Changes to tax credits and double taxation relief

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Executive summary

Three important developments are likely to take place in 2014 affecting internationally mobile personnel in Belgium.

  • The Belgian tax authorities will be submitting proposals regarding the personal tax credits for non-residents. As a consequence, expatriates benefiting from the Belgian special tax regime, may lose their tax credits, should they spend more than 25% of their time abroad during a given tax year.
  • A new double tax treaty has been signed between China and Belgium that imposes communal Belgian taxes on Chinese sourced professional income earned by Belgian tax residents.
  • Following a ruling from the European Courts of Justice, Belgium must amend its approach to personal tax credits for Belgian tax residents working in the European Economic Area.

Key developments

Changes to tax credits for non-residents and expatriates benefiting from the Belgian special tax regime

As part of the 6th Belgian State Reform, certain aspects of the Belgian personal income tax code will be transferred to the jurisdiction of the regions (Brussels Region, Flemish Region and Walloon Region). The legislative implementation of this “fiscal regionalization” will take place in the coming weeks, with significant changes to the Belgian Income Tax Code in its current form.

One of these changes relates to tax credits, which will be split between federal and regional tax credits. The tax credits for real estate expenses (such as mortgage deductions and investments for fire and burglary prevention) and service vouchers will become regional. All the other credits, including the standard personal tax credit and the credits for dependents, remain within a federal jurisdiction.

On the basis of these changes, the Belgian government will draft new rules to determine which Belgian non-residents will qualify for federal and/or regional tax credits, and under which circumstances.

Previously, the Belgian Income Tax Code recognized three categories of non-residents which determined the applicable tax credits:

  • Non-resident taxpayers who live with their family in Belgium (non-residents with abode – in most cases individuals benefitting from the Belgian special tax regime for expatriates).
  • Non-resident taxpayers who earn at least 75% of their income in Belgium (assimilated non-residents).
  • Other non-residents.

The first two categories were entitled to broadly the same tax credits as resident taxpayers. However, the third category could only claim certain credits related to specific investments (such as pension savings and service vouchers), but were not allowed to claim standard personal tax allowances or credits on behalf of their children or non-working spouse.

With the introduction of the new regional tax credits scheme, the Belgian government is required to ensure that non-resident taxpayers from an EEA Member state have access to both federal and regional tax credits provided they earn the majority of their income in that region (the so-called 75% de minimis threshold).

Therefore, the Belgian government will introduce categories based on both EEA citizenship and the source (the majority of) professional income. Whether or not the individual lives in Belgium will no longer be relevant. As such, the new non-resident categories will consist of:

  • Non-resident taxpayers, resident in the EEA, who earn at least 75% of their income in Belgium. These individuals fall under the scope of European 75% rule;
  • Non-resident taxpayers, resident outside the EEA, who earn at least 75% of their income in Belgium. These individuals cannot claim the application of the European 75% rule, but fall back on the previous category of assimilated non-residents;
  • Other non-residents.

Again, this implies that the previous category of non-residents with abode will be abolished.

An important consequence of these changes is that the expatriates living with their family in Belgium may lose the benefit of the tax credits, unless they have more than 75% of their income taxable in Belgium.

Additionally, the non-residents who earn 75% of their income in Belgium but are not EEA-resident and who had previously benefited from the real estate tax credits will lose these deductions.

The estimated additional tax that may become due on the basis of these proposals will vary depending on the expatriate’s personal circumstances and qualifying expenses, but is likely to range between EUR 2,000 and EUR 7,500 for the majority of the cases.

The legislation incorporating these changes is currently still in pre-draft and has not yet been submitted to Parliament. However, the changes will likely enter into force for the 2014 income year.

New Double Tax Treaty between China and Belgium

A new treaty for the avoidance of double taxation between Belgium and the People’s Republic of China has been ratified by the Federal and Regional Parliaments and came into force on 29 December 2013. The provisions will apply from 1 January 2014.

The new treaty has some minor changes and updates. However one particular revision is relevant to Belgian resident employees who also have Chinese source income. Under the new treaty, such individuals will be subject to Belgian communal taxes on their Chinese source employment income. This was not the case under the previous treaty.

In practice, this will result in an additional tax of between 0% and 4.5% on the income earned in China, which was not the case under the previous treaty.

New European case law: The “Imfeld”-case

On 12 December 2013, the European Courts of Justice issued a decision in the case “Imfeld vs. Belgium”.

To summarize, Belgium uses the exemption with progression method for providing relief for double taxation. There is credit available for dependent children, which in the case of married couples, is allocated to the partner with the highest income. If the latter is working abroad, the deduction will be applied on all income, including the income which is in a later state exempt. As such, the exemption with progression method leads to a loss of the available credit, in comparison to cases where the partner with the highest income earns all of their income from Belgium sources.

The Court ruled that where the Belgian legislation excludes these couples from a tax advantage which they would have received had the partner with the highest income earned this from Belgium sources, this leads to prohibited discrimination. Based on older case law (the case “De Groot”), the Belgian government had already implemented measures to compensate for the loss of tax credits in such a cross-border situation. This was achieved by awarding compensation for lost credits where the overall tax burden of a Belgian taxpayer working abroad exceeded that of a Belgian taxpayer in the same situation but working in Belgium.

The court ruled that this compensation was insufficient and that the overall tax burden should not be taken into consideration whilst applying for a tax advantage.

It should be noted that the draft legislation regarding fiscal regionalization (see topic 1 above) will also amend the Belgian legislation to bring it in line with new case law. If the current draft is maintained, the exemption for foreign source income will be applied before the deduction of tax credits, therefore resolving the loss of tax credits. However, the new legislation will only enter into force for income earned from 1 January 2014. Therefore, affected Belgian cross-border workers are advised to assess whether their personal situation is similar to that in this case and introduce a tax claim for income years 2012 and 2013, to avoid any such claims being time barred.

Next steps

Employers should review the effect of these new provisions on assignment processes and costs. We strongly recommend that companies seek further assistance to analyze the loss of certain tax deductions for their expat population or the additional taxes due for Belgian outbound assignees to China. In addition, it should be assessed whether further procedural actions need to be taken in respect of Belgian resident employees working in the EEA.