For employees, who work outside their country of residency, reference can be made to international tax treaties in order to determine in which country income taxes are due and which country has to grant treaty relief. The applicable rules usually can be found in article 15 of a tax treaty. Although at first look the rules look easy, the interpretation of article 15 can become quite challenging.

According to the base principle of the tax treaties, employee remuneration is taxable in the country where the tax payer lives, except in case the employment is performed in the other treaty state. Provided that work is performed in the other state (not the state of residency), the related income is taxable in the country where the work is carried out. In this article, we only cover the base rule of article  and not the exceptions, such as, for example the so-called183-day rule.

In order to determine the place of employment, the Belgian tax authorities apply the principle of ‘physical presence’: the employment is carried out where the employee is physically present in the course of a working day.  If an employee is present in several countries, his remuneration may for tax purposes need to be split up between various countries based on the allocation of work days between these countries.

Not all tax payers agree with  a strict application of the principle of physical presence. A dispute has arisen in the case of a Belgian resident, who was working as a marketing director with a German company. In his employment contract, Frankfurt (where the company’s offices are located) is mentioned as place of employment. In his function as marketing director, from time to time he also had to work at premises of the employer outside Germany in third countries (outside Belgium and outside Germany).

The tax payer agreed with the taxation in Germany of German work days, but discussion has arisen on the taxation of the salary for work days in the third countries. According to the Belgian tax authorities the salary for work in these countries is not taxable in Germany, because the employee is not physically present in Germany during these work days. By consequence, they want to tax these days in Belgium (country of residency of the tax payer).

The case came before the court of Leuven and the court did not follow the interpretation of the treaty by the Belgian tax authorities. The court was of the opinion that the professional activities, that were performed in the third countries were not carried out within the scope of an autonomous employment relationship in those countries.

The performance of an employment does not reasonably require that the employee is permanently present in the  (principal) work state for the performance of all activities. This principle can also be found in several decisions of the supreme court (6 November 2000, 28 May 2004 and 9 November 2007). In these decision, the court applies the principle of the professional home base of international truck drivers. For these truck drivers, the professional home base was deemed to be located in the country where the management of the transport activities took place and taxation was allocated to that country, even though not all activities were actually performed on the territory of that country.

In the case at hand, the court of Leuven stated that it was not required that the employee was permanently present in Germany in order to claim treaty exemption in Belgium. In addition, the activities as marketing director outside Germany were for the benefit of the German employer and therefore were part of the mission, which the employee was pursuing for the German company. Meeting his foreign colleagues was part of his tasks as marketing director. The obligation to work outside Germany from time to time was also mentioned in the employment agreement. In addition, the employee was reporting to his German employer for all his activities, which confirms that Germany was his professional home base.

The court concluded that there was no separate employment relationship in the third countries and did not have a direct professional relationship with these countries. The activities were closely related to the German employment and consequently were treated in the same way as the activities in Germany  and Belgium had to grant treaty relief on the total amount of German employment income.

The court decision of Leuven is remarkable as it extends the theory of the professional home base of an employee to activities other than international transportation. One will now have to look at other cases to see whether the decision of the court of Leuven is an isolated case or whether also other courts will go for a similar interpretation of article 15 of the international tax treaties.

The court of Leuven pays less attention to the physical presence requirement as compared to an earlier decision of the supreme court in the case of a Belgian resident tax payer, who was working as an administrative director of a Luxembourg employer (Cassatie, 28 October 2011). He usually (but not always) worked at the premises of the company in Luxembourg and also in this case, the lower courts had decided that Belgium had to grant treaty relief on the total income. The supreme court overruled this decision, but did not clearly conclude on the issue of physical presence (in the case at hand, the supreme court was of the opinion that the lower court had not (sufficiently) considered the importance of the duties outside Luxembourg when deciding not to strictly adhere to the principle of physical presence).

The decision of 2011 is, however, not conclusive as the supreme court did not state that full treaty exemption is not at all possible at all in similar cases. The supreme court required in such circumstances that a clear motivation is available as to the reasons, based on which one can decide that the professional home base of the employee is situated in the other treaty country.

From this case law it is clear that the interpretation of the concept of the professional home base of an employee versus a strict application of the principle of physical presence is, from a legal point of view, not straightforward. Tax payers therefore unfortunately still face a substantial degree of uncertainty on this matter.

Also the Belgian tax authorities realize the complexity of the issue and for this reason are more and more embedding the strict application of the principle of physical presence in the treaty itself. This can only be done for new treaties or at the occasion of a change to existing treaties. In this way, specific clauses can be found in the treaty/protocols with the US, the UK and Luxembourg. For these countries, the tax payer can no longer opt for the professional home base interpretation of article 15.

The decision of the court of Leuven is also interesting because it also covers the application of the treaty on severance pay. Also this topic is subject to discussion in international tax law.

In the case at hand, the employment of the marketing director was ended by means of a mutual agreement between employer and employee in April of 2009 with effect on 31 December 2009. From 1 June onwards, the employee had ‘garden leave’ and did not have to render professional services any more. During a number of months, the regular monthly salary was still paid out and the question arose where such income was taxable.

The court is of the opinion that the continued payment of the salary in the period between June and December constituted regular salary payments as if the work was still performed. Consequently, the income is fully taxable in Germany, where the work would have taken place if no garden leave would have been granted. This interpretation is in line with the point of view of the Belgian tax authorities (tax circular of 25 May 2005) and with the OECD treaty interpretation.