21/08/18

Belgium’s Rich Liquidate Investment Funds as Tax Break Ends

(Bloomberg BNA) -- Wealthy individuals in Belgium are increasingly liquidating a popular Luxembourg investment fund amid pending law changes meant to discourage stashing wealth offshore.

As a result of the changes, set to take effect retroactively from Jan. 1, 2018, Belgian tax residents will become liable for taxation on revenue earned from offshore public and institutional undertakings for collective investments. These include, for instance, a U.S. limited liability company and a Luxembourg civil-law partnership. There may also be impacts for a Luxembourg-based investment fund known as SICAV SIF—a specialized investment vehicle that is operationally flexible and fiscally efficient and which may be sold within the EU or to investors abroad.

Such entities will become transparent for tax purposes. The tax administration will treat the revenue earned as being earned by Belgian tax residents—subjecting it to local taxation. That means dividend distributions by SICAV SIFs to Belgian owners would be hit with the country’s 30 percent withholding tax.

“I saw a client this morning who wanted to simply liquidate his family’s SICAV SIF because it is no longer appealing from a Belgian tax perspective,” said Denis-Emmanuel Philippe, a lawyer at the Bloom law firm. He added that many of Belgium’s wealthy families have invested their savings in SICAV SIFs.

Belgium announced the changes in a June 8 press release, though it hasn’t released the official text. The adjustments are contained in two draft Royal Decrees amending Belgium’s 1992 Income Tax Code.

Belgium’s council of ministers has already approved the changes, which will enter into effect as soon as they are published in Belgium’s Official Government Gazette. There might still be amendments to the decrees as the Council of State, which advises the government on draft legislation, has yet to issue its recommendations.

Cayman Tax

Now, investment products that don’t generate taxable income, like Belgian investment-linked life insurance plans and Luxembourg SOPARFI financial holding companies, will likely become more popular, Philippe said.

In 2015, Belgian lawmakers introduced the Cayman Tax regime, meant to discourage Belgian residents from stashing their wealth in offshore legal entities such as trusts and low-tax or zero-tax foundations.

The regime requires tax residents to disclose income from such offshore entities in their tax returns and makes them liable for whichever Belgian tax regime would normally apply to the obtained revenue.

Second Expansion

In another key expansion of the regime’s scope, local Belgian taxes will now apply to revenue from European Economic Area entities that aren’t sufficiently taxed in the country where they are located.

Under the proposal, Belgian tax residents would have to disclose any entity held in an EEA country that isn’t subject to income tax or that is subject to an income tax representing less than 1 percent of its taxable income, practitioners told Bloomberg Tax.

“This is a very difficult rule that will result in an enormous amount of uncertainty and doubt and be burdensome to taxpayers because they’ll have to determine every year whether or not the entity is subject to the 1 percent rule,” said Julie Permeke, a senior associate at Baker & McKenzie CVBA/SCRL, who has seen the text of the draft decree.

Under the rules applicable until now, just a handful types of EEA entities fell under the scope of the Cayman tax, she told Bloomberg Tax.

“Both the tax administration and taxpayers very clearly knew: ‘If I have one of these entities I will fall under the scope of the Cayman tax,’” she said Aug. 17. These entities were: a Liechtenstein Stiftung trust, which is a legal entity without shareholders whose beneficiaries enjoy assets or income in line with the founder’s will; a Liechtenstein “Anstalt” company, which is a halfway house between a corporate body and a foundation, that may or may not have members; a Luxemburg “société gestion patrimoine familiale,” or family wealth management office, and a Luxemburg “fondation patrimoniale,” or heritage foundation.

Instead, a general criterion is now being introduced, said Alain Huyghe, partner at Baker & McKenzie CVBA/SCRL and head of tax practice group of the Brussels office.

“And how you should calculate this 1 percent will always be a difficult issue that will depend on the type of income generated by the entity,” he said Aug. 17.