Belgian residents preparing their tax returns for income year 2005 who wish to obtain a full or partial exemption of foreign-earned income will now need to have proof at hand, as we reveal.

Be prepared for requests to come as late as two years after the actual trips.

It is no secret that Belgium taxes employment income at high rates; the combined social security and income tax rates quickly go above 50 percent.  It has been popular planning for some years for Belgian residents who have an international role to receive part of their remuneration from the foreign countries where they work ('multiple employment structures'). 

The structure is put in place where the remuneration paid abroad can be taxed in the source country at lower rates than in Belgium, meaning that the total amount of taxes due is reduced.  Putting such a structure in place is only feasible where there is a double tax treaty between Belgium and the source country, so that the income is taxed in one—the lower tax— place.

In theory, foreign source income should only be considered tax-exempt in Belgium provided that the conditions mentioned in the treaty are met.  However, in practice, provided that the taxpayers report their foreign source remuneration in the box 'foreign earned income' of their resident tax return, the Belgian tax authorities generally exempt the foreign source income without verifying whether the conditions mentioned in the tax treaties to exempt the income are met.

Proof required

The Belgian tax authorities want to put an end to this practice of 'automatic' exemption.  They have issued a new Administrative Circular letter recommending local tax administrations to verify carefully whether the conditions to obtain an exemption are fulfilled.

As a starting point, the circular states the general principle that Belgian resident taxpayers are taxable in Belgium on their worldwide earned and unearned income, including the foreign-earned income.  Obtaining an exemption for this foreign income – based on the application of a double tax treaty – is to be seen as an exception to the general rule of full taxation in the state of residence.

Based on the above, if a taxpayer wants to obtain a full or partial exemption of foreign-earned income, they will now have to provide a detailed request in an annex to the tax return, making reference to the applicable double taxation treaty. Merely reporting the foreign income in the appropriate section of the income tax return will no longer be sufficient to obtain the exemption.

The circular takes immediate effect, meaning that the requirement already applies to taxpayers preparing their Belgian tax returns for income year 2005 (due July 2006).

The circular also puts the burden of proof onto the taxpayer, in the event of an investigation by the Belgian tax authorities, to show that the conditions for obtaining the exemption are fulfilled.  The fact that the foreign-earned income has been taxed abroad will no longer suffice to claim the exemption. On the other hand, it is not required that the income be taxed abroad in order to claim an exemption, unless the applicable double taxation treaty contains a 'subject-to-tax' clause.

In practice, it will be crucial for an employee to show evidence of physical presence abroad for business purposes as well as the existence of an employment relationship abroad.  For someone holding a director's mandate, on the other hand, the attendance list of the board meetings might be appropriate proof. We believe that the circular does not oblige the taxpayer to add all documents of proof when filing the tax return.  The documents would only have to be provided in the event of a tax audit. 

HR alert

It is of course likely that requests for assistance to gather appropriate documents will make their way to human resources departments. The HR team should be prepared for such requests to come as late as two years after the actual trips – at which point documents might well have been archived.  The easier that the HR department can make it to find the relevant data in an employee's file, the smoother the process will run. 

With an employee's personal tax liability at stake, any individual subject to an audit will obviously be anxious to get the matter resolved in their favour by providing the necessary proof.  In any cases where the individual is paid a net income, and the company is responsible for paying all taxes, the pressure will of course be on the company to resolve the matter without a large additional tax bill.

We would also advise HR departments to consider alerting the relevant individuals now to the change by the Belgian tax authorities, and that the likelihood of an audit is much greater.  Some might even want to conduct their own reviews into whether the requirements of the treaty are met in a particular case. This will hopefully avoid unpleasant surprises if and when an individual’s tax return is audited.

July 2006

Joël De Maere d'Aertrycke is a Tax Director in Deloitte's Belgium office. He can be contacted at jdemaeredaertrycke@deloitte.com

Subject: Tax in Belgium, Belgian residents working abroad