Belgian Constitutional Court partially annuls Cayman Tax 2.1

On 18 September 2025, the Belgian Constitutional Court annulled four key provisions of the existing Cayman Tax rules.

The Belgian Cayman tax rules apply since more than a decade now and have been significantly extended through the Program Law of 22 December 2023 (so-called ‘Cayman tax 2.1). A number of these extended rules have been presented to the Constitutional Court. We hereafter summarize the findings of the Court and the expected impact thereof.

Taxpayers affected by the below annulled provisions may benefit from increased legal certainty and should reassess their structures and filing positions. As most of the annulled provisions only entered into force since income year 2024, not all related tax assessments will yet be received by the taxpayers at this time. In case the tax assessment is however affected by the court’s decision, it is advisable the taxpayer files his administrative appeal within one year.

The Cayman Tax rules include a so-called substance exclusion that stipulates that no look-through taxation applies if the legal construction exercises a genuine economic activity. The Cayman Tax 2.1 reform clarified that “economic activity” should be understood as “the offering of goods or services on a specific market”. Hence, only commercial activities are included in the definition of “economic activity”.

The Constitutional Court considers that this definition is too narrow and that limiting the definition of “economic activity” to market-based offerings is incompatible with EU freedoms of establishment and capital (Articles 49 and 63 TFEU). 

A limitation of the EU freedoms would only be acceptable according to the Constitutional Court if there is a wholly artificial arrangement set up with the purpose of avoiding taxes. Moreover, the mere fact that a legal construction manages assets or derives income solely from asset management is by itself not sufficient to conclude that there is a wholly artificial arrangement.

As a result, the Court annuls the restrictive definition of “economic activity” (article 5, §3, first paragraph, c) of the BITC 1992). However, the exclusion of activities solely consisting of managing private wealth is upheld as this follows logically from the concept of “economic activity” according to the Court. Therefore, in case a legal construction is used for the management of one’s private assets, the substance exclusion cannot be relied upon. 

From a practical perspective this means that for a number of active holding companies, the substance exclusion could be relied upon and that looking through taxes paid in the past could potentially be reclaimed.

Note however that legal constructions that do not meet the subject-to-tax test but that operate a qualifying “economic activity” still need to be reported in the founder’s Belgian personal income tax declaration and are therefore known by the Belgian tax Authorities. A strong file evidencing the “economic activity” will therefore remain essential.

The Constitutional Court upholds the exit tax in principle, finding it justified to prevent tax avoidance and ensure a fair allocation of taxing rights. The exit tax applies when the legal construction is transferred outside Belgium or if a Belgian taxpayer’s place of residence is moved abroad. It is moreover required for the application of the exit taxation that there is an artificial arrangement.

The Court annuls the exit taxation (Article 18, §1, 3°/1 BITC 1992) insofar as it allows Belgium to tax undistributed profits earned by a legal construction during a period when the founder did not qualify as a Belgian tax resident. The possible taxation of reserves built up prior to the entry into force of the Cayman Tax remains in place.

This annulment puts boundaries to the application of the exit taxation notably for individuals who qualify as Belgian tax residents for a limited period of time and who would be taxed upon their relocation outside Belgium on revenues of their legal construction generated during a period when they were not tax resident in Belgium. 

The Constitutional Court upholds the Cayman Tax’s application to legal constructions held indirectly through intermediate entities, even if those entities are regularly taxed companies.

The Court considers that this is consistent with the regime’s goal of taxing artificially separated wealth, regardless of how many layers are involved. The Court also emphasizes that:

• Taxpayers transparently taxed on income of a legal construction may still claim an exemption upon distribution of such income;
• There is no ‘right to tax neutrality’ when interposing regularly taxed companies;
• The taxpayer’s intent in using such structures is irrelevant.

This decision means that a Cayman Tax analysis remains necessary also for indirect shareholdings until the lowest tier of investment and that practical objections in respect to applying such extended scope of application have not been accepted by the Court. In practice, many minority shareholders do not have access to all information required in order to conduct a Belgian Cayman tax analysis until the lowest tier of investment. This remains a significant burden to apply Cayman Tax rules in a correct manner, knowing that regularly taxed intermediate entities cannot serve as “blockers”.

An exemption from look-through taxation applies when the income of a legal construction is taxed at the level of a Belgian entities pursuant to Belgian CFC rules. A petitioner argued that this discriminates founders whose structures were taxed under similar non-Belgian CFC regimes.

The Constitutional Court agrees that this exemption of look-trough taxation under Cayman tax rules cannot be limited to Belgian CFC pick-up taxation. The Court therefore annuls the exemption (article 5, §3, first paragraph, c) BITC 1992) insofar as it prevents founders from proving that income was taxed (and can therefore be exempt from Cayman taxation) pursuant to foreign CFC rules similar to Belgian CFC rules.

We presume that similar CFC rules means CFC rules under either model A or model B of the ATAD. However, it would be helpful if the legislator could clarify this in the new amended legislation.

Collective investment funds (CIFs) are generally excluded from Cayman tax. However, this exclusion does not apply when more than 50% of a fund is held by one person or by related persons, so-called “fonds dédiés”. This anti-abuse measure was installed to prevent abuses of the exemption from Cayman tax applicable to collective investment funds which in principle require multiple investors.

The Constitutional Court acknowledges the legitimacy of setting a participation threshold but considers that the 50% limit is disproportionate. Not all CIFs with a majority ownership held by related parties constitute abuse.

The Court therefore annuls the irrefutable character of this exclusion (Article 2, §1, 13°/1, second paragraph BITC 1992) and requires that taxpayers have the opportunity to demonstrate that the third-party minority shareholder is not holding the interest for mere tax reasons. 

We expect that the legislator will include a refutable presumption in the existing exclusion rule.

The Court rejects several additional objections in relation to the following items: 

• The refutable presumption that UBO-listed individuals qualify as founders of the legal construction;
• The denial of (the current) capital gain tax exemptions for normal management of the private estate for the taxation of the Cayman Tax of capital gains realized by legal constructions;
• The taxation of dividends distributed by former legal constructions provided that the said construction qualified as legal construction in (at least) one of the 3 previous accounting years.

The Constitutional Court’s judgment significantly reshapes the Cayman Tax 2.1 framework. 

Taxpayers affected by the annulled provisions may benefit from increased legal certainty and should reassess their structures and filing positions accordingly. EY Law can help you revisit your filing position and defense files.