i Personal income tax General
Belgian-resident individuals are subject to Belgian personal income tax (PIT) on their worldwide income,2 while non-residents are generally only subject to (non-resident) PIT on their Belgian-sourced income. In both cases, Belgian taxation is subject to the provisions of the applicable double tax treaties.
A person is resident in Belgium if he or she has his or her domicile in Belgium. A person without domicile in Belgium can still qualify as resident if his or her ‘seat of wealth’ is established in Belgium.3
The term domicile refers to one’s place of main and permanent abode. This is a factual test. There is no clear black and white test, such as day-counting. Listing in the National Register of Individuals creates a (rebuttable) legal presumption regarding residency, and a married person is irrefutably presumed to reside with his or her family. Seat of wealth refers to the place from which individuals administer their wealth, regardless of its location.
There are four categories of income: professional income, real estate income, investment income and miscellaneous income.4
Professional income is generally subject to progressive tax rates (up to 50 per cent) and tax is to a certain extent levied at source (withholding tax).
Real estate income is generally taxable at progressive rates. The taxable base of real estate income is generally much lower than the actual rental value, except in cases of rental for professional use. Capital gains on privately held immovable property are generally not taxable as real estate income. However, in certain cases, such gain can qualify as miscellaneous income taxable at a flat rate.
For investment income (dividends including liquidation proceeds, interests and royalties), the default tax rate for interest and dividend income is 30 per cent, although exceptions apply. For example, dividends from qualifying small or medium-sized companies can be subject to a reduced tax rate of 20 or even 15 per cent. In addition, such companies can annually allocate their profits to a ‘liquidation reserve’, which can be distributed later at reduced tax rates. The application of the reduced tax rates is subject to certain conditions.
A reduction of capital must be allocated for tax purposes pro rata to the taxable reserves of the company making the repayment. The part of the capital allocated to these reserves will be taxed as a dividend.
For certain investment insurance products, a tax-exempt yield can be realised in both type 21 (capital and yield guaranteed) and type 23 products (no guarantee as to capital or yield). Individual life insurance contracts are generally subject to a premium tax.
The tax on investment income must generally be withheld at source by the Belgian paying agent. In that case, the income must not be reported in the annual PIT return. If no withholding tax is levied (for example, in the case of a foreign paying agent), the income must be declared in the annual PIT return, and a tax equal to the withholding tax will be levied.
Unless taxable as miscellaneous income (see below), capital gains realised on movable assets do not generally constitute taxable investment income. However, capital gains on shares of units of capitalising collective investment funds may be taxed at 30 per cent if more than 10 per cent of the assets are invested in debt securities, including cash. The same regime applies to shares redemptions or liquidations by such investment companies.
Royalties are taxable at 30 per cent. For copyright royalties, a reduced rate of 15 per cent can apply subject to certain conditions.
Miscellaneous income is taxed separately at flat tax rates. Among the most important categories of miscellaneous income are:
- occasional and speculative (non-professional) profits and proceeds, including capital gains on shares realised as a result of an abnormal management of private wealth (33 per cent);
- capital gains realised on the transfer of a substantial shareholding (25 per cent or greater) in a Belgian company to non-EEA legal entity (16.5 per cent); and
- capital gains on the sale of Belgian real estate (other than the family dwelling) within eight or five years after acquisition (16.5 or 33 per cent).
In 2013, a reporting obligation for Belgian residents involved with or receiving an advantage of legal arrangements was introduced. In 2015, a look-through tax pertaining to such legal arrangements was introduced in Belgian PIT.5 This tax is commonly referred to as the Cayman tax.
Managing the impact of the Cayman tax is of paramount importance for high-net-worth individuals residing or intending to reside in Belgium.
Despite the fact that the Cayman tax is still relatively new, it has already been subject to numerous changes, sometimes with retroactive effect. The cause is the extremely poor quality of the Cayman tax legislation combined with a lack of overall vision and an overzealous legislator keen on closing a loophole as soon as it pops up in legal doctrine or the press.
In its most recent incarnation, one of its original key elements, the look-through approach, was largely abandoned. It is now only applied with respect to founders6 and only insofar as the legal arrangement has not distributed the relevant income to the founder or another person before the end of relevant taxable period. If no such distribution occurs, the income of the legal arrangement keeps its original qualification and is taxed accordingly in the hands of the Belgian resident.
