On 11 December 2024, the Belgian tax authorities published a new circular letter 2024/C/79 (NL/FR) which confirms that double tax treaties do not limit the application of the Cayman tax.

The circular letter was published following the recommendation of the Belgian Court of Audit (NL/FR) to clarify the Belgian tax authorities’ position on the interaction between double tax treaties and the so-called Cayman tax rules.

The Cayman tax rules apply a tax transparent taxation in the hands of Belgian tax resident individuals and legal entities on income realized by their foreign legal constructions of which they are the founder or beneficiary. This constitutes a taxation on “dry income” because Belgian tax resident individuals and legal entities are taxed on income realized by another foreign entity. Since no mechanism is foreseen to remedy double taxation, the application of the Cayman tax often results in economic double taxation because the same income is taxed in the hands of multiple taxpayers, i.e. the legal construction and the founders.

The circular letter states that the Cayman tax rules do not infringe the double tax treaties in most cases. This is likely because, in most cases, Cayman taxation results in economic double taxation and not in legal double taxation whereby the same person is taxed on the same income or estate in more than one country. However, the tax authorities do not specify what “in most cases” means. The circular letter concludes that the “procedural” provisions of the Cayman tax which consist of (i) the extended declaration obligation (which includes the filing of an additional form 276 CJC as of tax assessment year 2024) and (ii) the extended statute of limitations of 10 years, can in any event (we understand even in case of legal double taxation) not be set aside by double tax treaties.

The circular letter also states that for legal constructions in tax treaty countries, the so-called sub-stance exclusion offers the possibility to avoid the taxation on dry income of the Cayman tax. It is the Belgian founder of the legal constructions who bears the burden of proof in this respect and the exclusion is limited to the Cayman taxation but does not offer relief from the “procedural” provisions of the Cayman tax (cf. above). Also, in practice, the question arises in which cases the substance exclusion can be applied (because it cannot relate to the management of the founder’s private estate) and which substance can be considered as adequate for the purpose of this exclusion.

The circular letter further justifies the tax authorities’ position in a technical manner to conclude that the existing Cayman tax legislation complies with the double tax treaties, the OECD Model Convention and the MLI.

In practice, the taxpayers and tax practitioners are waiting for a circular letter that further clarifies the scope of the new Cayman tax rules which apply as of 2024. Indeed, today we can only conclude that the impact of Cayman tax goes far beyond its initial purpose resulting in a lot of uncertainties on several topics such as SCI’s, Dutch StAK’s, the application of the annual tax on securities accounts, the application of the substance clause in practice, etc. Practical guidelines and clarifications on these topics are more than welcome.

Also remarkable is the fact that the circular letter does not mention whether the Cayman tax rules abide to all EU Law principles (like the freedom of establishment and the freedom of capital).

In case of any further questions regarding the circular letter, please do not hesitate to reach out to your trusted EY person of contact.

Footnotes

1. XBRL, eXtensible Business Reporting Language, is used to exchange business information.

2. XHTML refers to eXtensible HyperText Markup Language, a stricter version of HTML

3. Inline XBRL is a structured data language, readable both by humans and machines, which makes it possible for filers to prepare a single document (e.g., financial statement) rather than multiple versions.