The Private Wealth & Private Client Review: Belgium
Belgium does not have a specific tax regime aimed at attracting high net worth individuals. However, a relatively high number of foreign (especially Dutch and French) high net worth individuals have taken up residence in Belgium in the past decades. Certain features of Belgium's tax system were, indeed, particularly attractive for high net worth individuals.
Over the past few years, however, high net worth individuals residing in Belgium have been confronted with a significant increase in their tax burden, especially on investment income.
As result, nowadays Belgium often appears less attractive than it once was. This has also prompted many high net worth individuals to leave Belgium again and to migrate to countries such as the UK, Switzerland, the US or even more far-flung locations.
That being said, some of Belgium's advantageous tax features still stand today. For example, Belgian tax law still allows tax-free realisation of capital gains within the frame of a normal management of one's private wealth, and certain income tax exemptions exist for yield realised via investment insurance products. Furthermore, Belgium has no general wealth tax and inheritance and gift taxes can easily be mitigated through proper planning.
In combination with the country's central location, its EU membership and very extensive double taxation convention network, the Belgian tax system can still make Belgium an attractive location for high net worth individuals. An important feature remains that their tax treatment is no different than every taxpayer's treatment.
More than ever, proper pre-migration planning is a key prerequisite for a successful migration. Such planning includes, among other things, reviewing the possibility to secure a tax-free step-up in basis (for shares in non-Belgian companies) and the potential effect of certain peculiarities of the Belgian tax and legal environment. These include, for example, the impact of the Belgian 'Cayman tax' and the annual tax on securities accounts and stock exchange tax. Likewise, it should be assessed whether double taxation conventions are available to mitigate double taxation issues (e.g., withholding taxes on interest and dividend income in the source state). Likewise, testaments, prenuptial and postnuptial agreements, life insurance contracts, etc., should be reviewed.
i Personal income tax
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 the 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 the 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 per cent or even 15 per cent. Also, 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 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. 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 per cent or 33 per cent).
In 2013, a reporting obligation for Belgian residents involved with or receiving an advantage of 'legal arrangements' has been introduced. In 2015, a 'look-through' tax pertaining to such legal arrangements has been 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 of 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
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 certain 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 out of 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, 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 minimum of 1 per cent of the part of the taxable 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.
This new 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 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. However, 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 has been 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.10 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.11
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. But again, 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.12 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, foreign inheritance tax on immovable property can be offset against Belgian inheritance tax. 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 public bodies and charitable institutions (including private and public foundations), among others: 8.5 per cent (Flemish Region), 7 per cent 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. Movable assets (cash, stock, bonds, classic cars, art, etc.) can be gifted without intervention by a Belgian notary, and thus avoid registration. Under certain conditions, such gifts can also avoid the levying of gift tax but will generally require that the donor survives the gift for at least three years to also avoid the levying of inheritance tax. The Flemish government's intention is to change this minimum period from three to four years. At federal level, a legislative proposal to introduce an obligation to register foreign notarial gift deeds and hence to submit them to gift tax is pending.
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 per cent 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 Region) and 30 per cent (Walloon Region) for spouses and (grand)children, and up to 40 per cent (all three regions).
Family businesses can benefit from favourable tax rates (ranging from 0 per cent to 7 per cent) in all three regions. Flat rates or exemptions are also available for charitable gifts (e.g., to private or public foundations).
iii Other taxes
There is no general wealth tax in Belgium. However, as of 1 January 2018, residents and non-residents are subject to a 0.15 per cent tax on securities accounts (TSA) if the average annual value of the in-scope securities exceeds €500,000 (per account holder, irrespective of the number of financial institutions involved). For Belgian residents, TSA applies to securities accounts with Belgian or foreign financial institutions. For non-resident individuals, TSA only applies to securities accounts maintained with Belgian financial institutions. Anti-avoidance rules are in place.13 The Belgian Constitutional Court has annulled the TSA with effect as of 1 October 2019.
