The Belgian Council of Ministers of 28 March 2003 has approved a bill of law to enact an amendment to the double tax convention between Belgium and Germany for the avoidance of double taxation (further DTT). Amongst others, the amendment to the DTT abolishes the frontier worker regime. A frontier worker residing in Germany and working in Belgium will no longer be taxed in Germany, but in Belgium (except, amongst others, if the so-called 183-days rule is applicable). Carlos Gouwy of PricewaterhouseCoopers explains.

The current situation

According to article 15, paragraph 1 of the current double tax convention between Belgium and Germany for the avoidance of double taxation which was concluded on 11 April 1967 (further DTT), the remuneration of a German tax resident related to the duties performed in Belgium in the capacity of employee is in principle taxable in Belgium.

There are some exceptions to this principle. According to the so-called 183-days rule mentioned in article 15, paragraph 2 DTT, the remuneration relating to the duties performed in Belgium is not taxable in Belgium if the three following conditions are simultaneously met:

• The employee has worked less than 183 days – including normal labour interruptions (e.g. sickness days, weekends, holidays, etc.) – in Belgium during the calendar year; and
• The remuneration is paid by or on behalf of an employer, who is not a resident of Belgium; and
• The remuneration is not borne as such by a permanent establishment or fixed base of the German employer in Belgium.

According to article 15, paragraph 3, 2nd DTT, there are separate rules for employees working on board of a ship or airplane operated in international traffic or on board of a ship engaged in inland waterways transport. The remuneration for these duties is deemed to relate to duties exercised in the state were the place of effective management of the enterprise is situated and is consequently taxable in the latter state.

Furthermore, the current DTT contains a so-called ‘Frontier Workers Ruling’ in article 15, paragraph 3, 1st DTT. It states: “the salaries, wages and other remuneration received by people working in the border zone of a contracting state and who permanently reside in the border zone of the other contracting state, where they normally return to each day, are only taxable in this other state”.

The border zone is demarcated by the frontier and an imaginary line traced out 20 km of the border. The cities and villages crossed by this imaginary line are also part of the border zone.

Due to this frontier workers ruling, a frontier worker residing in Germany and working in the Belgian border zone is taxable in Germany if he normally returns each day to his permanent home in Germany, irrespective of the nationality of the frontier worker. This frontier worker regime is not optional, but mandatory if the conditions are met.

The remuneration of a Belgian frontier worker working in the German border zone remains vice-versa taxable in Belgium.

To remedy difficulties for border workers who occasionally have to work outside the border zone or who do not return to their home country every day, the Belgian and the German tax authorities have agreed a ’45 days arrangement’.

According to this arrangement, the capacity of cross-border worker is still allowed to a cross-border worker of one of the two countries who does not return to his permanent home every day, or who performs work for his employer outside the border zone in the other country for a period not exceeding 45 workdays per calendar year.

The German frontier worker has to report the remuneration for the duties performed in the Belgian border zone in his German resident income tax return. Because this remuneration is taxable in Germany, he can fully benefit from the tax deductible items in Germany. Furthermore, all benefits in kind (such as company car and stock options) have to be valued according to German income tax standards.

The Belgian employer does not have to deduct Belgian wage withholding tax from the remuneration if a proper border worker certificate for the exoneration is available (this certificate has to be approved by the Belgian and the German tax authorities).

If the border worker only works in Belgium, he will in principle be submitted to Belgian social security contributions.

The future

The Belgian Council of Ministers of 28 March 2003 has approved a bill of Law to enact an Amendment to the DTT, which was signed on 5 November 2002.

The Belgian tax authorities have published information with respect to the Amendment to the DTT, which they expect to be applicable on remuneration paid as from 1 January 2004. In order to be applicable as from 1 January 2004, Belgium and Germany must exchange forms of enactment in 2003 (by 30 November 2003 at the latest).

Amongst others, the Amendment to the DTT abolishes the frontier worker regime. A frontier worker residing in Germany and working in Belgium will no longer be taxed in Germany, but in Belgium (except, amongst others, if the before-mentioned 183-days rule is applicable).

Belgian tax resident

For former Belgian frontier workers (Belgian tax resident) working in the German border zone, the abolishment of the frontier workers regime can cause a cash flow problem.