On the other hand, in the case of a distribution by a legal arrangement, the income will now, in principle, always be qualified as a taxable dividend irrespective of whether the distribution is made to the founder or to another person. A qualification as a taxable dividend can then essentially only be avoided if the distribution brings the capital of the legal arrangement below the capital that has been contributed to it by the founder or if the income that is distributed has already been subject to the Cayman tax (for example, under the look-through rule). The law is written in such a way that these exceptions can only be invoked once all pre-Cayman tax reserves have been distributed and taxed in Belgium.
Moreover, the law now also provides for some deemed dividend distributions. These can, for example, be triggered in the case of transfer of assets (including transfer of seat) or a contribution involving legal arrangements.
Several special anti-abuse rules apply, rendering the Cayman Tax even more complex. The law now provides that a legal arrangement – an entity that as a matter of principle cannot be a Belgian entity or taxpayer – can commit tax abuse that can then seemingly be attributed to a Belgian resident founder.
There are three types of legal arrangements:7 type 1, type 2 and type 3:
Trusts and other fiduciary arrangements without legal personality (e.g., trusts), this irrespective of whether they are taxable or not (in their home jurisdiction).
Foreign entities with legal personality that are not subject to income tax in their home jurisdiction or for which the effective (corporate) income tax rate in their home jurisdiction (computed according to the Belgian tax rules) is lower than 15 per cent. By way of exception, and subject to some conditions, certain entities do not qualify as legal arrangements (or can be taken out of scope of the Cayman tax). These include companies running an operational business (economic activity test), genuine public or institutional undertakings for collective investment in transferable securities and alternative investment funds and entities listed on a qualifying stock exchange.
A distinction must be made between legal entities inside and outside the European Economic Area (EEA).
Originally, EEA entities were largely outwith the scope of the Cayman tax. They only qualified as legal arrangements if they were specifically blacklisted in a limitative royal decree (EEA Decree).
Initially the EEA Decree was a closed list containing only the Luxembourg Société de Gestion de Patrimoine Familial, the Luxembourg Fondation (which does not even exist) and the Liechtenstein Anstalt and Stiftung.
The amendment of the EEA Decree at the end of 2018 (but with retroactive effect as from 1 January 2018) led to a paradigm shift. Henceforth, every EEA entity is a legal arrangement provided it falls in one of the three following open-ended categories:8
- Investment funds in the EER, when they are held by one or more persons who are connected with one another. If the fund is compartmentalised, this is to be assessed per compartment. This implies that, for example, a Luxembourg Sicav dédiée (a dedicated investment company with variable capital) or a Luxembourg Sicav-SIF (a Sicav with specialised investment fund status) (or their compartments) can potentially come within the scope of the Cayman tax.
- Hybrids: these are companies that – despite having a separate legal personality – are treated as tax-transparent under local tax law while they are not treated as tax-transparent under Belgian tax law. Two exceptions apply. The first excludes companies that have as their main purpose the generation of a type of income that would be tax-exempt in Belgium under a double taxation convention if a Belgian-resident individual would receive such type of income directly (treaty exception). The second excludes companies when, under local law, their income is subject to income tax in the hands of the Belgian-resident shareholder or partner, and if this income tax amounts to a minimum of 1 per cent of the part of the taxable income that can be allocated to said partner or shareholder and is determined in accordance with Belgian rules.
- All companies and legal entities that are not taxed or are subject to income tax that amounts to less than 1 per cent of the taxable income determined according to the Belgian rules of the legal arrangement.
The EEA Decree gives rise to a lot of uncertainty because its potential scope is very wide. By way of example, a normally taxed corporation such as a Luxembourg Soparfi can, in certain circumstances, also qualify as a legal arrangement. Based on literal reading of the law, the same can also be true for income tax-exempt Dutch foundations.
It can be questioned whether the EEA Decree is compliant with double taxation conventions and EU law. Although there is some case law,9 the exact way these interact with the Cayman tax is to a certain extent still unclear.
Initially, a royal decree was issued that contained a non-limitative list of entities that were presumed (subject to proof to the contrary) to qualify as a legal arrangement (non-EEA Decree).
In 2019, the non-EEA Decree was amended with retroactive effect until 1 January 2019. Investment funds outside the EEA are now specifically qualified as legal arrangements under conditions that are mutatis mutandis, the same as those that are provided for in the EEA Decree. A definition of hybrids was included; however, the two exceptions that were included in the EEA Decree have not been inserted in the non-EEA Decree.