Stock exchange tax
The scope of the Belgian stock exchange tax (TOB) was extended on 1 January 2017 and now also covers transactions executed by Belgian residents (individuals and entities) through non-Belgian financial intermediaries.14 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 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.15
- As from 2018, the Belgian corporate income tax regime has been substantially overhauled with some changes only taking effect in 2019 and 2020.16
- 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 2018.17 As a result, all Belgian companies must 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 ultimate beneficial owner 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.18 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 DAC6 (Directive on Administrative Cooperation)19 was approved on 25 May 2018 and focuses on the reporting of aggressive tax planning. It charges qualified intermediaries (e.g., lawyers, accountants, tax consultants, trustees, banks, etc.) and ultimately even the taxpayer to report cross-border arrangements to the local tax authorities. Reporting is compulsory from 1 July 2020, with a retroactive effect for reportable arrangements since 25 June 2018. Information will be stored in a secure database and will be exchanged between Member States. How DAC6 will be implemented in Belgium, especially for those that are bound to professional secrecy rules, remains unclear. Belgium has extended the DAC6 reporting deadlines: a deadline extension until 28 February 2021 for arrangements reportable between 25 June 2018 and 30 June 2020, whereas the 30-day time limit for reporting as from 1 July 2020 will not begin until January 2021.
- All regions will have to align their gift and inheritance tax legislation with the new (federal) succession and matrimonial property law rules (see Section III).
i Matrimonial property
In the slipstream of the new Belgian succession law (see Section II), matrimonial property law underwent an important facelift with effect as from 1 September 2018.20
In the absence of a matrimonial agreement, spouses are married under the default regime of community of gains, whereby all assets acquired during the marriage are considered community property, except for those acquired by a spouse gratuitously through gift or inheritance.
Upon dissolution of the marriage, the community property, in principle, will be divided equally between the spouses.
Spouses can choose to adjust the community property and exclude certain assets, or to use the 'universal' community property system in which property acquired before the marriage is included as well as property acquired gratuitously during the marriage.
Spouses can also agree to a separation of property regime.
As from 1 September 2018, the new matrimonial property law introduced a legal framework for a separation of property regime with a participation clause for gains accrued during the marriage: each spouse owns his or her assets, regardless of whether they were acquired before or during the marriage. When liquidating the regime (upon death, divorce or a change of the matrimonial regime), gains accrued during the marriage are equalised (via payment or claim).
Each of the spouses can dispose of his or her own assets, except for the family home, which may never be sold or mortgaged by one of the spouses without the consent of the other. Common property must be administered in the interest of the family. Generally, both spouses can administer separately the common property. For important matters (e.g., mortgage loan or gifts), both spouses must act jointly.
Both prenuptial and postnuptial matrimonial agreements are frequently used in Belgian law. Such agreements need to be executed before a civil-law notary and are binding for both spouses and the court.
The new matrimonial property law rules allow courts to apply a fairness correction when spouses married under a separation of assets regime get divorced and unforeseeable circumstances lead to a clear injustice (to be appreciated by the court) for one of the spouses. Application of the correction would result in a payment by the 'rich or richer' spouse of a maximum of one-third of the gains accrued during the marriage. The correction can only be applied when explicitly provided for in the matrimonial agreement.
A major reform of succession law has taken place, with the new rules entering into force on 1 September 2018.21
The legislator intended to align succession law rules with the social reality (among others, increased number of cohabitant (non-married) partners and blended families). The legislator aimed at introducing more freedom to dispose of one's estate but forced heirship rules survived the political discussions.
The new succession law rules also aim at minimising estate disputes, including by allowing succession pacts.
Belgium has strict forced heirship rules, limiting the freedom to dispose by gifts or wills. These rules only apply if Belgian succession law applies (in accordance with the European Succession Regulation), in other words, when the deceased had his or her established residence in Belgium and did not choose his or her nationality's law.
Forced heirship rules protect the deceased's children and surviving spouse by entitling them to a 'reserved portion' of the fictitious hereditary mass. This mass is composed of the assets of the deceased upon death as well as all lifetime gifts made by the deceased, irrespective of when or to whom these gifts were made.
As from 1 September 2018, the new succession law rules provide that gifts are valuated at the time of the gift and this value increases every year (indexation). However, when usufruct is retained, valuation occurs at the time when the donee becomes the full owner of the gifted assets, being generally at the time of decease of the donor. Debts upon death are deducted from the fictitious hereditary mass.
The portion reserved for descendants amounts to half of the fictitious hereditary mass, irrespective of the number of children. In the presence of a surviving spouse, the entitlement of the children can be limited to the bare ownership.
The surviving spouse can claim the usufruct on the family home (including the household effects) or usufruct on half of the fictitious hereditary mass. In the presence of heirs entitled to a reserved portion, the surviving spouse's reserved portion will burden the disposable portion.
