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.

Pensions

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 also become taxable in Japan from 2020 onwards, if paid out by a Japanese source. This does not mean that the beneficiaries are in this way exempt from all obligations in Belgium. They 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).

The question then arises, whether in the Belgian tax return, one can request the treaty exemption (under the exemption with progression rule) as tax was already paid in Japan. The new treaty with Japan is very different from other treaties because in article 17 it is stated that pensions that relate to a prior employment may also be taxed in the country of residence of the taxpayer. Article 17 thus does not exclude a potential international double taxation on this type of income.

When further reading the treaty, one has to look at article 23, where it is explained how double taxation can be avoided. When a tax resident of Belgium receives pension income from sources in Japan, Belgium should exempt this income from tax, provided that evidence can be delivered that the pension has effectively been taxed in Japan. This exemption covers the taxes, that are due at federal and regional level, but does not cover the taxes from the commune, that remain due. A limited double taxation therefore remains.

The above applies to pensions for prior employment. Pensions for prior government services are subject to different rules. The treaty with Japan is more aligned on this matter with other treaties, as such pensions are usually taxed in the country from where they are paid out (from the government for which the services were rendered in the past). Only the communal taxes then remain due in Belgium. Also for this part of the treaty, however, care is required when applying the rules as in exceptional cases, the taxes will be due in the country of residence of the taxpayer. Each case must thus be carefully studied in order to correctly apply the treaty rules.

Alimony pay

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.