In case you earn a salary income outside Belgium, which is taxed abroad on the basis of a  tax treaty, signed between Belgium and the work state, this income will be exempt from income tax in Belgium in order to avoid international double taxation.

The exemption will be applied under the so-called ‘exemption with progression’ rule. This rule ensures that the progressive effect of Belgian income taxes is maintained, even in case treaty exempt income is earned.

A number of special rules are to be considered when filing the Belgian income tax return:

•  One has the obligation to report world-wide income in the Belgian tax return. This implies that in the code for salary income (code 1250) the total salary income (both Belgian income and foreign income) is to be reported.  The foreign income is to be reported under Belgian tax rules. This implies that in order to determine the taxable amount, one has to apply the Belgian income definition. The numbers on the foreign salary forms usually reflect the amount of taxable income, as defined under foreign tax rules. This income figure most often is to be recalculated to meet the Belgian definition of taxable income. Certain deductions (for example social security) are applied differently in other countries as compared to Belgium and some income components (for example benefits in kind) are calculated differently. Some homework is required from the tax payer in order for him to calculate the correct amounts to be entered in the Belgian tax form.
•  The foreign income is to be reported for the net amount received, after deduction of employee social security contributions and also after deduction of the actual foreign income taxes, which were paid. This is to the benefit of the tax payer, as it will reduce the amount to be reported in the Belgian tax return. In case in later years foreign tax refunds occur or additional taxes are due, these are to be processed in the year of payment/refund , provided that the tax payer still earns foreign exempt income in the same year. Following up these foreign payments/refunds will constitute additional homework for the tax payer.

Many people wonder whether reporting foreign, treaty exempt income, has a high impact on the Belgian tax calculation. We prepared a basic example to illustrate the impact (tax year 2012 – income of 2011) for a single tax payer, who lives in a community with 6,9% communal tax.

If the tax payer earns a taxable salary from Belgian sources of 50.000 Euro (after deduction of employee social security contributions), he will have to pay an income tax of 19.167,25 Euro.

In case he would also have a non Belgian professional activity, for which he earns a net foreign income (after deduction of social security and of foreign income taxes) of 15.000 Euro, the Belgian tax liability would increase to 20.922,05 Euro.

Reporting 15.000 Euro of additional income therefore results in a tax cost of 1.754,80 Euro. This amount is charged in order to ensure that the progressive nature of Belgian income taxes is maintained. For a number of neighbouring countries, the tax bill will further increase with additional community tax (the levy of 6,9%) which is calculated on treaty exempt income in order to ensure that the commune, where the individual lives, does not suffer a loss of income due to the international employment of it’s inhabitants. This communal tax, is only due for a limited number of countries.

The story becomes more complex in case the tax payer has a number of tax deductions in Belgium. By earning foreign treaty exempt income, two deductions will overlap: first there is a deduction due to tax deductible items (for example pension savings contributions) and secondly there is the foreign income tax deduction. As both deductions will overlap in the Belgian tax calculation, the actual tax saving effect of the personal deductions will be reduced.

The higher the ratio of foreign income versus  Belgian income, the higher the loss of tax deductions will become due to this overlap. In such a situation, it is useful to reconsider the tax deductions and to check whether it still makes sense to make certain tax deductible expenses. Since 2008, a tax circular is applicable, which allows a tax payer to file a tax claim to ask for certain deductions to be applied in case he earns foreign income. However, the calculation method, which is proposed in the tax circular will in most cases not be favourable to the tax payer. By consequence tax claims for a loss of tax deductions are highly uncommon in Belgium.