Following changes to the Belgian state organisation, important changes are now also implemented in the Belgian tax law (Law of 8 May 2014).

The changes are resulting in a complicated set of rules to determine which tax deductions are to be applied to non resident tax payers. In addition, in many cases less tax deductions will be available to non resident tax payers as compared to the old situation.

Background

As from 1989 onwards, specific calculation rules were introduced in Belgium for non resident tax payers, whereby certain tax benefits were not granted to specific groups of non residents.  It was noted that due to the progressive nature of the income taxes, non residents, who only earned part of their total world wide income in Belgium, only paid a low amount of taxes. Consequently, non resident taxes were increased by disallowing a number of tax deductions to this type of tax payers.

The change of the tax calculation rules for non residents would in 1989 also have impacted those individuals, who could benefit from the special taxation regime for foreign executives (tax circular of 8/8/1983). Indeed, by disallowing certain tax deductions, part of the tax savings, due to the special taxation regime, would have been lost. Bearing in mind that a large number of these expatriates  have a net salary agreement with their employer (i.e. the company pays the Belgian income taxes), an  increase of the Belgian income taxes for these executives, specialists and researchers directly increases the cost of employment in Belgium.

Such increase conflicts with the base concept of the special taxation regime, which is to reduce the cost of employment of expatriates in Belgium in order to attract foreign investments. In order to avoid this negative impact, the concept of ‘non residents with an abode (or a home) in Belgium’ was introduced in 1989 and in this way expatriates with a home in Belgium could remained entitled to tax deductions in Belgium.

The new system

The introduction of the regional taxation rules has resulted in a transfer of the compentencies relating to most tax deductions from the federal to the regional level. This inevitably is related to the system of the tax deductions for non residents.

An important change is the abolishment of the category of ‘non residents with abode in Belgium’. The consequence of this change is that more expatriates will no longer be able to benefit from personal tax deductions in Belgium.  From income year 2014 onwards, personal tax deductions will only be granted in the following cases:

• if at least 75% of the professional income of the calendar year is subject to taxes in Belgium;
• if the tax payer is a tax resident of The Netherlands, France or Luxembourg, he will always remain able to claim full or partial deductions, based on the non discrimination clauses in the tax treaties between these countries and Belgium. This is the case, even if they earn less than 75% of their income in Belgium.

The 75% rule will be applied differently for residents of countries, which are a member of the EER and for residents of other countries. For residents of other EER countries, all tax rules and deductions, which are now defined ad regional level, will be applied (provided that they meet the 75% condition).

Residents of other countries, who meet the 75% condition, are only subject to the federal tax rules and deductions, and will miss the deductions at the regional level.

What about the employer?

The changes are applicable from tax year 2015 onwards and therefore already impact the taxes on iincome year 2014. For this reason, the changes are not only relevant when the tax return is to be filed in 2015, but already are to be taken into consideration by the employer when calculating the monthly payroll withholding taxes.

This may imply that the employer has to review the estimate of income taxes for his non resident staff for income year 2014. In case of the employment of an expatriate with the special tax regime,  and who is expected to have a business travel exclusion of more than25% this year, a substantial increase of the tax gross up may be required in order to compensate for the loss of tax deductions.

Many employers make a tax estimate at the beginning of each year and a final calculation at year end. This year, it is advisable for them not to wait until the end of the year in order to review the tax situation of their expatriates in order to avoid surprises and unforeseen expenses at year end.

Special taxation regime

In case the special taxation regime is applicable, one first has to look at the period of employment in Belgium and the business travel percentage in order to evaluate whether the 75% rule can be met. If that is the case, the normal tax deductions can be applied both at federal and at regional leve and no specific action is required.

In case the executive does not meet the 75% condition, and in addition is not a resident of another country, there will be a loss of the tax deductions relating to the personal and family situation of the tax payer. In case the expatriate still is a resident of another country, he may still be able to keep certain tax deductions, thought the actual application of the related rules is likely to become quite complicated.

Location rules

Due to the impact of regional tax rules on certain non resident tax payers, all individuals will need to be located in one of the regions for income tax purposes, whereby he can only be located in one region. Married tax payers and legally cohabitant tax payers are always to be localized in the same region.

As non residents do not have their fiscal home in Belgium, it is not possible to refer to their family home in order to determine their fiscal location. For this reason, a non resident who earns professional income, will be allocated to the region in which he earns the highest amount of such income. It is not yet fully clear how this have to be applied. An easy reference would be the location of the employer, as it is indicated in the employment contract, though in principle the actual place where (most of) the work is performed is to prevail.

Conclusions

The regional taxation rules increase the overall complexity of the Belgian tax system, both for resident tax payers and for non resident tax payers.

Employers with foreign staff, will be faced with new challenges when managing the monthly salary withholding taxes of their employees. In addition, those employees, who can benefit from the special taxation regime may see a significant increase of their taxes from income year 2014 onwards in case their foreign business travel exceeds 25%.

In case the tax payer is a resident of another country, certain tax deductions may remain applicable. It is unfortunate that a distinction is made between EER residents and residents of other countries, as this is likely to only result in unnecessary complexity of the system without much gain to the Belgian revenue.

Finally, one can note that through the years, the benefits of the special tax system in Belgium are constantly eroding. This is not only due by the fact that the annual limits for the non taxable allowances (EUR 11.250 or EUR 29.750, depending on the case) have never been adjusted since the introduction of the system in 1983, but also by constant changes of the law (to the disadvantage of the tax payer), which are occurring from time to time.

With the most recent change and the expected loss of tax deductions for many expatriates, the value of the special tax status for expatriates and their employers is further reduced. Combined with the overall increase of the (already high) Belgian income taxes during the past few years, the overall attractiveness of Belgium as an investment location may also have been reduced.