A new tax treaty was signed between Belgium and Japan on 12 October 2016. Tax treaties do not immediately enter into force, and we had to wait until 19 January 2019 before the procedures were completed for the treaty to become active ….. on January 1 of the subsequent year. 2020 has started so the treaty is finally in full force.
The long time delay between the signing and the starting date of the treaty seems to have pushed the treaty somewhat into oblivion. Little was published about the treaty in recent months. It is, nevertheless, worthwhile to keep a focus on this important document and to consider some important consequences for individual tax payers. When reading comments on the treaty, we note that these most often relate to complex corporate tax issues. Individual tax payers may not have paid much attention to the new treaty, but now the time has come to take a closer look at some important changes.
Our attention was drawn to article 17 of the treaty on pensions and alimony pay.
Under the old treaty, pensions were taxable in the country of residence of the beneficiary. Japanese individuals, who moved to Belgium during their professional career and who remained here after the retirement date, were taxable on their pensions (including the ones from Japanese sources) in their country of residence, Belgium.
Under the new treaty, their pensions have become taxable in Japan from 2020 onwards, but only if paid out by a Japanese source, and Japanese withholding taxes may already have started. This does not mean that the beneficiaries are suddenly exempt from all obligations in Belgium. They will still have to report the receipt of the Japanese pensions in their annual Belgian income tax return for the net amount received (after deduction of the Japanese taxes). In the Belgian tax return, they can request the treaty exemption, but this is applied under the exemption with progression rule. In this way, the Japanese pension will still have an impact on the tax rate to be paid on other income, they may have and which is taxable in Belgium.
Any Belgian pensions or pensions from other countries, that they may receive, remain taxable in the country of residence, Belgium. If a person receives pension income from several countries, the taxes will be split between Japan (Japan sourced pensions) and Belgium (all other pensions).
In case Japanese persons, who are living in Belgium, are paying out recurring alimony payments to individuals (former spouse or children), who are living in Japan, they can deduct 80% of such alimony pay from their Belgian taxable income. The beneficiary of the payments, however, was up to the end of last year not taxed in Belgium. A requirement for the tax deduction was the filing of a special tax form (fiche 281.30) before March 1 of the year following the year in which the payments were made.
From January 2020 onward, the deduction from taxable income in Belgium remains possible, but the alimony pay has become taxable on behalf of the beneficiaries, who are living in Japan. The tax is calculated at a fixed rate of 26,75% on 80% of the amount paid. The tax must be calculated and paid in Belgium on a quarterly basis. The requirement to make up a fiche 281.30 has not changed. The beneficiaries themselves have no further tax filing obligation in Belgium if the withholding taxes were properly paid.