Post departure “tax on tax”
Under Belgian tax law, an expatriate employee’s post departure remuneration is taxable in Belgium if one of the following two conditions is met:
- The remuneration is borne by a Belgian resident employer, or
- The remuneration is borne by a foreign employer, but related to employment duties performed in Belgium by a recipient who was present in Belgium for more than 183 days in a calendar year.
This requirement can result in a potentially large administrative burden as it can mean tax returns having to be filed on behalf of individuals whose Belgian assignment may have ended a number of years previously. In order to try to alleviate this burden, the Belgian tax authorities have historically conceded an administrative tolerance that limits it somewhat. However, the accepted tolerance has tended to fade away over time because the local tax controllers were no longer comfortable maintaining it with no legal basis.
A recent Parliamentary question raised to the Minister of Finance has however confirmed the acceptance of the tolerance. Whilst this is a welcome development, it does not mean that the position becomes legally certain but it should reflect the current views of the Belgian Central Tax Administration.
When the employee is tax equalized back to their home country, the Belgian tax burden is paid by the employer on behalf of the employee, and this is also regarded as taxable compensation for the employee. To account for the tax due on this additional compensation the employer can either gross up the Belgian tax, or use alternative methods such as rolling over the Belgian tax burden in order to partially defer it. When the roll over method is used, this will result in a trailing tax liability. Since Belgian tax balances are collected via the assessment process, and this is issued two years after the year in which the income arises, if there is a balance due in Belgium picked up by the employer, this can result in additional income to be reported in Belgium for a relatively long period of time after the end of the expatriate’s assignment. It is worth noting that rollover may also be beneficial from a cost perspective, as it will result in the rolled over tax being liable to the lower tax bands available in the years into which it is deferred in to.
It is also worth considering that the rolling over of taxes in Belgium may potentially result in taxes being levied in another country, if an individual is tax resident in a country that taxes on a worldwide income basis. Further guidance on this should be sought if the rollover method is being considered.
In theory, each post departure tax payment causes a new taxable benefit in respect of the individual that it relates to for the year of payment of a Belgian tax balance. This could result in a very drawn out tax rollover and the subsequent trailing Belgian tax liability. It may also result in a tax arising in other countries if the individual is now tax resident there and the tax jurisdiction levies taxes on a worldwide income basis.
To avoid the “snow ball effect” of post departure reporting of the trailing tax liability, the Belgian tax authorities have conceded an administrative tolerance. In accordance with this tolerance, any post departure balance due would be reportable on behalf of the individual or the first two years following the end of their Belgian assignment. Any trailing liability thereafter would instead be treated as a disallowable corporate expense (therefore generating a tax charge of 33.99%), rather than prompting an individual filing requirement. This administrative tolerance has been recently confirmed by the Minister of Finance during Parliamentary questions. However, such a confirmation does not provide legal certainty but should reflect the position of the Central Tax Administration on the issue.
We note that the answer provided by the Minister during Parliamentary questions, is not aligned with the particularly robust guidance previously provided by the same Minister of Finance, which gave much more rigid and quasi-automatic application of the so-called “secret commission” tax (309%) to be applied notably on any employment income that is not correctly reported at a corporate level via the annual salary forms. For further details please refer to our Alert of 11 January 2012.
If a Belgian trailing tax balance is to be treated as disallowable expense rather than an employee’s benefit, it would therefore not normally need to be reported as a taxable benefit by the employee.
The “disallowed expense” methodology to restrict the “snow ball effect” of post departure reporting to two years is at this stage still considered as an administrative tolerance rather than a legal certainty. As such, whilst it can be followed for the time being, it is liable to potentially be changed in the future.
In light of the recent budget and the subsequent tightening of the corporate reporting requirements in respect of employment income, employers should re-evaluate the tax reimbursement techniques that they currently use in Belgium. Where the rollover methodology will continue to be used, employers should consider strengthening their position by applying for a binding ruling from the Belgian tax authorities as to how post-departure “tax on tax” situations should be treated.