Before the reform, an individual pension promise was funded in one of two ways:

1. The company could book internal provisions.

2. The company could purchase insurance coverage against the death/retirement of its director ('key man insurance'). The company would generally purchase sufficient insurance to cover the cost of the pension promise. Upon the death/retirement of the director, the company would receive the payout from the insurance contract, which it then used to pay the pension.

The new law permits a company to conclude a contract with a third-party pension provider (typically an insurance company), stipulating that benefits will be paid directly to the director. Such an arrangement gives increased certainty to the director of receiving the supplementary pension benefits regardless of the company’s financial position.

The contributions paid by the company to the third-party provider will be considered as a deductible cost for the company (within certain limitations). Importantly, the contributions will not be considered as taxable income to the director.

If the pension is financed through a third-party pension provider (such as an insurance company or pension fund), a tax of 4.4 percent is due by the company on the contributions paid into the pension. The 4.4 percent premium tax is not due on a pension funded through internal provisions.

Lump-sum distribution of pension benefits – as opposed to payment of an annuity – can qualify for favourable tax treatment in Belgium under certain circumstances. Qualification for favourable taxation will now be affected by the way that the pension has been funded.

1. For a pension promise financed through internal provisions, the pension capital will be taxed at 16.5 percent federal tax if paid: Upon retirement as from 60 (the normal retirement age in Belgium is 65); or upon death.

   Municipal taxes are also due on the lump sum; they can increase the overall rate from 16.5 percent up to about 17.655 percent.

   If the payment is made while the director is still receiving remuneration from the company in his capacity as self-employed director, the pension payments will be taxed as ordinary income and at the regular income tax rates (up to 54percent approximately).

2. For a pension promise financed by payments to a third-party pension vehicle of which the director is the beneficiary, the preferential rate will be applicable if the lump sum payment is made: Upon the director’s retirement (in principle, at the age of 65); or upon or after the director’s sixtieth birthday; or upon death.

   Thus, the major difference is that the 16.5 percent rate will be applicable for pensions funded through a third-party pension vehicle if the lump sum is paid after the director has reached the age of 60, regardless of whether he or she continues to receive remuneration from the company.

If the director has left Belgium prior to receiving the pension payment, it is possible that no taxes will be due on the additional pension.

Most treaties for avoidance of double taxation to which Belgium is party provide that pensions (other than social security benefits) are taxable only in the country of residence of the beneficiary.

Whether and how the Belgian pension capital should be taxed will thus depend on the domestic tax rules of the country of residence. It is possible that only a very small amount of tax (or even no tax at all) will be due in the home country in connection with the Belgian pension benefits.

Such planning can be particularly relevant for mobile executives. The director should seek tax advice in his or her new country of residence before receiving the pension payment, to see what taxation rules will apply.

Joël de Maere d'Aertrycke is a director in the Deloitte IAS practice in Brussels. He can be reached at 32.2.600.68.62 or jdemaeredaertrycke@deloitte.com.