A third type of legal arrangement aims at insurance wrappers used in certain avoidance schemes.
The Cayman tax also includes the notion of a chain construction. A chain construction is deemed to exist when a parent legal arrangement holds shares or economic rights in an underlying legal arrangement.11 Such an underlying legal arrangement can itself be a parent legal arrangement of a lower tier legal arrangement in which it holds shares or economic rights. This way it is possible to form a chain of legal arrangements whereby the income of an underlying legal arrangement is attributed to its parent legal arrangement prorate the shares or economic rights the latter holds in such a lower tier legal arrangement. This income is then attributed upwards to the founder of the (ultimate) parent legal arrangement.12
Rules are in place to avoid double taxation if income that has already been attributed in such a way to the founder is later taxed again when it is distributed up the chain to (ultimately) the founder. Again, however, the applicable allocation rules have been drafted in such a way that they are to the disadvantage of the taxpayer.
ii Inheritance tax and gift tax
Inheritance tax (IHT) and gift tax are both regional taxes. Rules in the Brussels, Walloon and Flemish regions may therefore vary.
Upon the death of a person that has his or her domicile in Belgium, IHT is due by the heirs on the net value of the worldwide assets of the deceased.
The criteria to determine residency for PIT purposes also apply to determine whether a person is resident in Belgium for IHT purposes.13 The citizenship of the deceased and the residence and the citizenship of the heirs are irrelevant for inheritance tax purposes. What region the deceased was resident in will subsequently be determined by analysing in which region the deceased lived the longest in the five years prior to his or her death.
Subject to certain conditions and within certain limits, the law provides that foreign inheritance tax on immovable property can be offset against Belgian inheritance tax. On 3 June 2021, the Belgian Constitutional Court held that the fact that the law does not provide this possibility with respect to foreign inheritance tax on movable property is unconstitutional. Belgium has only concluded bilateral inheritance tax agreements with Sweden and France. As Sweden has abolished inheritance tax, only the agreement with France may have an impact on cross-border inheritance taxation issues between France and Belgium. For non-residents, IHT is only due on their Belgian real estate. For EEA residents, IHT is due on the net value; for non-EEA residents, IHT is due on the gross value of the Belgian real estate.
As IHT is regional, the tax rates, tax computation and exemptions vary for the three regions. Except when flat rates apply, rates are double progressive and depend upon the kinship between the deceased and the heir, and upon the value of the assets. Direct-line heirs and spouses (and, under certain conditions, cohabitant partners) are taxed at rates of up to 27 per cent (Flemish region) or 30 per cent (Brussels Capital region or Walloon region). The highest rates (for non-related beneficiaries) go up to 55 per cent (Flemish region) or 80 per cent (Brussels Capital region or Walloon region).
Family homes (when bequeathed to the surviving spouse or cohabitant partner) and family businesses can benefit from favourable tax rates in all three regions, although the conditions differ from region to region.
Reduced flat tax rates apply to certain public bodies and charitable institutions (including private and public foundations), among others: zero or 8.5 per cent (Flemish region), 7 or 25 per cent (Brussels Capital region) and 7 per cent (Walloon region).
IHT legislation provides for ‘fictitious legacies’ increasing the taxable base, as well as an anti-abuse provision to counter illegitimate tax avoidance.
Since 2015, the Flemish tax authorities collect the Flemish IHT (whereas the federal tax authorities still collect Brussels and Walloon region IHT). The Flemish tax authorities frequently take controversial positions that affect ‘classic’ estate planning strategies and create uncertainty.
Belgian gift tax is only due upon registration of a document or deed in Belgium. Such registration is compulsory for Belgian notarial deeds in general, particularly for transfers of Belgian real estate. As from 15 December 2020 registration has also become compulsory for foreign notarial deeds containing a gift of movable assets. Under certain conditions, these assets (cash, stock, bonds, classic cars, art, etc.) can also be gifted without intervention by a (Belgian or foreign) notary, and thus avoid registration and the levying of gift tax. They will however generally require that the donor survives the gift for at least three years to also avoid the levying of inheritance tax.