Assuming that the Amendment is applicable as from 1 January 2004, the frontier worker should be aware that, in 2004 or 2005, he will have to pay the Belgian income tax liability relating to his income of 2003 to the Belgian tax authorities. This obligation will arise in a year when the taxpayer has already been subject to German wage withholding taxes.

Therefore, in order to spread the payment of the Belgian and the German income tax liability, the Belgian tax authorities recommend that the frontier workers pay the estimated Belgian income tax liability for income year 2003 already, during 2003, by means of tax prepayments (‘versements anticipés’ / ‘voorafbetalingen’). Moreover, the frontier worker will benefit from a tax 'bonification' (a small tax relief) for the tax prepayments made.

A tax resident of Belgium has to report his worldwide remuneration in his resident income tax return. As a consequence, the remuneration that is taxable in Germany has to be reported in the Belgian resident income tax return.

The remuneration that is taxable in Germany (according to the DTT) will be exempt with progression in Belgium (this means that the exempted German income is taken into consideration in order to determine the tax rates that are applicable to the other income that is taxable in Belgium).

Furthermore, the frontier worker should be aware that, although his remuneration for the duties performed in Germany will be taxable in Germany, he will be liable to Belgian municipal taxes on this exempted remuneration as from 1 January 2004 (as if the income was not exempt in Belgium).

Due to the fact that the remuneration that is earned and that is taxable in Germany is exempt from Belgian income tax, the benefits resulting from tax deductions might partially or completely disappear (for example mortgage tax relief and maintenance allowances).

German tax resident

What are the practical concerns for a former German border worker who becomes taxable in Belgium?

It has to be investigated whether the former border worker can qualify for the Belgian expatriate tax regime. The special tax regime can apply under certain conditions to non-Belgian executives who exercise exclusively activities that require a special knowledge and responsibility, to foreign specialized personnel whose recruitment in Belgium is extremely difficult if not impossible and to foreign researchers.

The eligible persons must have been sent to Belgium by a foreign enterprise to work temporarily in one or several branches of that enterprise, or in one or several companies controlled by that enterprise. Or they must have been sent to Belgium by a foreign enterprise that is part of an international group, to work temporarily in one or more Belgian companies, which are part of that group, or in an office of control and coordination set up within an international group.

Alternatively, they have must have been directly recruited abroad by a Belgian company affiliated to a foreign company, or by a Belgian enterprise that is part of an international group.

The taxable income of the qualifying foreign executives does not include the reimbursement of expenses attributable to the employer – in the this case related to additional expenses incurred by the foreign executive directly as a result of his temporary stay in Belgium – and the remuneration related to professional services performed outside Belgium.

To be able to apply the expatriate tax regime immediately after the abolishment of the frontier workers rule, we recommend to apply for the expatriate tax status with the competent tax director’s office in Brussels within six months from the moment that the frontier workers rule is abolished.

Belgian wage withholding tax will be due on the Belgian source remuneration of the former frontier worker, if the salary is paid by a Belgian employer or if the former frontier worker is working in a Belgian permanent establishment of his foreign employer.

According to the Belgian tax authorities, the highest wage withholding tax rates (as per table III for Belgian wage withholding tax purposes) are applicable. As a consequence, no tax-free allowances for married or for single persons - with or without children to support - are considered in the wage withholding tax. Furthermore, the marital quotient – such as the possibility to allocate, under certain conditions, a part of the remuneration to the spouse to obtain a lower income tax burden – is not applicable.

The former German frontier worker has to file a Belgian non-resident income tax return in due time (probably between 1 September and 31 December of the year following the income year). In the final non-resident income tax assessment, the tax-free allowances and the marital quotient will be considered if at least 75 percent of the yearly remuneration of the previous frontier worker is taxable in Belgium.

In his Belgian non-resident income tax return, all benefits in kind will have to be valued according to Belgian standards (such as company car, stock options, and other such benefits). The local taxes for non-residents of Belgium amount to 6.7 percent (to be calculated on the principal amount of income tax).

Due to the fact that the remuneration that is earned and that is taxable in Belgium is exempt from German income tax, the benefits resulting from tax deductions in Germany might partially or completely disappear.

October 2003

Carlos Gouwy, Senior Consultant at PricewaterhouseCoopers Tax Consultants in Belgium, can be contacted at carlos.gouwy@pwc.be