You have regularized an offshore structure with the Belgian tax authorities (BTA). How should you report this in your tax return from the entry into force of the “Cayman Tax”? What is the applicable tax system in case of liquidation?
Two advance rulings
In two recently published rulings, the Ruling Commission (Service des Décisions Anticipées en matière fiscale – SDA) decides on the tax consequences of the liquidation of “regularized” structures: the allocations made on this occasion are not taxable.
The offshore structures concerned were a Panamanian foundation and a British Virgin Islands (BVI) company. Both spontaneously declared to the BTA, which means that their respective founders, on the occasion of the regularization of their situation, had been taxed pursuant to a tax ”look through” approach, on the income received by the offshore structure as if it did not exist even though it had legal personality.
The question asked to the Ruling Commission (SDA) was how the revenues allocated by the offshore structure would be processed in case of liquidation. In fact, a priori, if the structure is not taken into account, the structure cannot make any distributions nor be dissolved or liquidated. Therefore, the transfer of all or part of the assets of the offshore structure to an account of the beneficial owner should not be subject to taxation (as a liquidating dividend).
However, as we all know, from January 1, 2015, Belgian tax law contains specific provisions on transparency. Some of these provisions have the same result as the abovementioned simulation: the revenue received by the offshore structure is taxed according to a ”look through” approach in the hands of the taxpayer as if it were collected directly by the latter. Nevertheless, the “Cayman Tax” system is hybrid for structures with legal personality, since these structures can make allocations of taxable income, in spite of what is stated by tax transparency regime.
The structures covered by these provisions will in many cases include foundations from BVI or Panamanian foundations that have been considered as simulated in the context of a regularization procedure.
Under these circumstances, which tax system shall prevail?
The Ruling Commission noted that, following the regularization proceedings and the submission of the tax returns containing the revenues received by the offshore structures, the tax authorities admitted, without any doubt, the simulated / transparent nature of the abovementioned structures and the fact that the taxpayer, had accepted in both cases the consequences of this simulated / transparent nature.
Consequently, according to the Ruling Commission, the liquidation of the structures concerned constitutes a non-taxable event. The assets to be transferred to the taxpayer cannot be considered as a liquidating dividend either under the provisions of Common Law or on the basis of the Cayman Tax regulations.
According to both rulings:
- The “regularized” structures which have been deemed “simulated”, must not be mentioned in the tax return as “legal constructions”;
- The revenues received by such structures must be declared as if the Belgian taxpayer were to receive it directly;
- However, the transfers of revenues from the structure to the Belgian taxpayer must not be declared since those are not considered a taxable event.
It should be noted that the question of whether a structure must be regularized or subject to the Cayman Tax will be answered through a case-by-case analysis on the basis of the factual circumstances.