The basic principles relating to personal tax deductions are rather straightforward for Belgian tax payers, who earn all of their income in Belgium. Single tax payers are entitled to a personal tax deduction. The amount of the personal tax deduction is increased in case the individual has children or other tax dependents. Married tax payers (and legal co-habitants) have the same personal deduction (base amount). In case they have dependents, the 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 situation suddenly becomes extremely complex. This is caused by the concurrence between the treaty exemption on one hand and the deduction for the tax payer and for dependents on the other hand.
Another factor, which adds to the complication is the possible entitlement of the tax payer to certain deductions both in his country of residence and in the other country, where income is earned. Only to the extent where insufficient relief is given abroad, additional relief may be required in the country of residence of the tax payer. The question then arises on the value of the deductions in each location, especially in the foreign country, where non resident tax rules most often are applied and where tax deductions for non residents in general tend to be lower as compared to similar deductions for local tax payers.
In practice, it appears that the taxation may be different, depending on the composition of the family of the tax payer, whereby the following types of tax payers can be identified:
In the past, several discussions have already arisen on this matter, which even went up 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).
From these cases, one can conclude that in principle the country of residence of a tax payer needs to grant all deductions, which are proper to the personal situation of the tax payer. The other country (where income is earned) has to grant the deductions in case not sufficient income is earned in the residence country in order for the personal deductions to be possible. In such cases, the work state needs to grant these deductions.
Recently, a new court case came up, where new elements came into the discussion. This was 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 two step 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.
The court of Liège raised the question to the European Court of Justice whether European Law would disallow a situation whereby a married couple, living in one country and also earning income in another country, where one of the spouses is taxed as a single tax payer and can not benefit from all personal and family deductions, actually loses the benefit of certain deductions, to which they would have been entitled in case all or most of their income would only have been earned in their country of residency.
Contrary to prior case law, the European Court of Justice now has decided that the tax calculation method of Belgium is not in line with the principle of free establishment (of a self employed activity) 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.
This court case leads to new insights in the problem of the tax calculation for families, where one of the partners has non Belgian source income. The Belgian tax legislation now will need to be adjusted in order to eliminate this disadvantage. How this actually has to be done seems easy at first look, but actually is a quite complicated technical issue. In case Germany would have granted (sufficient) tax relief for the two children, the outcome of the court case could have been different.
Under the current situation, one will need to obtain a good understanding of the elements in the foreign tax calculation before one is able to determine the Belgian calculation method. The complexity of such an analysis will make it very difficult for both the authorities and the tax payers to up front have a good insight in the calculation rules. Is will also be quite a challenge for the Belgian legislator to develop an alternative calculation method, which meets the European requirements in all possible cases without at the same time granting new tax benefits to other types of tax payers, where no changes to the current calculation rules would be needed. The court decision certainly is beneficial to the Belgian tax payers, but may in the end result in many new areas of uncertaintly.