Introduction
The Belgian Cayman Tax is a specific Belgian tax measure targeting income earned through certain foreign legal structures. These structures, such as trusts, foundations or similar entities, are often used to shield income from taxation. Under this regime, Belgian resident individuals or legal entities must report and pay taxes on the income of these foreign entities as if the income were earned directly by them. The goal of the Cayman Tax is to prevent tax avoidance by ensuring transparency and fair taxation, especially when such entities are situated in jurisdictions with favorable tax regimes.
Administrative Guidelines
After introducing a new reporting requirement earlier this year, the Belgian Tax Authorities have provided some guidance on the rather complex interaction between the Cayman Tax and Double Tax Agreements (DTAs) that Belgium has concluded with other countries (Circular Letter Nr. 2024/C/79, December 11, 2024). It clarifies how DTA provisions affect the taxation of income attributed to Belgian resident individuals or legal entities under the Cayman Tax Regime.
International Law vs. Domestic Law
As mentioned, Belgian Tax Law usually taxes the income of a foreign legal structure in the hands of the Belgian founder as if it were directly earned by them. A similar legal provision applies to Belgian legal entities subject to corporate tax. This provision covers both legal entities with and without separate legal personality.
Given the primacy of international law over domestic law, the provisions of DTAs concluded by Belgium, which have direct effect, generally apply, even if they conflict with the provisions of Belgian Income Tax Law.
However, in cases where legal structures are located in countries with which Belgium has concluded a DTA, there is usually no conflict between the DTA and the Belgian Income Tax Code, as these treaties typically do not limit the application of the Cayman Tax.
Relevance of Double Tax Treaties
DTAs, based on the OECD Model Treaty, primarily address legal double taxation, where the same taxpayer is taxed on the same income in two different jurisdictions. Economic double taxation, on the other hand, where two different taxpayers are taxed on the same income, is only addressed in a limited number of cases in the DTAs.
Under the Cayman Tax Regime, economic double taxation may arise when:
- Belgium taxes the founder on income earned by the legal structure.
- The host country taxes the legal structure itself as a resident entity.
This does not constitute legal double taxation, as the income is taxed in the hands of two different taxpayers. Consequently, DTA provisions often do not prevent the application of the Belgian Cayman Tax.
Economic Double Taxation
In the majority of cases, the income received by the legal structure is taxable in the hands of the founder as investment income (dividends or interest). Less frequently, under certain circumstances, the income may be classified as business income, royalties, capital gains, or real estate income.
Belgium’s DTAs generally grant the taxing rights to the founder’s country of residence, which is often Belgium, under the ‘Other Income’ provision (Articles 21 or 22 of the OECD Model Treaty). This provision allows Belgium to tax income that does not fall under specific categories as listed above.
If the host country also taxes the income at the level of the legal structure, economic double taxation occurs. However, this does not violate the DTA, as such treaties aim to resolve legal, not economic, double taxation,under Article 23 OECD Model Treaty.
DTA Safeguard Clause
Certain DTAs include Safeguard Clauses based on Article 1, §3 of the OECD Model Treaty (i.e. DTA with Australia, Chile, China, Denmark, India, Indonesia, Croatia, Mexico, New Zealand, Pakistan, Poland, Portugal, the United Kingdom, Russia, Senegal, Slovakia, South Africa, and the United States).
These clauses clarify that DTAs do not limit a country’s right to tax its own residents, except for specific treaty provisions. This further reinforces Belgium’s authority to apply the Cayman Tax to Belgian residents, even when a DTA is in place.
Substance-Based Exclusion
Belgian Taw Law also provides an exclusion, often called the ‘Substance Exclusion’, which does limit the Cayman Tax’s application. If the foreign legal structure demonstrates that it is engaged in substantial economic activity and is not merely managing the founder’s private wealth, the Cayman Tax does not apply.
The following criteria must be met:
- The structure must operate in a jurisdiction with which Belgium has a DTA.
- It must conduct genuine economic activities unrelated to private wealth management.
- It must maintain sufficient premises, personnel, and equipment.
This reflects the Belgian legislator’s intent to distinguish between legitimate business activities and tax avoidance schemes.
Conclusion
The interaction between the Belgian Cayman Tax and Belgium’s DTAs generally does not hinder Belgium’s ability to tax income attributed to its residents:
- The Cayman Tax is compatible with DTAs, as economic double taxation typically does not constitute a violation of treaty provisions.
- Substance-based exclusions ensure that genuine economic activities are not unfairly taxed.
- Safeguard Clauses further reinforce Belgium’s right to combat tax avoidance and apply the Cayman Tax.
Through these measures, Belgium ensures fair taxation while respecting its international treaty obligations. This recent administrative instruction explicitly confirms that DTAs generally do not hinder the application of the Belgian Cayman Tax in an international context.