The regions have different rates for gifts of immovable property and of movable assets. The latter can generally benefit from low flat rates (ranging from 3 to 7 per cent). Notwithstanding important regional reductions over the past couple of years, immovable gifts are still more expensive, as tax rates are progressive and can go up to 27 per cent (Flanders and Brussels regions) and 30 per cent (Walloon region) for spouses, children and grandchildren, and up to 40 per cent (all three regions) for other beneficiaries.
Family businesses can benefit from a zero per cent tax rate in all three regions. Flat rates or exemptions are also available for charitable gifts (e.g., to private or public foundations).
iii Other taxes Wealth tax
There is no general wealth tax in Belgium.
A renewed annual tax on securities accounts (TSA) was introduced with effect from 26 February 2021. The tax of 0.15 per cent targets securities accounts with an average value exceeding €1 million. The new TSA replaces the TSA 1.0, which was annulled by the Belgian Constitutional Court on 17 October 2019.
Compared to the annulled previous iteration, the scope of the new TSA has been broadened further and now includes a.o. securities accounts held in Belgium and abroad by a Belgian owner (both natural persons and legal entities). The new TSA also covers, in principle, securities accounts held by non-Belgian residents (both natural persons and legal entities) held with Belgian financial institutions.
Compared to its predecessor, the new TSA is levied on the securities account itself. Therefore, the number of account holders or their ownership status is irrelevant.
Stock exchange transaction tax
The Belgian Stock Exchange Transaction Tax (SETT or TOB) is principally due on any stock exchange transaction concerning the sale or purchase of existing shares instigated by a Belgian tax resident (both natural persons and legal entities) even if the transaction is carried out by a foreign intermediary. The TOB currently amounts to 0.12 per cent (on bonds, capped at €1,300 per transaction), 0.35 per cent (on stocks, capped at €1,600 per transaction) and 1.32 per cent (on redemptions of capitalisation shares of collective investments vehicles, capped at €4,000 per transaction).
iv Other points of attention relevant to high-net-worth individuals
Besides the introduction of the Belgian Cayman tax and TSA, the Belgian tax and legal arena has undergone numerous other major changes that are also relevant for high-net-worth individuals. These include the following:
A new Belgian Code of Companies and Associations entered into force on 1 May 2019. The reform pursues simplification (reduction in the number of corporate forms), more flexibility (fewer compulsory rules) and modernisation (abolition of the capital requirement for private limited companies). Given the regular use of corporate entities for estate planning purposes, this reform creates both opportunities and challenges from an estate planning perspective. On 28 April 2020, a reparation law was enacted and also implemented Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement.14
Belgium has introduced an ultimate beneficial owner (UBO) register as imposed by the Fourth and Fifth Anti-Money Laundering Directives of 20 May 2015 and 30 May 2018.15 As a result, all Belgian companies had to be recorded in said register by 30 September 2019. The setup of the UBO register is broad (and arguably goes further than required by the Directives). For example, according to the Belgian authorities, if a Belgian company is held through a chain of intermediary entities, all entities between the Belgian company and the UBO need to be recorded in the UBO register. This means that trusts and foundations that directly or indirectly hold a Belgian company will be visible in the Belgian UBO register. This obviously triggers important privacy concerns.16 On a more positive note, the identity of the depository receipt holders of a foundation acting as a certification vehicle are not visible to the general public. The Royal Decree of 23 September 2020 introduced some new rules and features, including regarding the publication of the history of modifications made to the UBO information and the obligation for reporting entities to substantiate the disclosed information regarding their UBOs with supporting documents. The deadline for uploading these supporting documents and the annual confirmation of the information in the UBO register was extended to 31 August 2021.
The DAC 6 Directive,17 the sixth iteration of the Directive on Administrative Cooperation, aims to introduce a reporting requirement for cross-border potentially aggressive tax structures and imposes an obligation on Member States to automatically exchange such reports with other Member States. The purpose of DAC 6 is to identify potentially aggressive cross-border tax arrangements, through the presence of ‘hallmarks’, enabling Member States to adjust their tax laws accordingly.
The DAC 6 Directive was transposed into the Belgian legal order by the Law of 20 December 2019 and the Royal Decree of 20 May 2020. The reporting obligation is partly retroactive insofar as it also applies to arrangements that were implemented in the period from 25 June 2018 to 30 June 2020. Initially, these existing arrangements had to be reported by 31 August 2020. However, due to the corona crisis, this deadline was postponed to 28 February 2021 at the latest. New arrangements should in principle be reported within 30 days.