Belgium: A new obligation to declare foreign private wealth structures

Transcription

1 Belgium: A new obligation to declare foreign private wealth structures Gerd D Goyvaerts* Introduction Over the last decade Belgium has been evolving from a country with a fairly beneficial tax system for high net worth individuals (HNWI) to an increasingly unfriendly tax environment for the rich and wealthy. Continuously over the recent years tax rates on passive income such as interest and dividends have been increased, and historic loopholes in the tax system which were knowingly tolerated by the tax authorities have been closed or made subject to severe anti-money laundering regulations with a worldwide scope of application. All this is due to a socialist inspired policy where the levy of (high) taxes has been chosen as the means to fight budget shortages over budget saving measures and state management reorganisation measures as has been requested and promoted by the European Council. The latest invention of the State Secretary for the coordination of the fight against tax fraud is an obligation for founders and beneficiaries of private wealth structures to report these in their annual tax return by a check the box procedure. After the reporting duty regarding the existence of a foreign bank account (introduced in 1996) and of a foreign life insurance policy (introduced in 2012), the legislator has introduced a new reporting duty for the personal income tax return. The law on various provisions of 30 July adds a new paragraph to Art 307 of the Belgian Income Tax Code (ITC), under which Belgian resident taxpayers will be required to report in their annual tax return that they (or their spouse or children) are the founder or are by any means (potentially) a beneficiary of a legal structure. Article 2 of the ITC extensively describes what is meant by the terms legal structure or founder of a legal structure and is aimed mainly at private wealth structures such as trusts, stiftung, anstalt, offshore limited companies and the like. * Tax Partner with Tiberghien lawyers, Antwerp and Brussels. This article will also be published in the 2014/1 issue of the Journal of International Tax, Trust and Corporate Panning, Jordans, London, UK; # Belgian Official Journal 1 August 2013.

2 Anti-fraud plan The new reporting duty is an extension of the anti-fraud action plan that the Belgian Government proposed in May That plan already provided for the introduction of a reporting duty by the Belgian resident taxpayer of the existence of foreign private wealth structures and suggests, with reference to the Dutch APV separated private assets scheme, the possibility of a transparent taxation approach towards certain foreign companies and structures (controlled foreign companies (CFC) type of taxation). No modification to the taxable base yet The new reporting duty does not (yet) provide for a modified tax regime or for a transparent taxation treatment of foreign private wealth structures. It is envisaged however that the government will implement such modifications in the future, and a bill of law has been prepared in November 2013 and has been extensively debated amongst the political parties involved, yet not been approved so far. It is at present unclear if this bill of law will still be approved and become applicable for income earned in 2014 (tax assessment year 2015), and therefore to be reported in the 2015 tax return. Albeit that as time went by, this has become rather unlikely. It is important to note in this respect that there is a general election in Belgium in May 2014, which may shift the present political balance to a government that may be less in favour of unbalanced taxation, albeit that such hopes may be a too an optimistic conclusion. No prohibition According to the explanations given by government in the preparatory works to the new law, it is not intended actually to prohibit the use by Belgian taxpayers of legal structures like trusts and foreign foundations. Taxpayers may legally continue setting up and investing assets in and via trust like structures, provided they respect all legal, regulatory and substance (over form) requirements that these structures require. Taxpayers should however ensure that the legal relationship is not a sham, and that the entities established abroad are actually and effectively governed/managed from abroad. Obviously the transferred assets need to be acquired legally and subjected to tax, hence the importance of a possible voluntary disclosure procedure that could have been applied under the law of 27 December 2005, which was applicable until 31 December Needless to say that even without any amendment to the law in providing for taxation by transparency, there a weakness for the taxpayer may hide. Tax authorities rightfully have been challenging the use and abuse of foreign organised private

3 wealth structures, mainly in offshore locations, where it has not always been possible to prove that such structures were effectively managed from the location/country where they allegedly had registered their statutory seat. In addition, when the ultimate beneficial owners exercise undue influence over the manner in which the assets are managed, the structure may be vulnerable for attack under a type of sham doctrine proper to the state of residence of the ultimate beneficial owner taxpayer, in our case Belgium. In Belgium such sham is a fraudulent offence and can be subject to criminal prosecution. It is therefore of the utmost importance that not only the local regulatory requirements are respected, yet that any (direct) undue influence by the Belgian based ultimate beneficial owner(s) is avoided, and that at all times it can be demonstrated that effective management of the structure is located at the proper place. It can be expected that the present jurisprudence on the subject, both Belgian and at the European and international level, will focus further on this specific aspect. Evidently, in order to be able to challenge a specific structure, the tax authority needs to be aware of its existence. It is here that the new declaration obligation comes in. The new reporting duty is in the context of the move towards transparency and far- reaching automatic exchange of financial data, as provided in the European Mutual Assistance Directive and the Savings Directive. 2 In this context, the draft modification of the Savings Directive expressly provides that the exchange of information between Member States in the future will also apply for interest payments to intermediary structures and special-purpose vehicles. 3 The last phase of the Belgian voluntary disclosure initiative, which ran until the end of 2013, can be seen as part of the government's initiative, intended finally to convince those having illicitly structured assets to submit a return for voluntary disclosure and pay past taxes and fines due, this prior to Under this new reporting duty, government wants to provide the tax administration with a clear visibility of assets which have been transferred by taxpayers to foreign private wealth structures. Oddly enough, the relevant new legislation does not contain any reference to Art of the ITC (previously Art 250 ITC62), which has existed since This Article provides a specific procedure for tax assets held in certain private wealth structures by means of a tax transparent approach (CFC approach). 2 Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and repealing Directive 77/799/EEC (2011) OJ L 64/1. Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments (2003) OJ L 157/38. 3 Commission, COM(2008) 727 final, 2008/0215 (CNS), Proposal for a Council Directive amending Directive 2003/48/EC on taxation of savings income in the form of interest payments.

