Private Wealth in Belgium

This article explains the tightened Belgian look-through taxation regime targeting the founders of foreign trusts and legal entities and subsequently summarises the amended CFC legislation.

Consequently, we give an overview of the applicable rules of the tax on securities accounts. Finally, we discuss some trust-related tax aspects and explain the applicable tax treatment of gifts under Belgian law.

Look-through taxation for natural persons

After the Belgian government had already introduced an obligation in 2013 for individuals to disclose the existence of certain “legal constructions” of which they were the founders, a look-through taxation regime – also known as the “Cayman tax” – became applicable in Belgium at the beginning of 2015.

Several legislative amendments followed in consecutive years. The latest reform dates from December 2023 and tightened the scope of application of the look-though taxation provisions significantly.

Look-through taxation regime

Pursuant to the look-through taxation provisions, the natural persons who must be considered as the founders of the targeted legal construction are obliged to pay tax on the income obtained by the legal construction. The income of a legal construction thus becomes taxable in the hands of the Belgian resident founder as if they had received it directly, even if the income is not actually distributed to the founder.

Definition of legal constructions

A distinction must be made between different types of legal constructions:

• trusts and trust-like arrangements; and
• foreign entities with legal personality.

The latter legal entities only come within the scope of the look-through taxation if they are situated in a jurisdiction where they are either not liable to income tax or are liable to an effective income tax that is lower than 15% of the entity’s taxable income that is determined according to the rules applicable as if the entity were subject to Belgian income taxation. The 15% test is to be applied on an annual basis, so that the income of the same legal entity may be taxable under the look-through taxation in one year but not in the following. The 15% test does not apply to trusts that are in the scope of the look-through taxation anyway, regardless of whether or not they are subject to tax.

Legal entities situated in the European Economic Area (EEA) qualify as legal constructions only if they fall under any of the following targeted categories.

• (Alternative) undertakings for collective investment in accordance with the UCITS directive or the AIFM directive that are held for more than 50% by one investor, or by several investors who are related persons (up to the fourth degree of kinsmanship). The ownership test is to be assessed at the level of each compartment.
1. A presumption based on the existence of related persons will apply when the asset manager receives specific instructions from the shareholders of a compartment or in the case no independent asset manager has been appointed.
• Legal entities that are opaque for Belgian income tax purposes but are treated as transparent according to the tax legislation of the jurisdiction where they are established (hybrids). However, if the partners of the hybrid entity pay a minimum 1% income tax in the country of establishment on the partner’s share in the taxable income of the hybrid entity (as determined in accordance with Belgian corporate income tax rules), then they are not in scope.
• The last category targets entities that are either not subject to corporate income tax or subject to an amount of income tax lower than 1% of the taxable income as determined in accordance with Belgian corporate income tax rules.

Regarding entities established outside the EEA, these are legal constructions if they fall within the scope of the general definition of legal construction. For certain non-EEA entities, the legislature has also provided in rebuttable legal presumptions that they should be treated as legal constructions. Such is the case for entities established in a jurisdiction which is included in the EU list of non-cooperative jurisdictions or the list of jurisdictions with no or low taxation.

Insurance contracts are also targeted if certain conditions are met. An insurance contract comes within the scope of the look-through taxation if it is entered into by contributing assets from the aforementioned legal constructions or if it invests in such assets.

Multi-layer investment structures

Prior to 1 January 2024, multiple-layer structures solely fell within the scope of the Cayman tax when they were exclusively made up of legal constructions. The Cayman tax was therefore inapplicable where an entity, not qualifying as a legal construction, was the holder of legal constructions.

Henceforth, with the introduction of the concept of “intermediate structure”, all legal constructions held directly or indirectly by a Belgian tax resident founder are subject to look-through taxation.

This new measure will lead to a huge increase in the tax compliance for Belgian tax residents having made indirect investments in foreign entities. For each of these interposed entities, it would need to be checked whether they qualify as a legal construction which requires a recalculation of the taxable basis according to the Belgian rules. 

Definition of founder

The term “founder” is broadly defined to include not only the individuals that have founded the legal construction but also those who have transferred assets to it, as well as their heirs. The term also includes the individuals that hold, directly or indirectly through a chain of intermediate structures, legal or economic rights to the structure or its assets.

