Hybrid Nature of the LLC
The U.S. Limited Liability Company (LLC) is a commonly used structure and a classic example of a hybrid entity. In the U.S., it has legal personality, but it is generally treated (at Federal level) as a pass-through entity unless it elects to be taxed as a corporation. Instead of the entity itself paying tax on its profits, the U.S. tax authorities ‘look through’ it and tax the income directly in the hands of the owners (i.e. partners, members, or shareholders).
Belgium, however, does not recognize this transparency and regards the LLC as a company with legal personality. This difference in treatment lies at the heart of its classification under the Belgian Cayman Tax. Although this is a rather complex matter, Belgian tax residents operating through a U.S. LLC will find this article highly relevant.
Abolition of Treaty Exclusion
Until the end of 2023, certain hybrid entities within the European Economic Area (EEA) could avoid being classified as a (taxable) ‘legal arrangement’ under the Cayman Tax through the so-called ‘treaty exclusion’. This was, for example, the case with the French SCI (Société Civile Immobilière). It was not treated as a ‘legal arrangement’ under the Cayman Tax. Because its core activity is holding real estate, the income it generates is taxed in France under Article 3 of the Belgium–France tax treaty, where the property is located. As a result, French SCIs generally fell outside the scope of the Cayman Tax.
Entities outside the EEA, such as the U.S. LLC, never had access to this option. It could not rely on the ‘treaty exclusion’ and instead had to invoke the ‘subject-to-tax’exclusion in order not to be classified as a (taxable) ‘legal arrangement’. If the entity is based outside the EEA, it must meet a minimum tax rate of 15% on its profits in order to avoid the Cayman Tax applying.
With the Program Act of December 22, 2023, the above ‘treaty exclusion’ was abolished altogether. As of January 1, 2024, the only safeguard is the ‘subject-to-tax’test, which requires a minimum effective tax burden of 15% on the entity’s taxable income (calculated according to Belgian standards). In practice, LLCs rarely meet this requirement when the entity itself is not liable for tax, meaning they almost automatically fall within the Cayman Tax regime as a ‘legal (type II) arrangement’. For hybrid entities within the EEA, on the other hand, the shareholder’s or partner’s income tax must amount to at least 1% of their share in the company’s taxable income.
Residual Article Approach
If the subject-to-tax requirement is not met (because the 1% shareholder-level or 15% entity-level threshold is not reached), the question arises whether the Cayman Tax can be applied transparently at the level of the founders.
The Belgian tax office reaffirmed its position in Circular Letter Nr. 2024/C/79, stating that tax treaties generally do not limit the Cayman Tax. Their reasoning is that the measure leads to economic, rather than legal, double taxation. Legal double taxation occurs when the same income is taxed twice in the hands of a single taxpayer, which is prohibited under tax treaties. Economic double taxation, by contrast, arises when the same income is taxed in the hands of different taxpayers, and this is not prohibited.
According to the tax authorities, the non-distributed profits of foreign entities are to be allocated to the residual article of the applicable treaty, viewed from the perspective of the Belgian founder. The residual article (usually Article 21 DTA) allocates taxing rights over income not specifically addressed by other treaty provisions and always gives the right to tax to the country of residence of the beneficiary. On that basis, Belgium claims taxing rights over such income through the Cayman Tax, regardless of the classification in the entity’s home jurisdiction.
Leuven Court: Business Profits Article Blocks Cayman Tax
In February 2025, the Leuven Tax Court took a different approach in a case involving a Hong Kong company (Decision of 7 February 2025, Nr. 21/1625/A). The court rejected the tax authorities’ reliance on the residual article and instead held that the non-distributed profits fell within Article 7 (Business Profits) of the Belgium–Hong Kong treaty. Because the company had no permanent establishment in Belgium, taxing rights lay exclusively with Hong Kong. The Cayman Tax should not apply in this case. The court emphasized the primacy of treaty law over domestic law and dismissed the Belgian Taxman’s approach.
For U.S. LLCs, this ruling is significant. If the LLC qualifies as a U.S. resident for treaty purposes and has no permanent establishment in Belgium, taxpayers can argue that its non-distributed profits fall under Article 7 of the Belgium–U.S. treaty (Business Profits) and are taxable only in the U.S. This directly contradicts the Administration’s residual article approach and provides a potential defence for Belgian shareholders/owners of an LLC.
LLC Dilemma: Case Law vs. Tax Practice
The U.S. LLC is currently caught between these two approaches. On the one hand, Belgian case law suggests that treaty protection is available and that non-distributed profits should fall under Article 7 DTA, precluding Belgian taxation. On the other hand, the Belgian taxman continues to push the residual article approach based on their strict interpretation of the Cayman Tax rules.
The Belgian Cayman Tax, like for example the U.S. GILTI rules, targets non-distributed low-taxed profits, but while GILTI offers relief through deductions and foreign tax credits, the Cayman Tax applies more harshly to Belgian individuals (and private wealth structures), without comparable mitigation.
LLC Distributions: Dividend Treatment & Treaty Relief
Because an LLC is not fiscally transparent under Belgian law, any payments afterwards made by an LLC to a Belgian resident shareholder are treated as dividends. For such hybrid entities, however, the Belgium–U.S. DTA provides a specific exemption regime (Article 22(1)(b), see also Article 3.7 in Annex to Circular Letter AFZ No. 3/2013 of 5 February 2013): ““The subparagraph seeks to coordinate the use of United States entities that are so called hybrid entities, in that they are fiscally transparent for United states tax purposes (the income of such entities is subject to tax in the hands of het investors of the entity), but such entities are viewed as companies under Belgian law”.
Importantly, this exemption applies only to income actually distributed by the LLC, not to the LLC’s undistributed earnings. The Cayman Tax targets undistributed profits, and does so under the residual article, not the dividend article. As a result, Belgian shareholders of an LLC can invoke the exemption regime only when the LLC makes an actual distribution. For undistributed earnings, the Cayman Tax thus remains applicable.
Consequently, it might appear that Belgian LLC owners are best advised to distribute all profits annually in order to avoid the application of the Cayman Tax.
LLCs Under Fire
Belgium treats an LLC as a company and distinguishes between distributed and non-distributed profits for tax purposes, exposing the latter to the Cayman Tax. In contrast, U.S. tax law generally taxes LLC income directly to the members under pass-through treatment, regardless of distributions. This mismatch creates the potential for double taxation.
Since 2024, U.S. LLCs may more frequently fall within the scope of the Cayman Tax due to the abolition of the ‘treaty exclusion’ and the strict 15% ‘subject-to-tax’ test. Recent Belgian case law demonstrates that treaty provisions take precedence over Belgium’s domestic anti-avoidance rules and protect non-distributed profits from taxation, but the Administration’s suggest the debate is far from settled.
For Belgian shareholders of U.S. LLCs, careful documentation of the LLC’s tax position and activities remains essential. Ultimately, the key question is whether non-distributed profits fall under Article 7 (Business Profits, taxable only in the U.S.) or Article 21 (Residual Article, opening the door to a Belgian taxation). Until higher courts provide clarity, every LLC case will likely remain a point of contention with the tax authorities.