In case one works outside Belgium and earns a substantial amount of income, which is exempt from Belgian taxation under a tax treaty, it is recommended to review the tax deductible items and to reconsider changing one’s strategy.
Income, which is derived from treaty countries, may be exempt from Belgian taxes under the exemption with progression rules. To apply the exemption, the Belgian tax calculation has two phases:
- calculation of the Belgian tax on all income (Belgian and foreign) including all deductions, which were claimed by the tax payer;
- deduction for foreign earned income (the world wide tax, calculated in phase one is reduced based on a pro-rata of net taxable foreign income against total net taxable income (Belgian plus foreign income).
By using this calculation method, the tax savings, which are realised through tax deductions in phase one of the calculation are offset by the pro rata calculation in phase 2. For a tax payer, who earns a substantial amount of treaty exempt income, the actual savings of the tax deductible items will mostly be lost. This is not a fair situation since the deductions are in most cases not considered in the countries, where the taxable income is generated, and where the tax payer is subject to non resident tax rules (most countries tend to limit the entitlements to tax deductions for non resident tax payers).
A Belgian tax payer has challenged this unfavourable calculation method before the courts of Ghent, but the Court of Appeal of Ghent ruled in favour of the tax Authorities.
Under the current situation, one can only advise tax payers with substiantial amounts of foreign income, which is exempt from taxation in Belgium to make a review of the tax impact of these deductions. It may be useful to review whether there is a possiblity to claim the deductions against taxable income in another jurisdiction. Alteratively, a tax payer could decide not to spend further money on items, which do not generate substantial deduction and to use the funds in a more tax efficient way. Finally, some tax payers may continue to try to challenge the Belgian tax calculation method due to discrimination. Sooner or later, cases are likely to appear where one of them will succeed in these efforts.