Additionally, individuals identified as ultimate beneficial owners of a legal construction in a beneficial ownership register are presumed to be the founders of the legal construction. This presumption is rebuttable.

No minimum participation threshold is set in order to qualify as a founder, and very minority investors may also have to undergo look-through taxation.

Exclusions from look-through taxation

(i) UCIs and listed entities

(Alternative) undertakings for collective investment may benefit from an exclusion unless more than 50% of the ownership rights are held by just one investor, or by several investors who are related persons.

If the undertaking for collective investment is excluded from the scope of Cayman tax then it serves as a blocker, resulting in any investment held by the undertaking also being excluded.

Listed entities are excluded from the look-through taxation provisions and they also function as a blocker.

(ii) Substance exclusion

A so-called “substance carve-out” applies to legal constructions with sufficient substance. For the exclusion to apply, the following conditions must be met.

• The legal construction must be established in a country that has entered into a double tax treaty or a tax agreement providing for the exchange of information with Belgium.
• Legal constructions are considered to be active if they carry out a genuine economic activity in their country of establishment, by means of premises, personnel and equipment. The activity may not be limited to the management of the founder’s private assets and must provide for offering goods or services on a given market.

Carrying on an economic activity is thus subject to a very restrictive definition. It is highly debatable whether this restricted definition will stand up to a challenge before the EFTA Court and the Court of Justice in the context of the EU freedom of establishment and the free movement of capital.

An active legal construction does not act as a blocker so that any passive investments held by the active legal construction may still be subject to look-through taxation.

The substance exclusion must be formally claimed in the annual tax return of the founder and does not prevent the application of the reporting obligation as described below.

(iii) Cayman tax and CFC interference

Another exclusion applies in case of interference of Cayman tax and CFC rules.

Cayman tax can interfere with CFC rules, for example, if the Belgian company holds shares in a CFC that also qualifies as a legal construction. In accordance with a specific exclusion provision, the Cayman tax is not applicable if the legal construction qualifies as a CFC for corporate income tax purposes. This should avoid too much overlap between these two rules, but double use could still occur in multiple intermediate investment structures.

Preventing taxation upon subsequent distribution by the legal construction

The look-through taxation applies regardless of whether or not the legal construction has actually distributed any of its income to the founders. To prevent double taxation occurring if income is in fact later distributed to a Belgian resident, Belgian tax law provides that distributions by a legal construction are exempt from further taxation as dividend income if the distributed income has already been effectively taxed in Belgium under the look-through provisions.

This means that the exemption rule does not apply to any income that has not been actually taxed under the look-through approach because the income was either not taxable or exempt under the Belgian domestic rules (like in the case of capital gains on shares) or under the provisions of a double tax treaty (like in the case of foreign-source real estate income).

Exit tax upon emigration of the founder

Upon the emigration of the founder abroad, the undistributed income of the legal construction is deemed to be distributed by way of a dividend. As a result, the founder will be taxed on a fictitious dividend income at a flat rate of 30% upon relocation. The exit tax can be paid in instalments over five years if the legal construction is established in the EEA.

No foreign tax credit

Foreign taxes paid by targeted legal constructions cannot be credited against any Belgian income tax due from their founders. This may lead to international double taxation.

Reporting obligation

The founder of a legal construction must report its existence through the annual income tax return. Failure to fulfil this obligation is punishable by a fine of EUR6,250 per year and per undeclared legal construction.

Advanced rulings

Several rulings have been published by the ruling commission on the applicability of the look-through taxation.

A compartment of a Luxembourg UCI (société d’investissement à capital variable) has been determined to be a legal construction because the shareholders were related persons and the substance exclusion was not accepted by the ruling commission as the fund managed the private wealth of the shareholders according to the ruling commission.

The Belgian ruling commission decided that a UK Self-Invested Personal Pension (SIPP) must be regarded as a legal construction but it was excluded from the scope of the look-through taxation as the SIPP carried out a genuine economic activity with several premises, a couple hundred employees in service and a sufficient amount of equipment.

The “hybrid” definition has been applied to a Luxembourg SC (société civile). It was also decided that a Luxembourg SOPARFI is within the scope of the look-through provisions if the 1% test is not met.

