The times, they are a-changing......

Author:

Rik Deblauwe and Anouck Biesmans
Tiberghien
Brussels

Trusts and foundations are not mentioned in the Belgian Civil Code, and, therefore, have been neglected in Belgian civil law for a long time. The word fiducie, taken from Roman law, is mentioned in nineteenth-century commentaries, but Belgian lawyers felt rather uncomfortable with the concept – like most civil law lawyers at the time.

Nevertheless, the validity of common law trusts was recognised by the Belgian courts in 1935, and was never really questioned, although there was very little case law. When the Belgian Private International Law Code was introduced in 2004, trusts were explicitly mentioned. Public foundations had existed under Belgian law since 1921, and private foundations were introduced into Belgian law in 2002.

The Belgian tax status of a trust is still uncertain, as is the status of trust distributions, both for inheritance tax, and for income tax.

In 2004, the Belgian tax administration decided, in relation to Belgian inheritance tax, that a trust is a stipulation by the grantor for a third party. The consequence is that discretionary distributions are liable to inheritance tax only at the moment of distribution. In this context, "discretionary" means "a distribution decided solely by the trustee". Such a distribution can occur many years after the death of the grantor. In the meantime, no inheritance tax is due.

More recently, the Belgian Tax Ruling Commission has issued a number of rulings, deciding that:

• An estate held by a non-discretionary trust is liable to inheritance tax at the moment of death of the grantor (R 700.112). The Court of First Instance of Brussels confirmed this point of view in its judgment of April 22 2010 (Rec.gén.enr.not. 26.245).
• Distributions of capital from trusts are not liable to income tax (R 700.112)
• Non-discretionary distributions from trusts are liable to income tax (R 700.112)
• Distributions from an irrevocable discretionary trust (that is "distributions that fall from the sky") are not liable to income tax (R 900.329).

Meanwhile the Court of Appeal of Brussels held that the lower inheritance tax rate for legacies to non-profit organisations also applies to legacies to UK charitable trusts (judgment of September 9 2009, Fiscoloog 1213/6).

These are the building blocks we have to work with.

In the author's opinion, it could be argued that a trustee, for Belgian inheritance tax purposes, could be considered as administrator of the assets. The beneficiaries are the real economic owners of the trust's assets. In the case of discretionary trusts, however, this ownership can change at the discretion of the trustee. However, the trust's assets do not belong to the trustee, unlike assets held by insurance companies. An insurance company can use any of its assets to pay pensions, but a trustee has a legal duty to keep the trust assets separated.

This would mean that a transfer into trust is not a stipulation for a third party, but a gift to the beneficiaries. It would also mean that, if the last domicile or residence of the grantor was in Belgium, inheritance tax would be due if he dies within three years of making the gift, and that no inheritance tax would be due if he dies more than three years later.

As to income tax, distributions from a discretionary trust or distributions of the assets held by the trustee are not liable to tax. Only non-discretionary distributions of the income that the trustee receives on the estate held in trust are subject to income tax.

Whether a foundation should be treated the same way as a trust for tax purposes is still the subject of discussions. It is true that a foundation has a legal personality, which a trust does not. It could be argued that a transfer to a foundation is a gift to the foundation, and that no Belgian inheritance tax would be due on it if the donor dies more than three years after making the transfer.

The only way to obtain legal certainty in a specific case is to ask for a ruling.

Anouck Biesmans joined Tiberghien in 2007. She specialises in estate planning and has published several articles on aspects of the subject. Anouck has represented clients before the Court of Justice of the European Union

She holds a Bachelor's in Law and a Master's in Taxation Law from the Catholic University of Leuven and was an Erasmus exhange student at the University of Rouen in 2005.

She speaks Dutch, English and French.