At the end of 2012 (law of 13 December) the Belgian tax legislation for non resident tax payers has been amended in order to ensure that more Belgian tax can be collected on individuals, living outside Belgium, and who earn income from a Belgian source.
In the past, situations where possible where no income tax was due in Belgium (or abroad) as a result of the combination of international tax treaties with Belgian internal tax law. In the new law, a “catch all” clause has been added in order to avoid such situations to arise.
In an international tax situation, one first looks at the treaty to determine which treaty state is allowed to tax an income component. Subsequently internal tax law is applied. It is therefore possible that a tax treaties appoints Belgium as the competent location where tax can be levied on certain (Belgian source) income, but that actual tax can not be imposed due to the absence of an internal tax rule where such income is actually treated as taxable.
In order to impose tax, the income element should be included in the Belgian taxable income base, as defined by internal Belgian tax law (under non resident income tax rules). The new legislation therefore increases the scope of the definition of taxable income for non residents.
The base rule for non-residents is that they are only taxed in Belgium on Belgian source income (article 228 § 1 Income Tax Code – ITC 92). In section 2 of article 228 a listing of taxable items is given, but in the past this listing proved to be incomplete. For this reason a third section has now been added to article 228 as a “catch all” clause, relating to Belgian source income, which have not yet been covered in the first two provisions of article 228. The clause relates to income, which has been taken on charge by Belgian individuals or fiscal entities (associations, corporate bodies, public authorities or a permanent establishment of a foreign company).
A first category of income, which is now covered by the new clause consists of income types, for which Belgium is appointed as tax jurisdiction by a tax treaty, and which are normally taxable according to internal Belgian income tax law, but which in the past could not be taxed in the absence of a Belgian operational base of the individual.
As an example, reference is made to royalty income under the treaties with Argentina, Brazil and India, which is paid out to a resident of one of these countries as a compensation for technical assistance or services, which are rendered in Belgium. Under internal Belgian tax law, such income is treated as taxable self employed income (profits or professional fees). In the past, such income could not always be actually taxed in Belgium if they were not earned by means of a fixed base of operation in Belgium. Under the new income definition, the need for a Belgian base of operation is no longer required.
A second case relates to residents of countries without tax treaty with Belgium, who earn income in Belgium, and who are not taxed in the country where they live. One refers to the delivery of services by a non resident to a resident of Belgium.
In case the income is paid from a Belgian source, this income now becomes taxable in Belgium, even in case the services are rendered outside Belgium by a service provider, who has no further connections with Belgium. The taxation would, however, only take place if the tax payer can not deliver evidence that the income (from Belgian source) has actually be taxed in h is country of residence.
Income is deemed to have been taxed abroad if the beneficiary has been subject to the normal tax treatment of the income in his residency state. This could include the use of a tax exemption under local law.
It is obvious that the application of this rule is complicated significantly by the fact that the tax payer is residing outside Belgium and has no connections with this country other than the source of his income. It is therefore very difficult for the Belgian revenue service to actually catch these potential tax payers. For this reason, the tax would be levied by means of a 33% withholding tax, to be collected with the Belgian resident, who is paying out the income. This new withholding tax obligation is added to article 270 of the ITC 92 and to article 87 of the Royal Decree for the execution of the ITC.
Before the withholding tax is calculated a standard cost deduction of 50% is applied. This implies that the actual tax burden on the income is only 16,5 % on the gross income amount. One wonders why this complexity has been invented as one could have defined the lower tax rate from the start, making the rule more transparent and attractive.
The withholding tax is the final tax due, though the individual can still elect to file a tax return and to apply normal tax rules, if this would be more beneficial to him.
One can not avoid having a number of concerns with the new rule. First of all, the new tax rule will be quite difficult to apply by the Belgian clients of the foreign service providers as they are not aware of the tax situation of the individual in the other country. The rule also leads to a risk of international double taxation, which may not be easy to resolve and which can give rise to complex and time consuming disputes. In the end the risk (for penalties) will mainly be shifted to the Belgian client, who may not be happy with this situation.
In case the service provider is located in another EU Member State, it is also possible that the rule would lead to discussions relating to the free movement of services in Europe, for which it clearly is a barrier. In the end, one also wonders whether the actual income, which in the end could be derived from the new rule is proportional to the complexity, caused by the rules, both for the service provider (who may want to object against the withholding) and the Belgian client (who is faced with complexity and potential penalties).