Pursuant to the latest reform, it was confirmed in a tax ruling that a French investment fund taking the form of an SLP (société de libre partenariat) is an excluded entity insofar as no (related) persons hold more than 50% of the rights per compartment.

CFC rules applicable to Belgian companies

CFC legislation has been adopted in the context of the mandatory implementation of the EU Anti-tax Avoidance Directive (ATAD). The Belgian legislature has introduced new rules with effect from 2023, significantly increasing the impact of the CFC legislation for Belgian (holding) companies.

Definition of CFC

A foreign company will be considered a CFC if the following two conditions are simultaneously satisfied.

• The Belgian company holds a participation of at least 50% in the capital, voting rights or profit of the foreign company, either directly or “together with” associated entities or individuals.
• The foreign company is either not subject to income tax or is subject to less than half the income tax it would have been subject to had it been located in Belgium. This minimum taxation condition requires that tax base of the foreign company will also have to be recalculated annually in accordance with Belgian corporate income tax rules.

Taxation of undistributed profits

If a foreign company qualifies as a CFC, the undistributed profit of the CFC (calculated taking into account the Belgian corporate income tax rules and the percentage of passive income) must be allocated to the Belgian company and be included in the Belgian taxable base.

Exclusions

An exemption applies in the following circumstances. 

• When the CFC carries out a genuine economic activity by means of premises, personnel and equipment. The activity must consist in offering goods or services on a given market. Intra-group services between members of an international group qualify as an economic activity if they are provided at arm’s length remuneration conditions.
• If less than one-third of the income accruing to the foreign entity qualifies as passive income.
• If the CFC qualifies as a financial undertaking as defined by the Belgian Income Tax Code and only one third or less of that CFC’s passive income results from transactions with the Belgian taxpayer or an associated enterprise.

Prevention of double taxation

Dividends that are subsequently distributed by the CFC will benefit from a 100% participation exemption up to the amount of foreign undistributed passive income already taxed in Belgium. Capital gains on shares in a CFC will also be eligible for exemption.

Lastly, a tax credit is provided to the Belgian taxpayer for the taxes paid by the CFC on its passive income in its country of residence. If the Belgian taxes are insufficient to fully offset the Belgian taxes, the unused portion of the CFC’s foreign taxes is not refunded, but can be carried forward.

Belgian Cayman tax and CFC rules’ compatibility with tax treaties?

The Belgian tax authorities do not accept that the look-through taxation and CFC rules may violate tax treaties. A general application of the Cayman tax in cases where there is no abuse of law and the foreign structure is created for legitimate purposes does, however, seem to infringe the relevant tax treaty rights to which the taxpayers are entitled. Several states indeed made an explicit reservation regarding the introduction of the savings clause (CFC clause) in tax treaties in the context of the multilateral instrument.

The same reasoning may be defended in respect of the CFC legislation applicable to entities located in non-EEA treaty states.

Tax Targeting Securities Accounts

An annual tax of 0.15% applies on securities accounts (TSA) that exceed EUR1 million in average value.

Accounts within scope of the TSA

The TSA is a subscription tax levied on securities accounts. A securities account is defined as an account on which financial instruments can be credited and debited.

Securities accounts are within the scope of the TSA if they are held by individuals or legal entities. For the purposes of the TSA, founders of legal constructions that are targeted by the Cayman tax are treated as account holders with respect to the securities accounts held by these legal constructions.

Belgian resident account holders are subject to the tax with respect to both their Belgian and foreign securities accounts. Non-resident account holders are targeted with respect to their securities accounts held with Belgian financial institutions.

It follows from the aforementioned rules that securities accounts held by foreign trusts are in scope of TSA if the settlor of the trust is a Belgian tax resident (individual), regardless of whether the accounts are held with Belgian or foreign financial institutions. Securities accounts held by legal entities that are treated as legal constructions (eg, Luxembourg SPF, US LLC, BVI company) are also in scope if the (indirect) shareholder of the entity is a Belgian resident (individual), regardless of whether the accounts are held with Belgian or foreign financial institutions.

