Introduction

The topic of tax deductions for individuals, who carry out professional activities outside their country of residence has during the past years already been subject to many discussions and studies by tax scholars.

In case a person is only generating taxable income in his country of residence, he or she obviously is entitled to all tax deductions that are available in that country. The question becomes much more complicated in case income is taxable in other countries as well. We can for example refer to the following matters:

• if a non-resident tax payer has direct access to all tax deductions in a work state without any conditions, he may be able to benefit from a high level of deductions across multiple countries if taxable income is earned in more than one jurisdiction. Iin each country, deductions are then taken and the total amount of deductions across all countries can become very high, especially if many countries are involved in the taxation. This can lead to an unfair tax advantage as compared to regular resident tax payers, who can only make use of one set of deductions.
• if a tax payer is working outside his home jurisdiction, it is possible that he cannot effectively make use of all available deductions in his home country (as not all income is taxable in that jurisdiction). This then leads to a disadvantage for this individual, compared to his peers.

Tax deductions as such do not tell the whole story. Apart from  the issue of tax deductions, when comparing taxes, one must also pay attention to the difference in tax rates between countries. In addition, a cross-border employee may be able to limit the total impact of progressive tax rates by spreading taxable income over more than one country. Indeed, if taxable income is accrued  in several countries, the combined impact of progressive rates can be lower per country as compared to a scenario where we have full taxation in only one country.

Based on such considerations, tax authorities have in the past been limiting access for non-resident tax payers to certain tax deductions. In this way, they try to avoid that individuals with cross border professional activities would be better off as compared to local workers.

The final outcome of these tax rules is not always positive for the tax payer and in some cases, this has resulted in disadvantages for cross border workers. Many legal disputes have already arisen on this matter, including long and complicated discussions before the European Court of Justice.

In line with many other countries, Belgium also decided to limit access to tax deductions for non-resident tax payers. The first limitations already go back to 1989, but since then the law has been amended several times. The most recent changes are applicable from income year 2014 onwards (Belgian tax year 2015) and may result in some unexpected and complex situations.

Following fundamental changes to the basic tax system in Belgium from 2014 onwards, when taxes were split up between a federal level on one hand and a regional level on the other hand, also the non-resident tax rules had to be aligned.

Non-resident tax payers can always deduct obligatory social security expenses and business expenses from their taxable income and get relief for pension contributions into a company provided pension scheme. In order to get additional deductions, they need to be in a situation, where at least 75% of their taxable income is subject to tax in Belgium.

For married tax payers, the 75% rule is calculated per partner if only one of them earns taxable income in Belgium. If both spouses have Belgian taxable income, the total family income is considered.

Once the 75% criterium can be met, there is a further distinction:

1. tax payers, who are a tax resident of another European Area Country, are entitled to exactly the same tax deductions as Belgian resident tax payers.

This includes the regional tax deductions. In order for them to properly apply these regional deductions, they have to follow a specific set of rules, which determines which regional rules are applicable to them. Usually this will be the region in which the highest amount of taxable income has been earned.

It is possible that a person is employed by a company, that is established in region A, while the actual work place is situated in region B. In such case the actual work place determines the applicable rules. The correct application of this principle will in practice be very difficult because Belgian salary documents mention the place where the employer is located, but do not mention the place where the work is actually carried out. It is quite obvious that this will lead to problems.

Difficulties will also arise for tax payers, who have regular professional activities in several regions (for example sales people or service engineers), especially as the competent region may differ from year to year.

It is therefore to be expected that errors and disputes will arise on this matter.

2. tax payers, who are not tax residents of another European Area Country, are only entitled to tax deductions at the federal tax level and cannot make use of the regional deductions.

Special cases

1. Residents of France, The Netherlands and Luxembourg: they have access to tax deductions based on the non-discrimination clauses in the tax treaties between these countries and Belgium. Under the tax treaties, they may fall under pro rata rules, where deductions are reduced in line with the portion of their income, which is taxable in Belgium. The exact calculation of the pro rata amounts can become difficult.

2. Individuals, who can benefit from the special tax status of foreign executives (tax circular letter of 8 August 1983), may now face a significant loss of tax benefits. In the past, they could benefit from all tax deductions and benefits if they had a home in Belgium. Now they are only entitled to all benefits if they would be residents of France, The Netherlands or Luxembourg or in case the income that is actually subject to Belgian tax is at least 75% of their total income and provided that they are tax residents of another EER country.

In case individuals come to live and work a few years in Belgium, they will often not keep a tax residency in another country. Consequently, they would never be able to benefit from the regional tax deductions, even in case all or most of their income is taxable in Belgium.

These expatriate individuals are now are faced with a loss of deductions and benefits as compared to the past, more specifically if they can meet the 75% rule, but have not kept a tax residency abroad. Expatriates are usually not able to meet the 75% rule in the years of arrival to Belgium or departure from Belgium. This may also occur during the assignment in years where they have more than 25% of deductible foreign business travel (as a result of which their taxable income falls below the 75% threshold).

The loss of regional deductions will in most case relate to the purchase of a house in Belgium. To the extent that the related loan is eligible for Belgian beneficiary tax treatment, expatriates, who are working in Belgium cannot or no longer (since income year 2014) make use of the related tax deductions, that can be significant.

Although this loss of deductions can certainly be considered as ‘unfair’ compared to employees, who also live and work in Belgium without the benefit of the special tax status, it is not certain at all whether they are able to fall back on legal rules to force the Belgian revenue to nevertheless grant the tax benefits to them.

When they are not residing in another country of the European Economic Area, they may be refused access to the protection that is offered by the European rules on free movement of workers and capital. It is also unclear whether they could successfully challenge the Belgian tax system by claiming that there is a discrimination as compared to local Belgian employees, who cannot benefit from the special tax status, but who have access to all regional tax benefits.

Some typical federal deductions and credits

• personal tax exempt allowance
• tax exempt allowance for tax dependent children
• marriage quotient (in case of a partner without professional income)
• alimony pay
• deduction of interest, capital payments for mortgage loans and life insurance contributions that do not relate to their primary residence or home in Belgium
• tax deductible charities
• pension savings contributions
• service vouchers
• energy savings expenses
• home security expenses

 Typical regional deductions

Regional deductions are identified in the tax form under item codes, that start with the numbers 3 (partner 1) and 4 (partner 2).

• deduction of interest, capital payments for mortgage loans and life insurance contributions relating to their primary residence or home in Belgium
• Flemish deduction for certain loans to family members (“win-win loan”)

More errors appear to be are arising

The current Belgian rules are not transparent at all and unfortunately the Belgian non-resident tax return has not be designed in a way that facilitates an understanding of the rules. The form is not user friendly and it is difficult to understand the actual impact of the use of certain tax codes in the tax return. This will certainly lead to frustrations with tax payers, when completing their Belgian annual tax form. They also may experience unpleasant surprises when receiving the tax assessment in case the amount of tax due is much higher than they anticipated.

In addition, we noted during recent months that even in cases where the tax return was correctly completed, errors were made by the tax authorities when calculating the taxes due. This will unfortunately result in an increase in the number of discussions with the tax authorities in the coming years.