The new Dutch tax treaty with Belgium

29th July 2003, Comments 0 comments

For people living in the Netherlands and working in Belgium, the tax rules are set to change in 2003. The disappearance of the "frontier worker" ruling is the biggest difference between the old and new treaties. Rina Driece of Loyens & Loeff explains.

 

TAXES - THE CURRENT SITUATION
(until the end of 2002)

The main rule contained in the current tax treaty between the Netherlands and Belgium is that if a resident of the Netherlands works (partially) in Belgium, then, under certain conditions, he will owe income tax over the related wages in Belgium.

If the work he carries out is not for a Belgian employer nor carried out for an employer who is established in the Netherlands and has a fixed location/centre of activities in Belgium, then he only owes income tax if he worked there in excess of 183 days in a calendar year. (There are separate rules for those who work on board a ship or airplane in international traffic or on board ships used for transportation on inland waterways, as well as for managers, board members and supervisory directors of companies).

When filing an income tax return in the Netherlands, the employee must include the wages earned in Belgium as part of his worldwide income, over which the Netherlands may levy income tax. When determining the amount of Netherlands income tax due, the Netherlands tax is reduced because of the tax to be paid in Belgium. This tax exemption must be claimed on the Netherlands income tax return.

The tax relief is granted in accordance with the method of proportionality (in the form of an exemption under maintenance of the progressive tax rate). This means that for purposes of determining the Netherlands tax rate that is applicable to the income that is taxed in the Netherlands, the income that was subject to taxes in Belgium is taken into account.

Subsequently, a deduction is allowed on the amount of income tax due in the Netherlands proportionate to the portion of income over which Belgium was allowed to levy taxes. This means that, in effect, a tax relief is granted in the Netherlands to the average tax rate that applies to the worldwide income taxed in the Netherlands.

Due to the fact that income that is earned in Belgium is (partially) tax exempt from Netherlands income tax, the benefits resulting from tax deductions claimed on the Dutch tax return might (partially) disappear or must be postponed (postponement ruling).

At the moment, there is a case before the European Court of Justice against the Netherlands regarding the deductibility of deductible items in the case of natural persons whose taxation has largely been granted to another country. It is stated that the method of proportionality, applied by the Netherlands, is in violation of European Law. If the European Court of Justice agrees with this, then the benefit of certain deductible items will not be lost and can, depending on the situation, be enjoyed with immediate effect.

Frontier Workers Ruling; tax duty in the Netherlands

The current tax treaty between the Netherlands and Belgium contains a so-called Frontier Workers Ruling. In this ruling, it has been determined that employees who live in the Netherlands border area (Limburg, Brabant, Zeeland and a small area of South Holland, around Dordrecht) and who work in the Belgian border area (also a predetermined area, including Antwerp) are subject to taxes in the Netherlands, if certain conditions are met.

This way they benefit from the fact that the tax rates are lower in the Netherlands and that they can make full use of the deductible items, whereby the mortgage interest concerning the "own home” generates the most important deductible item. TAXES - THE NEW SITUATION
(as it is expected as of 1 January 2003)

New tax treaty, the Frontier Workers Ruling ceases to exist

It is expected that on 1 January 2003 a new tax treaty between the Netherlands and Belgium will enter into force. It that moment it is not yet clear whether they can make this date. If not, it will probably enter into force on 1 January 2004.

The main rule for employees will not change. Dutch residents who work in Belgium will owe Belgian income tax in connection with work carried out in Belgium. The Netherlands will retain the right to levy taxes if the employee did not spend more than 183 days during a calendar year in Belgium, and there is no Belgian employer nor a Dutch employer who has a fixed location/centre of activities in Belgium. (With the same exceptions regarding employees on ships, airplanes, inland waterway ships and the management of a company).

However, the new tax treaty no longer has a Frontier Workers Ruling. This means that residents of the Netherlands who work in Belgium and who are to be considered frontier workers (until the end of 2002) and therefore, contrary to the main rules, pay taxes in the Netherlands, will have to pay taxes in Belgium over their salary as of the year 2003.

The same applies to any other compensation or wages in kind they might receive from their employer, based on the applicable rules in Belgium. Monthly Belgium advance levies will have to be imposed on the wages to be paid out, in anticipation of the final taxes due in Belgium.

This could mean quite a fiscal setback for those Dutch employees who, under the current treaty, work in Belgium as frontier workers. The tax rates are higher in Belgium, and they cannot or hardly make use of the deductible items in the Netherlands.

The latter due to the fact that the wages earned in Belgium are subject to an exemption based on the method of proportionality, resulting in no or lower taxable income in the Netherlands from which to deduct the items. Some deductible items can be “saved” until the employee enjoys a taxable income in the Netherlands again (based on the above “postponement” ruling).

The deductible items can also be passed on to a partner who is earning an income, though if the partner’s income is lower, deduction might take place at a lower rate, which might be disadvantageous after all.

Compensation rulings

The disappearance of the Frontier Workers Ruling with the introduction of the new tax treaty could mean a setback for those employees who are working as frontier workers under the current treaty. In order to compensate for this, the new treaty contains two compensation rulings, which are as follows:

  • (1) Compensation ruling for “new” frontier workers

    Actually, there will still be “frontier workers” under the new treaty, only no longer in the former sense. The term now covers all employees who live in the Netherlands, but work across the border, in this case, in Belgium. They no longer have to work in the Dutch border area, or work in the Belgian border area. The simple fact that they owe income tax in Belgium over (a portion of) their wages is sufficient for them to qualify for the compensation ruling.