Taxable basis and rate of the TSA

The annual tax rate amounts to 0.15% and the taxable base equals the average value of all financial instruments held in the securities account. This includes securities such as shares, depositary receipts, bonds, investment fund units (eg, trackers/ETFs) and derivatives. Importantly, the cash balance held on the actual securities account is also included in the taxable value.

Financial instruments that are not held through a securities account, such as registered shares, are not subject to the tax. Cash is not within the scope of the TSA if it is held through current or savings accounts.

The average value held in the account is calculated by taking into account a reference period of 12 months, running from 1 October to 30 September.

Threshold of EUR1 million

The tax is only due if the average value of the exceeds EUR1 million; this threshold is applied with respect to the securities account itself and does not take into account the share of each account holder in the case of joint ownership.

Filing and payment obligations

With respect to securities accounts held with a Belgian intermediary (by a Belgian resident or non-resident account holder), the tax return must be filed and the tax must be withheld and paid by the intermediary. If the securities account is held with a foreign intermediary, the account holder must ensure the filing and payment of the tax themselves, unless they can demonstrate that these obligations have already been fulfilled by another intermediary.

Anti-abuse measures

Upon the introduction of the TSA, the Belgian legislature introduced a general anti-abuse rule and some specific and non-rebuttable anti-abuse rules.

With a judgment on 27 October 2022, the Constitutional Court annulled the specific non-rebuttable anti-abuse provisions as well as the retroactive entry into force of the general anti-abuse provision, so that it only applies from 26 February 2021 – ie, the date of the entry into force of the new TSA, instead of 30 October 2020– ie, the date on which the new TSA was first announced in the Belgian Official Gazette.

Influence of tax treaties

The application of the TSA with regard to securities accounts held with Belgian financial institutions by non-resident account holders raises the question of whether an applicable double tax treaty does not prevent Belgium from imposing such a tax.

If the relevant double tax treaty covers taxes on capital (wealth tax) and allocates taxing power to the resident state, Belgium would not be allowed to levy the TSA on securities accounts held by non-resident account holders. For example, for a Dutch tax resident, the double tax treaty between Belgium and the Netherlands stipulates that assets such as securities on a securities account may only be taxed in the country of residence (ie, the Netherlands) and thus not in Belgium.

Tax Aspects Relating to Trusts

Income tax treatment of distributions made by a trust

From a Belgian income tax perspective, any distribution made by foreign trusts to beneficiaries that are Belgian tax residents will be treated as dividends and be taxable in the hands of the beneficiaries, unless:

• the beneficiary can prove that the relevant income or gain has already effectively been taxed in Belgium in accordance with look-through taxation legislation (Cayman tax) in the hands of the founder; or
• the taxpayer can demonstrate that the distribution triggers a decrease in the value of the trust’s assets to below the value of the assets originally contributed.

Inheritance tax treatment of a trust

When it comes to Belgian inheritance tax, there is no look-through taxation with regard to foreign trusts. In general, the tax authorities have taken the position in the three regions that no inheritance tax is immediately due on all the assets upon or pursuant to the death of the Belgian tax resident settlor if the trust was set up and has acted as an irrevocable and discretionary trust. If, however, the trust makes a distribution upon and/or after the death of a Belgian tax resident settlor, that does trigger inheritance tax liability on the value of the distribution.

Gift Tax Provisions

Belgium’s gift tax rates are considerably lower than its inheritance tax rates, with gift tax rates in direct line going from 3% to 3.3%, depending on the region in which the donor lives, while progressive inheritance tax rates of 3% to 30% apply for inheritances in direct line.

From a Belgian tax perspective, gift tax is a registration tax under Belgian law. The registration procedure – triggering gift taxes – is now compulsory for:

• gift deeds passed before Belgian notaries, regardless of whether or not the donor is a Belgian resident; and
• gift deeds passed before foreign notaries if the donor is a Belgian resident on the date that the gift occurs.

If the gift can be formalised without requiring a notarial deed, then no gift tax is due. However, if a donor dies in the three years following such a non-registered gift and qualifies as a tax resident of the Flemish or Brussels Metropolitan region at the time of their death, inheritance taxes will be due, taking into account the value of the gifted assets. The three-year period has been extended to five years for donors who have their tax residency in the Walloon region at the time of their death.