Forced heirship rules are mandatory. In principle, it is not possible to waive such rights during the life of the testator, except for a future spouse if one of the spouses has children from a previous relationship. Such waiver must be done in a marital agreement and cannot extend to the usufruct of the family home (including the household effects). As from 1 September 2018, it will also be possible for heirs entitled to a reserved portion to explicitly waive their forced heirship right on the gifted assets by way of a punctual succession pact.
iii Modernisation of the Belgian Civil Code
As part of the overall project to modernise the Belgian Civil Code, a new Book 8 on Evidence has been inserted22 and a new Book 3 compiles the property law rules.23 The latter will enter into force on 1 September 2021. Relevant changes are to be noted regarding the relationship between bare owners and usufructors (sharing of costs, e.g., for maintenance and repair) and regarding, for example, terms of building and leasehold rights.
Wealth structuring and regulation
A holistic approach to wealth planning should comprise planning for income, wealth, transfer, gift as well as inheritance taxes.
The increased tax charge on investment income has prompted some high net worth individuals to explore income tax planning opportunities by making optimal use of favourable regimes such as for private investments in 'Private Privaks'. This Belgian investment vehicle allows individual shareholders to invest in unquoted companies. In 2018, the regulatory and tax status of the Private Privak was amended24 with the goal of creating a regulatory framework and to provide tax benefits that are comparable to similar non-Belgian investment vehicles. For example, it is now no longer prohibited for a Private Privak to exercise control over the company in which it invests. It is expected this will remove a major roadblock for the use of the Private Privak in a private equity environment. Also, from a tax perspective, additional advantages are provided: within limits, capital losses on shares will result in a tax reduction for PIT purposes.25 Moreover, an exemption applies from movable withholding tax on dividends that are paid out by a Private Privak to the extent that they result from capital gains on shares. Next, subject to certain conditions, a reduction in withholding tax is available for the other dividends paid out by a Private Privak.
Increasingly, high net worth individuals are also exploring investments via (normally taxed) companies. As indicated above, the Belgian corporate income tax regime has recently been subject to a major reform providing for lower tax rates (25 per cent from 2020) and a 100 per cent exemption for qualifying dividends and capital gains (but with the conditions for capital gains being tightened).
IHT can, in principle, easily be avoided through lifetime gifts of movable assets. In most cases, parents attach several conditions and modalities to such gifts. For example, they retain the usufruct, which entitles them to the dividends and the voting rights of the shares. Specific clauses can also reduce the rights of the children to transfer the gifted assets (for example to their spouse) or can provide for a fideicommissum de residuo resulting in a gift of the remainder of the assets when a child-beneficiary deceases (for example, to his or her siblings or to his or her children). Such clauses usually seek tax advantages as well as protection against dissipation of the family wealth.
Prior and complementary to the gift, the family business is often 'wrapped' via a controlling vehicle such as a Dutch (or Belgian) Stichting Administratiekantoor (STAK). The shares of the family business are first contributed to the STAK in exchange for depositary receipts (certificates). These depositary receipts are then gifted. From a tax point of view, the certificates are assimilated to the shares and the STAK is tax-transparent (if certain conditions are met).
The STAK enables the implementation of family governance and a well-planned transition to the next generation. In some cases, the STAK rules are embedded in a family constitution. A STAK can be a more sophisticated alternative to a shareholders' agreement. Recent changes to the Cayman tax legislation could, however, hinder the use of a Dutch STAK.
Belgium has no proper trust legislation. A foreign trust can, nevertheless, be recognised by Belgian international private law provisions.26
A Belgian settlor who sets up a foreign trust must respect the Belgian forced heirship rules. If these rules are infringed, heirs protected by forced heirship rules can claim a reduction of the assets settled into the trust, even if the applicable trust law would provide otherwise. The execution of the judgment will, however, be regulated by the law of the jurisdiction where the trust was created or the trust assets are located, and that jurisdiction may provide for the non-enforceability of a Belgian court award.
For Belgian PIT purposes, the Cayman tax rules will apply to trusts and their Belgian settlors and beneficiaries.27 As already mentioned, founders and other residents involved with trusts have a reporting obligation in their Belgian PIT return.
There is no specific legislation relating to trusts for Belgian IHT or gift tax purposes. According to the tax authorities, distributions upon or after the decease of a Belgian resident settlor may be subject to IHT (with the rate depending on the degree of kinship between the settlor and the beneficiary).
The use of trusts in a Belgian context is generally not recommendable from a tax perspective.