4 Definition of a legal structure The targeted legal structures are on the one hand defined as legal relationships based on the Anglo-Saxon trust and similar structures in new Art 2, 13 a) ITC, and on the other hand as foreign legal entities in the new Art 2, 13 b): (1) The term legal relationship is inspired by the definition of a trust as used in the Belgian Code on International Private Law (BIPL), but is not limited to the trust concept alone. Specific examples of structures (other than trusts) have however not been mentioned in the parliamentary preparatory documents. (2) Foreign legal entities which are not subject to income taxes in their country of residence or which are subject to a significantly more favourable tax regime regarding the revenue from capital and movable goods (analogous to Art ITC), are being targeted. In order to qualify under the new obligation, the legal rights, shares, units or depository receipts issued in return for the economic rights of such entities are to be held wholly or partially by a Belgian tax resident. Parliamentary preparation for the new law refers, by means of example, to a Liechtenstein anstalt or a Bahamas LLC. The very broad formulation of the concept of legal structure is intended to include various entities of all sorts. The specifically targeted countries and legal forms will be specified by a Royal Decree still to be issued. To this end, Annex 1 of the aforementioned proposal of amendment of the Savings Directive shall serve as inspiration for the drafting of the list. It remains subject to debate whether the said Royal Decree will be exhaustive or not, ie that it will not be sufficient for a specific country or entity not to be listed, for it to be excluded from the obligation to be declared. The Minister of Finance has issued a comment in this respect which however seems to indicate that if a certain type of company is not mentioned in the list of the Royal decree, then no reporting duty would have to be fulfilled. 4 In any event, the Royal Decree will be revised annually. The preparatory works to the law state that transformations of movable property according to which the value of the assets held by the taxpayer is not reduced by the mere transfer to a legal relationship ; and therefore, an actual consideration for transferred goods is received, are not targeted. This however does not entail that the mere contribution in kind or in cash to a foreign company in exchange for shares, would not be targeted. Foreign companies do not qualify as a legal relationship under the new Art 2, 13 a) of the ITC yet are seen as foreign legal entities under the new Art 2, 13 b) Question by Mrs Veerle Wouters (nr 20716).

5 Entities such as the (Belgian) civil partnership or a Belgian private foundation would in any case not need to be disclosed based on this justification, as the founder receives share units or certificates. In case of the Belgian private foundation, this entity is subject to its own tax base. It would nevertheless have been better if this exception regarding transformations were to be included directly in the legal provisions and would apply to both types of legal structures. Founders and (potential) beneficiaries versus trustees The law introduces a broad definition of the status of founder (including the actual founder, but also the client if the structure was established by a third party, and including the heirs of a deceased founder). Who exactly is meant by a (potential) beneficiary in any way of a legal structure, however, is not explained in the law. The law does not foresee any obligation or liability towards the trustees and/or members of the board of directors or Vorstand of the specific trust or entity. This seems logical since one assumes that all of these structures are foreign, and it may not be self-evident for Belgium (unlike for the USA under the Foreign Account Tax Compliance Act) to uphold tax or legal obligations for persons and entities resident abroad. Nor can the trustees or alike be held liable for breach of the reporting duty by the settlors and/or beneficiaries. Needless to say that many beneficiaries will want to co-ordinate with their trustees to verify which beneficial entitlement they have in order to confirm what the likely tax consequences may be upon declaration. Failure in complying with the reporting duty is an offence under the tax code, punishable under art 445 of the BITC with a fine varying from to 1, If tax were to be evaded in the process, then a tax increase varying from 10% up to 200% can become due. Entry into force in tax year 2014 The new rules apply as from assessment year 2014 (income year 2013). Just as was the case for disclosure of the existence of a foreign insurance policy, the law does not clarify at what time the legal structure, of which the taxpayer is the founder or beneficiary, must exist. In any event, the measure is aimed to target all structures, which exist or have existed in the course of the calendar year It can therefore be expected that the administration, by analogy with Art para 2 ITC, will state as a guideline that all the structures which existed at any time in 2013 must be declared. This means that the dissolution of any legal structure before the end of 2013 will not have avoided the reporting duty.

6 Conclusion By rendering the declaration of the existence of legal structures obligatory in the annual tax declaration, taxpayers are forced by legal obligation to disclose these structures in the course of Non-disclosure can be perceived as fraudulent behavior. Those taxpayers who have questions regarding the adequacy of the legal structure of which they are a founder or beneficiary, therefore only have limited time left to have their files examined by their counsel. Gerd D Goyvaerts, [email protected] Tiberghien Lawyers, Minerva Building, Karel Oomsstraat 47A B.5, BE-2018 Antwerp,