Exploring Circular 2024/C/79: Interaction of the "Cayman Tax" with Double Tax Treaties

The Cayman Tax is essentially a transparency tax aimed at taxing the income collected by a “legal arrangement”—or by a “subsidiary arrangement” in multi-level structures—at the level of its founders as if they had directly received this income themselves.

The transparency taxation of the Cayman Tax applies to personal income tax as it primarily aims to combat the abusive use of legal arrangements designed to isolate the private assets of Belgian tax residents to evade tax administration scrutiny. For this reason, the Cayman Tax is not applicable as part of the corporate income tax rules. However, it is important to note that the Cayman Tax also applies to legal entities' income tax (“impôt des personnes morales” / “rechtspersonenbelasting”).

Don’t hold your breath though, this circular letter does not even scratch the surface of the practical difficulties generated by the Cayman Tax such as the so-called “Belgian recalculation”, but only aims at justifying the application of the Cayman Tax irrespective of whether the legal arrangement is resident in a country with which Belgium has concluded a DTT.

The Fisconetplus website’s summary says it all: “The double tax treaties concluded by Belgium do not prevent [the Cayman Tax] from taking effect”. We could (almost) stop there already.

In short,

• Supported by the existing position regarding the CFC rules in the OECD comments, the tax administration considers that, in principle, there is no issue with a Belgian taxpayer being taxed on income received by a foreign company with legal personality and resident in a country with a DTT. This is because it constitutes only economic double taxation, characterized by the taxation of two different persons on the same income. In contrast, DTTs primarily address international legal double taxation, i.e., the application of comparable taxes in two states on the same taxpayer, for the same taxable event, and for identical periods.

• The tax administration then proceeds to add a whole series of ancillary elements, so to speak, superfluous arguments, in light of the preceding hammering argument:

  • DTTs provide no protection because, despite the fact that the Cayman Tax results in transparent taxation for the Belgian founder on income received by a foreign company classified as a legal arrangement, the foreign entity would nonetheless not be considered a transparent entity for DTT purposes. 

  • For DTTs modified by the Multilateral Instrument, the new preamble and the new anti-abuse clause reinforce the interpretation that the provisions of the DTTs do not prevent the Cayman Tax from taking effect because these domestic provisions are intended to counteract tax evasion.

  • Finally, the safeguard clause included in certain DTTs confirms the general principle that the DTT does not restrict the right of a contracting state to tax its own residents.