A Belgian foundation is a separate legal entity designated to pursue a specific disinterested (altruistic) purpose,28 such as charitable giving, art collections or historic buildings. The foundation cannot provide any economic benefit to its founders and directors or to any other person, unless this is required for the realisation of its purpose.
The rules pertaining to the Belgian foundation have recently been inserted in the new Belgian code of companies and associations, in force as from 1 May 2019.
A Belgian private foundation is, in principle, not designed for passing on wealth to the next generation. It is, however, often used to support family members across generations (education, medical costs, etc.) and for making distributions in the context of that purpose.
Belgian private foundations are generally subject to an annual tax of 0.17 per cent on the value of their assets.29
Transfer of movable assets to a private foundation can be tax-free in the case of a transfer of movable assets if the donor survives the gift for a minimum of three years after making a gift. The Flemish government has announced its intention to increase this minimum period from three to four years. If a gift is made before a Belgian notary public (or otherwise subject to mandatory registration) or if an exempt gift is voluntarily registered gift tax is due (at a flat rate).
In principle, Belgian private foundations are subject to legal entities' income tax (LEIT)30 and not to corporation tax. LEIT has a more limited tax base than corporation tax but – as is the case in PIT – the Cayman tax also applies to entities subject to LEIT.
Belgian residents involved with foundations may be subject to the Cayman tax. This is the case if the relevant foundation qualifies as a legal arrangement. This was ab initio the case for the Liechtenstein Stiftung and various non-EEA foundations. However, since the amendment of the EEA Decree in 2018, many other foundations now risk qualification as legal arrangements. Based on a literal reading of the law, this could also be the case for the Dutch foundation as it is not subject to Dutch income tax subject to certain conditions.31
There is no specific legislation dealing with the IHT consequences of a Belgian or foreign foundation. The Federal Ruling Commission has issued rulings on the tax treatment of distributions out of a Belgian private foundation. These rulings concern both PIT and IHT.
In these cases, the Ruling Commission decided that distributions to the beneficiaries were not subject to income tax or IHT.32 The Belgian Federal Ruling Commission applies similar principles to foreign (including Liechtenstein) private foundations.33
Since 18 August 2015, the Flemish region has established its own ruling commission. This Flemish Ruling Commission has issued a ruling on the IHT consequences of a Belgian private foundation34 and of a Liechtenstein Stiftung.35 The outcome of this last ruling is diametrically opposed to the ruling issued by the Federal Ruling Commission. From a legal perspective, the Flemish ruling appears wrong because it is founded on very debatable grounds. Nevertheless, the Court of First Instance of East Flanders (Ghent) has come to the same (equally wrong) conclusion36.
If Belgian inheritance rules apply, protected heirs can claim a reduction of the assets transferred to a Belgian of foreign foundation, if and to the extent this transfer is regarded as a gift.
iv Belgian partnerships
A Belgian partnership has no legal personality and is tax-transparent for Belgian income tax purposes.
It is now regulated by the new Belgian code of companies and associations, in force as from 1 May 2019.
For estate planning purposes, the partnership is often used to 'wrap' assets (for example, a portfolio of investments or a classic car collection) prior to a lifetime gift. The partnership agreement is then drafted in such a way that the donor or donors can maintain control notwithstanding the gift of their shares in the partnership.
Traditionally, a Belgian partnership is very discrete entity as it can be created by private deed with few publication or reporting obligations. The latter has changed and will probably continue to change owing to tightened accounting obligations, compulsory registration in the UBO Register and in the Belgian Crossroads Bank of Enterprises.
Outlook and conclusions
In Belgium, as in many other jurisdictions, high net worth individuals struggle with the tension between legitimate privacy concerns and the trend towards ever-increasing transparency.
Moreover, the instability of the Belgian tax climate exemplified by the rapid increase of the tax burden on investment income and the utter chaos and uncertainty created with the introduction of the Cayman tax have certainly rendered Belgium less attractive for high net worth individuals.
The main issue with Belgium's current tax system is that it is the product of one short-sighted partial amendment upon another whereby the legislator seeks to promote or discourage perceived desirable or undesirable tax behaviour.
The lack of vision and stability and the increasing tendency to introduce tax rules with retroactive effect until 1 January of the relevant tax year imply that it is increasingly difficult to navigate the Belgian tax maze.
These challenges are obviously not unique to high net worth individuals. However, the size and complexity of their wealth make them more likely to encounter these problems.
