New regional tax system impacting both resident and non-resident tax payers
On 22 April 2014, the Belgian Parliament passed a law passing greater fiscal autonomy to the Regions, with specific implications for individual income tax. This is part of a wider reform generally referred to as the “Sixth Belgian State Reform”.
The impact in the field of personal income taxes can be summarized as follows:
- Levy of a regional additional tax under the jurisdiction of the Brussels, Flemish or Walloon Region for resident tax payers;
- Shift of specific tax reductions, currently under the Federal authority, towards the Regions;
- Application of the Regional tax system to specific groups of non-resident tax payers.
This law, together with the Special law of 6 January 2014 enables the tax bullet points components of the Sixth Belgian State Reform to enter into force for 2014.
Levy of a regional additional tax under the jurisdiction of the Brussels, Flemish and Walloon Region
Under the current tax system, personal income taxes are imposed solely at the Federal and Municipal levels. Now an additional Regional tax will be installed as of income year 2014 for resident (and under certain conditions non-resident) tax payers. Unlike the Federal taxes, which are calculated on taxable income, the Regional taxes are calculated on a “preliminary” tax liability. This system is comparable to the current calculation method for Municipal taxes.
Under the current conditions, such an additional tax should however, not result in an increase of the overall tax liability
To realize this, the Regions will initially impose a tax equal to the amount of taxes relieved at the Federal level. Going forward, the Regions can decide individually and autonomously to adjust, within certain limits, the regional additional tax percentage and differentiate as such their fiscal policy compared to the other Regions.
Critical under the new methodology is the localization of a tax payer in one of the three Regions. For resident tax payers, the law foresees in a localization criteria based on their “fiscal residence” on January 1st of the tax year (i.e. year following the year in which the liability arises). This principle confirms the current approach towards residency as applied by the Belgian tax authorities and mainly focuses on the location of a resident’s abode.
Shift of specific tax reductions from the Federal level towards the Regions
Following the transfer of competences, the Regions will receive full authority on a specific number of “tax incentives”. Regional authorities may grant tax reductions for the following types of item:
- Loans for a tax payer’s own dwelling;
- Expenses for energy saving;
- Service vouchers and local employment agency vouchers (PWA-ALE);
- Expenses for protection of a private home against fire and burglary;
- Contributions to the maintenance and renovation of protected monuments and buildings.
The scope and conditions to benefit from the above tax reductions as currently defined remain unchanged until the Regions may have amended or implemented their own legislation in this respect. Other deductions, including the standard deductions and tax deductions for dependents, remain under the Federal jurisdiction.
New categorization of non-resident tax payers
The shift of specific tax reductions to the Regions created the need for a new categorization of non-resident tax payers. Under EU regulations, the Belgian government is required to ensure that resident tax payers from another EEA member state, earning the majority of their income in Belgium, have access to the same tax benefits as Belgian resident tax payers.
The old categorization, mainly based on the concept of having an abode in Belgium, has been abolished and the new categories of non-residents are now defined as follows:
- Non-resident tax payers, resident in the EEA, who earn at least 75% of their income in Belgium;
- Non-resident tax payers, residing outside the EEA, who earn at least 75% of their income in Belgium;
- Other non-residents.
Although the taxation of non-resident tax payers remains in principle a Federal competence, the rules of the Regional tax systems will also be applicable to the first category of non-residents to ensure this group is entitled to the same tax benefits as resident tax payers. Tax payers in the scope of the second and the third category, cannot claim any regional tax deduction although the second category can still claim some Federal tax benefits such as a tax deduction for alimony payments and some tax reductions with respect to the expenses for mortgage loans.
Consequently, individuals entitled to full tax benefits based on the condition of having an abode in Belgium under the old categorization, are not necessarily entitled to the same benefits under the new rules. Losing these benefits could impact an individual’s final tax liability. A fourth category of non-resident tax payers, providing pro rata tax benefits to residents of the Netherlands, Luxembourg and France based on the non-discrimination clause in the double tax treaties, remain in place (privileged non-residents). The Regional rules will be applicable also to this category of non-residents.
Resident tax payers will be viewed as localized in one of the three Regions on the basis of the concept of fiscal residence but other criteria are required for non-residents as they will typically not have a residence in Belgium. In principle a non-resident, subject to a Regional tax system (i.e. category 1 or 4), is localized in the Region in which the income was received. In the event income was received in multiple Regions, the individual will be subject to the regional rules of the Region in which the highest net professional income was realized. Especially in this context an internal allocation of the income over the Regions might be required. In order to increase the consistency over various income years, the law foresees certain presumptions which should facilitate the internal allocation. As an example, employment income is deemed to be received 100% in the Region where the employee has his or her habitual place of employment.
Employers should review the effects of the new provisions on their assignment process and cost. Typically the new tax calculation method could impact outbound employees under a tax equalization program, especially in the context of the calculation of hypothetical taxes. For inbound employees the loss of specific tax deductions could immediately result in an increased tax equalization cost for expatriates paid on net terms or a decrease of the net in pocket for those paid on gross terms.
In addition, we recommend employers review the payroll data process to make sure that all the required data is available to enable the localization of the income in the specific Regions. These Mobility related considerations will be in addition to the wider process of updating normal payroll procedures to accommodate the changes with regard to domestic employees.