Since 2015, Belgian tax law on foreign trusts, offshore companies and foreign foundations referred to as “Cayman tax”, provides a look-through taxation system according to which revenue perceived by these low taxed entities is taxed as if the founder had received the income directly. These regulations have been subject of many comments and criticism. Over the years 2016 and 2017, multiple rulings in advanced clearance have been given by the tax authorities in order to mitigate and clarify the tax consequences of this new look through taxation regime.
By law of 25 December 2018 Belgian parliament has modified “Cayman tax” at several points thereby focusing on distributions by trusts as well as on distributions which relayed back to so-called old retained earnings. These new regulations are quite complex and not at all favourable towards distributions out of trusts which have been settled prior to 1 January 2015.
In summary, one can state that if a trust makes a distribution, in principle the distribution will be considered to be a dividend subject to a tax of 30% flat. The distribution is however not considered to be a dividend, and hence remains tax free, if the recipient of the distribution can provide either or both elements of proof:
- The distribution is financed by revenue which has already been subject to Belgian tax.
- The distribution is financed by amounts which were brought into the trust by means of capital.
There has been however introduced a so-called priority rule which goes by the principal of “FIFO”, that is “first in first out”. That rule says that any distribution which is made by a trust, is to be accounted for primarily on the so-called “old retained earnings”. Thereby the distribution is primarily deemed to pertain to old retained earnings which have not yet been subject to Belgian taxes. Concluding, only when the recipient can prove that the trust does not have any remaining “untaxed old retained earnings”, the distribution will remain exempt.
Obviously, this priority rule can be the subject of much criticism and in a variety of files argumentation may be developed to counter this type of anticipated taxation.
Specific anti-abuse regulations have also been enacted in order to discourage the change of the seat of management location of a trust to a country whom Belgium does not have a TIEA (“Tax Information Exchange Agreement”) or DTT (“Double Tax Treaty”) with. In such case the transfer of the seat will trigger a deemed dividend comprising all retained earnings in the trust fund, then subjected to a flat dividend tax rate of 30%.
These new regulations may be notably important for trusts which have been setup by former non-residents with temporary residence in Belgium and may indeed have an adverse impact on the taxation of ongoing distributions from the trust fund. Careful planning is at hand!