By the same token, even today, with the possibility to realise tax-free capital gains in the context of the ordinary management of one's private wealth and the absence of a general wealth tax, Belgium remains a location that is definitely worth considering for a high net worth individual seeking to relocate.
In stark contrast with the bric-a-brac status of the Belgian tax system is the recent update of Belgian succession law, matrimonial law, property law and company law. The modernisation of the legislation in these key domains offers high net worth individuals residing in Belgium exiting opportunities to organise or reorganise their personal life and affairs, their wealth and the transfer thereof.
1 Alain Nijs and Joris Draye are partners at NijsDraye | Attorneys at Law.
2 Article 5, Belgian Income Tax Code.
3 Article 2, Section 1, paragraph 1 Belgian Income Tax Code.
4 Article 6, Belgian Income Tax Code.
5 The Cayman tax was introduced by the Program Law of 10 August 2015 (Belgian Official Gazette, 18 August 2018) and was amended by the Law of 26 December 2015 regarding measures to reinforce job creation and spending power (Belgian Official Gazette, 30 December 2015) and the Program Law of 26 December 2017 (Belgian Official Gazette, 29 December 2017). Next to these changes in the law, the scope of the Cayman tax was also amended by a number of Royal Decrees (see below). The Cayman tax also applies to Belgian legal entities' income tax but not in Belgian corporate income tax.
6 Article 2, Section 1, paragraph 14 Belgian Income Tax Code. The notion of the 'founder' of a legal arrangement is very broad. It encompasses, among others, settlors of trusts, individuals who have transferred assets to a legal arrangement and individuals holding legal or economical rights in a legal arrangement. Moreover, the capacity of the founder is – upon the decease of a founder – passed on to his or her heirs, unless such heir can prove that he, she, or his or her own heirs, will not at any time or in any way benefit from any advantage from the legal arrangement.
7 Article 2, paragraph 13, Belgian Income Tax Code.
8 Royal Decree of 23 August 2015 replaced by Royal Decree of 18 December 2018 (Belgian Official Gazette, 29 December 2015) and last amended by Royal Decree of 21 December 2018 (Belgian Official Gazette, 3 December 2018).
9 Royal Decree of 23 August 2015 (Belgian Official Gazette, 28 August 2015) amended by Royal Decree of 6 May 2019 (Belgian Official Gazette, 16 May 2019).
10 An entity that is not a legal arrangement cannot form part of a chain.
11 Article 2, Section 1, paragraph 13/2, paragraph 13/3 and paragraph 13/4, Belgian Income Tax Code.
12 Position of the Flemish tax authorities (Vlabel) No. 15123 dated 2 September 2015. Even though IHT does not contain the legal presumptions contained in the PIT legislation, the Flemish tax authorities take the position that there is rebuttable presumption of residency in Belgium if the deceased was registered in the National Register of Individuals. It is unclear if this also applies to expats.
13 Introduced by the Law of 7 February 2018 (Belgian Official Gazette, 9 March 2018).
14 Program Law of 25 December 2016 (Belgian Official Gazette, 29 December 2016).
15 Law of 23 March 2019 on the introduction of the Companies & Associations Code (Belgian Official Gazette, 4 April 2019), Royal Decree of 29 April 2019 (Belgian Official Gazette, 30 April 2019 – Edition 2).
16 Law of 25 December 2017 on the corporate income tax reform (Belgian Official Gazette, 29 December 2017.
17 Directive 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No. 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC; Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU.
19 Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and repealing Directive 77/799/EEC.
20 Law of 22 July 2018 (Belgian Official Gazette, 27 July 2018).
21 Law of 31 July 2017 (Belgian Official Gazette, 1 September 2017).
22 Law of 13 April 2019 (Belgian Official Gazette, 14 May 2019); entry into force on 1 November 2020.
23 Law of 4 February 2020 (Belgian Official Gazette, 17 March 2020).
24 Law of 26 March 2018 and Royal Decree of 18 May 2018.
25 Circular letter 2020/C/14 of 22 January 2020.
26 Articles 122 and 123 of the Belgian International Private Law Code.
27 See above.
28 Law of 2 May 2002 amending the Law of 27 June 1921 regarding Non-Profit Associations, International Non-Profit Associations and Foundations.
29 Articles 147–160-bis, Belgian Inheritance Tax Code.
30 Articles 220–226, Belgian Income Tax Code.
31 See above.
36 Court of First Instance of East Flanders (Ghent) of 3 June 2019.