At the end of 2017 the rules for calculating Belgian taxes were changed through the introduction of a pro rata method for calculating exemptions and reductions for certain tax payers, who did not earn taxable income in Belgium during a full calendar year.
The new rules only have an impact in the following cases:
- Belgian residents, who leave Belgium and move to another country
- Persons, who move into Belgium and become tax residents of Belgium
- Individuals, who do not come to Belgium to settle here, but who earn Belgian taxable income during only a part of a year.
When there is a reduced taxable period, the progressive effect of income taxes will obviously decrease because less income is subject to the highest tax rates. In the past, the tax was further reduced because deductions from taxable income and tax reductions were applied for a full annual amount, even cases where the taxable period was shorter than a full calendar year.
This second effect is now greatly eliminated. Many tax benefits are reduced from tax year 2018 onwards in relation to the duration of the taxable period as compared to a full calendar year. The rules actually have a retro-active effect into income year 2017 as this year already falls under the rules for tax year 2018.
The pro-rata counting is not done from day to day, but is done on the basis of full months. A calendar month, during which the 15th day falls is counted as a full month.
A taxpayer lives in Belgium from 1 January to 25 April of the year: there is a pro-rata for 4 fully months, namely 4/12.
This pro rate is then applied to a number of deductions for the calculation of personal income tax. First of all, this impacts the:
- tax-free allowance for the taxpayer
- increased tax-free allowance for dependents
- income thresholds for determining who is a tax dependent person
In addition many other deductions, exemptions and reductions are affected:
- tax exemption for interest, derived from a savings bank account
- the (new) tax exemption for the first part of dividend income
- exemption for commuting expenses
- the tax benefits for so-called ‘long-term savings’ (certain loans and life insurance policies)
- the tax reduction for the acquisition of employer shares
- the tax shelter reduction for investment in start-ups
- overtime tax relief
- tax credit for certain self employed workers
- tax credit for low activity income
- limit for tax beneficial treatment of income from intellectual property
- limit for fiscal benefit of a PC project, set up by the employer
- beneficial overtime in the restaurant sector
As mentioned above, the new pro rata rules also apply to non-residents. The impact for them is more limited than for residents because their entitlement to tax benefits was already made dependent in the past on the condition that a sufficiently high proportion of the total annual income of the taxpayer is actually taxed in Belgium (the so-called ‘75% rule ‘). In addition, non-residents generally tend to make less use of fiscal benefits in comparison with residents, who tend to optimize their taxation more.
As such, the idea of a pro-taxation of tax advantages for short taxable periods makes sense. Whether the new rules will generate much revenue for Belgium is doubtful, however. What is certain is that the Belgian tax system has again gained in complexity, both for the tax payers and for the already overburdened tax officials.