The basic principles relating to personal tax deductions are rather straightforward for Belgian tax payers, who earn all of their income in Belgium or for single tax payers. In case we have married tax payers and if part of the family income is earned abroad, however, the issue suddenly becomes complex. The current Belgian calculation rules are unfavorable to these tax payers in certain cases and in the past, several discussions have already arisen on this matter.
As already mentioned in an earlier article, which was published on this blog in 2014, the discussions in the past already went up several times to the level of the European Court of Justice. Famous cases are the Schumacker case (European Court of Justice 14/2/1995) and the De Groot case (European Court of Justice 12/12/2002). Also the Belgian Constitutional Court has issued a number of decisions. Recently, this was again the case (Decision number 68/2014 of 24 April 2014).
Married tax payers (and legal co-habitants) have a personal tax deduction per spouse. In case they have dependents, the tax deduction is increased for each dependent child or other person. This increased deduction is granted to the partner with the highest amount of taxable income. The situation is easy in case all (family) income is taxable in Belgium. In case one of the partners has foreign source income, which is not taxable in Belgium due to the application of an international tax treaty, the increased deduction is also allocated to the partner with the highest income. If this is the partner with treaty exempt income, the actual deduction is lost because it is allocated to tax exempt income and therefore has no (or very little) impact on the final tax calculation for the family.
Recently, there was the European Court decision in the case of Mr. and Mrs. Imfeld-Garcet, who were living in Belgium with their two children. Mr. Imfeld carried out a professional activity (as an independent practitioner) in Germany and earned the highest amount of income of the family while his spouse was working as an employee in Belgium.
In Germany, Mr. Imfeld was taxed on his income (under the tax treaty between Belgium and Germany), but he was treated as a single tax payer for German income tax purposes and consequently could not claim relief for the two children. In Belgium, he had to report his world wide income. His Belgian tax was first reduced by the deduction for the children and was subsequently completely offset by the tax treaty relief. As a result of this calculation method, there was no tax difference irrespective of the number of children, for which a deduction was granted to him.
As Mr. Imfeld earned the highest income of the family, the (useless) children deduction was allocated to him and could not be transferred to his spouse to be offset against her Belgian taxable income.
In the Imfeld-Garcet case, the European Court of Justice decided that the tax calculation method of Belgium is not in line with the principle of free establishment (of a self employed person) within Europe. The calculation method is leading to a disadvantage for a couple earning most income in another European country (with tax treaty exemption) as compared to a couple, which earns all or most of the income in Belgium.
As usual, the Belgian tax authorities are again very reluctant to implement this new case law, as apparently the implementation of measures, which are favorable to the tax payers are not high on the government’s priority list.
In the meanwhile a new case came before justice of a married couple with 3 children, who were also living in Belgium. The husband earned a salary as an employee in Luxembourg, which is taxable in Luxembourg and treaty exempt in Belgium. The increased tax deduction for children was allocated to this foreign exempt income, as a result of which the actual deduction was lost. The couple claimed the allocation of the increased deduction to the wife, who earned Belgian source income. In their opinion, they were discriminated in comparison with a non-married couple, where the parents have a choice in which tax return to claim the deduction for the children.
The Constitutional Court has accepted their claim and confirmed the discrimination, which is occurring for married persons, who file a joint income tax return.
As the calculation software of the tax authorities is not yet in line with this recent European and Belgian case law, the tax payers will need to take further action in order to claim the deductions. They can still file a tax claim on prior years and can even go back for 5 years as the court decisions are to be treated as ‘new elements’, which justify such claim. The amount, which can be claimed back in this way can become quite substantial.
It is not possible to indicate in the tax return, how the allocation of the increased deduction for dependent persons is to be done. One can therefore not anticipate on the discussion by checking the appropriate boxes on the tax return. The tax payer has to await the (erroneous) tax assessment and then take action by filing a tax claim.