    >TAXES - THE CURRENT SITUATION
    (until the end of 2002)

    The main rule contained in the current tax treaty between the Netherlands and Belgium is that if a resident of the Netherlands works (partially) in Belgium, then, under certain conditions, he will owe income tax over the related wages in Belgium.

    If the work he carries out is not for a Belgian employer nor carried out for an employer who is established in the Netherlands and has a fixed location/centre of activities in Belgium, then he only owes income tax if he worked there in excess of 183 days in a calendar year. (There are separate rules for those who work on board a ship or airplane in international traffic or on board ships used for transportation on inland waterways, as well as for managers, board members and supervisory directors of companies).

    When filing an income tax return in the Netherlands, the employee must include the wages earned in Belgium as part of his worldwide income, over which the Netherlands may levy income tax. When determining the amount of Netherlands income tax due, the Netherlands tax is reduced because of the tax to be paid in Belgium. This tax exemption must be claimed on the Netherlands income tax return.

    The tax relief is granted in accordance with the method of proportionality (in the form of an exemption under maintenance of the progressive tax rate). This means that for purposes of determining the Netherlands tax rate that is applicable to the income that is taxed in the Netherlands, the income that was subject to taxes in Belgium is taken into account.

    Subsequently, a deduction is allowed on the amount of income tax due in the Netherlands proportionate to the portion of income over which Belgium was allowed to levy taxes. This means that, in effect, a tax relief is granted in the Netherlands to the average tax rate that applies to the worldwide income taxed in the Netherlands.

    Due to the fact that income that is earned in Belgium is (partially) tax exempt from Netherlands income tax, the benefits resulting from tax deductions claimed on the Dutch tax return might (partially) disappear or must be postponed (postponement ruling).

    At the moment, there is a case before the European Court of Justice against the Netherlands regarding the deductibility of deductible items in the case of natural persons whose taxation has largely been granted to another country. It is stated that the method of proportionality, applied by the Netherlands, is in violation of European Law. If the European Court of Justice agrees with this, then the benefit of certain deductible items will not be lost and can, depending on the situation, be enjoyed with immediate effect.

    Frontier Workers Ruling; tax duty in the Netherlands

    The current tax treaty between the Netherlands and Belgium contains a so-called Frontier Workers Ruling. In this ruling, it has been determined that employees who live in the Netherlands border area (Limburg, Brabant, Zeeland and a small area of South Holland, around Dordrecht) and who work in the Belgian border area (also a predetermined area, including Antwerp) are subject to taxes in the Netherlands, if certain conditions are met.

    This way they benefit from the fact that the tax rates are lower in the Netherlands and that they can make full use of the deductible items, whereby the mortgage interest concerning the "own home” generates the most important deductible item. TAXES - THE NEW SITUATION
    (as it is expected as of 1 January 2003)

    New tax treaty, the Frontier Workers Ruling ceases to exist

    It is expected that on 1 January 2003 a new tax treaty between the Netherlands and Belgium will enter into force. It that moment it is not yet clear whether they can make this date. If not, it will probably enter into force on 1 January 2004.

    The main rule for employees will not change. Dutch residents who work in Belgium will owe Belgian income tax in connection with work carried out in Belgium. The Netherlands will retain the right to levy taxes if the employee did not spend more than 183 days during a calendar year in Belgium, and there is no Belgian employer nor a Dutch employer who has a fixed location/centre of activities in Belgium. (With the same exceptions regarding employees on ships, airplanes, inland waterway ships and the management of a company).

    However, the new tax treaty no longer has a Frontier Workers Ruling. This means that residents of the Netherlands who work in Belgium and who are to be considered frontier workers (until the end of 2002) and therefore, contrary to the main rules, pay taxes in the Netherlands, will have to pay taxes in Belgium over their salary as of the year 2003.

    The same applies to any other compensation or wages in kind they might receive from their employer, based on the applicable rules in Belgium. Monthly Belgium advance levies will have to be imposed on the wages to be paid out, in anticipation of the final taxes due in Belgium.

    This could mean quite a fiscal setback for those Dutch employees who, under the current treaty, work in Belgium as frontier workers. The tax rates are higher in Belgium, and they cannot or hardly make use of the deductible items in the Netherlands.

    The latter due to the fact that the wages earned in Belgium are subject to an exemption based on the method of proportionality, resulting in no or lower taxable income in the Netherlands from which to deduct the items. Some deductible items can be “saved” until the employee enjoys a taxable income in the Netherlands again (based on the above “postponement” ruling).

    The deductible items can also be passed on to a partner who is earning an income, though if the partner’s income is lower, deduction might take place at a lower rate, which might be disadvantageous after all.

    Compensation rulings

    The disappearance of the Frontier Workers Ruling with the introduction of the new tax treaty could mean a setback for those employees who are working as frontier workers under the current treaty. In order to compensate for this, the new treaty contains two compensation rulings, which are as follows:

    • (1) Compensation ruling for “new” frontier workers

      Actually, there will still be “frontier workers” under the new treaty, only no longer in the former sense. The term now covers all employees who live in the Netherlands, but work across the border, in this case, in Belgium. They no longer have to work in the Dutch border area, or work in the Belgian border area. The simple fact that they owe income tax in Belgium over (a portion of) their wages is sufficient for them to qualify for the compensation ruling.

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