SCI’s income is limited to French immovable income. Such income would be exempted from Belgian income tax if Marcel and Irene would receive this income directly on the basis of the double tax treaty concluded between Belgium and France. Therefore, the French SCI qualifies for the first exemption.

Also, the French income tax due on the income of the SCI, payable by the shareholders, generally amounts to more than 1% if the (fictitious) Belgian taxable basis. This means that the second exemption would also be applicable.

Since Marcel and Irene’s French SCI qualifies for at least one exemption, the SCI does not qualify as a targeted entity. Marcel and Irene therefore have no obligations under the Belgian Cayman tax in respect of their French SCI. Marcel and Irene will however pay income tax in France on the income of the SCI and will also pay income tax in Belgium when the SCI distributes a dividend.

The overkill of the cayman

The Cayman tax was introduced to avoid that Belgian residents can obtain a tax benefit by holding assets through law-taxed foreign legal structures. Hereto, Belgian founders of such entities are taxed on the income of the targeted foreign legal structures on the basis of the look-through-tax.

Experienced explorers might therefore be surprised that the Cayman tax also set its sight on certain hybrid companies as their shareholders are already taxed on the income of the companies in the jurisdiction of establishment. If no exemption can be claimed (EEA only) or when no relief is available on the basis of a double tax treaty, the Cayman tax results in a double tax burden. In any event, the application of the Cayman tax implies that Belgian resident shareholders now also must comply with the reporting obligation and the tax on distributions.

Given its urge for expansion, Belgian founders of foreign legal structures must fear the overkill of the Cayman tax!