17 Feb January 28 2021, A Belgian Constitutional Court Decision
Director, Trust Administration and Wealth Management
Last December’s Newsletter focused on the relevance of using a Canadian trust as part of wealth and estate planning involving individuals residing in civil law jurisdictions.
It notably examined the case of Belgium and, more specifically, a 2020 decision by the Tribunal de première instance francophone de Bruxelles (Brussels Francophone Court of First Instance) confirming that the Belgian “Cayman Tax” regime which transparently taxed, on an annual basis, income generated in a Canadian trust in the hands of a “settlor” residing in Belgium (notwithstanding Canadian tax already paid on that same trust’s income) was contrary to the provisions of the Canada-Belgium Income Tax Convention. Indeed, the treaty exclusively grants to Canada the power to tax the income received by a Canadian resident trust that is not distributed to one or several Belgian beneficiaries.
As a result of this decision, “A Belgian resident, who is considered a “settlor” of the trust by way of a domestic fiscal fiction, cannot be taxed on income received by another “person” within the meaning of the Canada-Belgium Income Tax Convention”.
A decision recently handed down by no less than the Belgian Constitutional Court, the highest court in Belgium, further nullifies the effects of the Belgian Cayman Tax with respect to Canadian trusts.
Under a provision of the Cayman Tax that was challenged by a Belgian resident and which was the subject of the decision, trust distributions of accumulated income not previously subjected to the above-mentioned transparency tax, should be considered and taxed as “dividends” once distributed in Belgium, notwithstanding the fact that the same amounts may have already been previously taxed in the country of which the trust is a resident.
Under the Cayman Tax, an entity other than a trust that has a legal personality (e.g., a corporation) could be exempted from this distribution tax if, according to the law in the country where the entity is established, it is subject to a tax rate that is equal to or greater than 15%. However, entities that have no legal personality (e.g., trusts) could not benefit from that exception, although they may pay a tax greater than 15% in their country of residence, as is the case in Canada.
This resulted in a discriminatory treatment that the Court acknowledged and nullified. In fact, the Court noted that, given the Belgian legislator’s objective to fight tax evasion, it is unlikely that it wanted to treat the beneficiaries of income distributed by entities that do have a legal personality (such as corporations) more favourably than the beneficiaries of trusts that do not have a legal personality.
Consequently, the effects of the Cayman Tax provisions with respect to trusts distributions are nullified in the case of a Canadian-resident trust that is subject to taxation greater than 15% on its worldwide income.
This decision again demonstrates the relevance and usefulness of using a Canadian trust in an international context.