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On December 11, 2024, the Belgian tax authorities published a new administrative circular.
This document formalizes the double taxation of Belgian taxpayers who are “founders” of a “legal arrangement” under the Cayman Tax framework.
In the circular, the tax authorities reserve the right to tax income received by a foreign structure in the hands of its Belgian founder, even when the power to tax such income does not belong to Belgium under a double taxation treaty (DTT).
The reasoning is that DTTs aim only to prevent juridical double taxation (where the same income is taxed twice for the same taxpayer) and not economic double taxation (where the same income is taxed twice for two different taxpayers).
The Cayman Tax: A Transparency-Based Taxation System
The Cayman Tax, despite its name, is not a tax per se. Named after the Cayman Islands—symbolic of tax havens—it operates as a system of transparent taxation.
Initially introduced by the law of July 30, 2013, the Cayman Tax was merely a declarative obligation for trusts, foundations, and other low-taxed foreign entities or structures. It wasn’t until 2015 that this obligation transformed into a taxation regime, which was expanded in 2018 and again in 2024.
Under this regime, income received by a low-taxed foreign structure—classified as a “legal arrangement”—is attributed transparently to its Belgian “founder,” who is typically the Belgian resident who established it, as if the income had been received directly by them.
Through this mechanism, lawmakers aim to tax foreign assets “floating” abroad before any distribution occurs, thereby encouraging Belgian residents to repatriate such assets.
This transparency-based taxation implies that dividends and interest earned by these foreign structures are taxed at a rate of 30% in the hands of the Belgian individual taxpayer. Meanwhile, capital gains on securities are taxable at 33% if they result from transactions beyond the scope of normal private asset management, as defined by the Income Tax Code.
It is worth noting that this transparency-based taxation does not prevent the taxation of income distributed by the legal arrangement. However, it is possible to exempt certain income already taxed under the Cayman Tax in the hands of the Belgian resident.
The Purpose of DTTs: Avoiding Double Taxation
Belgian law stipulates that Belgian tax residents are taxable on their “worldwide” income. This means they are taxed not only on income from Belgian sources but also on income from foreign sources. Naturally, this could lead to double taxation. Therefore, exceptions exist to this principle, typically in the form of DTTs, which aim to mitigate double taxation.
These treaties allocate taxing rights between states to prevent double taxation for residents of treaty-partner states.
Generally, bilateral treaties signed by Belgium allocate the taxation of a company's profits to the state where it is established unless the activity is conducted through a permanent establishment. Thus, Belgian tax authorities usually cannot tax the profits of a foreign company until these profits are distributed to the Belgian taxpayer (e.g., as dividends or interest).
Challenging Integration of the Cayman Tax with DTTs
The Minister of Finance recognizes the obligation to comply with DTTs signed by Belgium. In 2015, parliamentary documents confirmed that "the transparent taxation... is, of course, applied in compliance with the double taxation treaties concluded by Belgium with the countries of origin of the income."
Thus, it is indisputable that Belgian domestic law provisions, such as the Cayman Tax, must align with DTTs.
However, under the Cayman Tax, once a foreign company qualifies as a “legal arrangement,” the tax authorities artificially attribute the company's profits to the Belgian taxpayer and tax them under personal income tax without considering the DTT's allocation of taxing rights.
This results in double taxation, as the foreign structure’s income is taxed first in its country of residence and then again in Belgium in the hands of the structure's founder.
As previously noted, most DTTs signed by Belgium allocate the right to tax a company’s profits to its state of residence.
The tax authorities thus arrogate a right they would not otherwise have, by blindly applying a transparency tax derived from a domestic legal norm, thereby prioritizing it over the respect for international treaties.
This leads to the disregard of treaties signed by Belgium, constituting a flagrant violation of international law, which the Belgium Supreme Court has recognized as prevailing over national law since its landmark ruling "Le Ski" of 1971.
The tax authorities justify this behaviour by claiming that treaties are intended solely to prevent juridical double taxation, not economic double taxation. However, this reasoning is flawed. First, the argument is irrelevant in the absence of the right to tax these incomes. Second, it is misleading: if the double taxation is economic rather than juridical, this is solely due to the fictitious allocation of the income from the foreign company to the Belgian taxpayer based on a domestic legal provision, and not due to the actual situation.
Moreover, the treaties do not provide for the possibility of transparently attributing the income of a "legal construction" to its "founder."
It must be emphasized that it is not the role of the administration to assume the duties of the legislature.
This is particularly true in tax law, where the principle of legal certainty, enshrined in Article 1 of the First Additional Protocol to the European Convention on Human Rights (which has direct effect in domestic law), must be upheld. At the European level, taxation is viewed as an interference with the right to property. To comply with the principle of legal certainty, the legislature's intent must be expressed clearly and precisely so that it is predictable for those subject to it.
Tax laws must therefore not be interpreted in a way that distorts their meaning. The justification of a transparency tax through such an interpretation of double taxation treaties, under the guise of combating tax evasion, does not hold up.
Since Belgium generally grants income exemptions only if such income is taxed in the source country, and because the rules on controlled foreign companies (CFCs) are already aimed at preventing tax avoidance, the application of the Cayman Tax in the presence of a treaty is unjustified. Under no circumstances can the objective of combating tax evasion justify a disproportionate infringement on fundamental rights, such as the free movement of businesses and capital, and the right to property.
Conclusion and Action Points
It is essential to remember that under the constitutional principle of tax legality, an administrative circular does not bind taxpayers or courts but only members of the tax administration. While the administration will adhere to the circular during audits or discussions, taxpayers can challenge it.
The only reasonable conclusion is that DTTs preclude the application of the Cayman Tax.
Ultimately, this taxation regime applied to companies covered by DTTs has little justification. It primarily discourages investments in foreign companies and unnecessarily increases the reporting obligations of Belgian taxpayers.
It is crucial to review your international structuring in light of this new approach and make necessary adjustments to avoid future disputes with tax authorities.
For further assistance, contact Vanbelle Law Boutique at your best convenience.
Walid Jaafari
Junior Associate
