Belgian residents are taxed on their worldwide income. In case they earn a salary abroad, tax treaties can be applied in order to exempt such foreign employment income from Belgian taxes.

This exemption is based on article 15 of the OECD model treaty. Although at first look, the treaty principles appear to be quite simple, the interpretation of this article has many hidden features, which may give rise to a surprise for the tax payer.

In the past, one did in most cases not have to look at the tax situation in the country of employment in order to obtain treaty exemption in the country of residence (Belgium). It did not matter which tax treatment took place in that country and whether the income, for which exemption was claimed was actually subject to any tax or not.

This could lead to an interesting scenario where exemption could be obtained in Belgium, even if no tax at all was paid in the country of employment.

The Belgian tax authorities have started to sign new tax treaties, in which the exemption in Belgium has become linked to the tax situation in the other state. As tax treaties are bilateral of nature, they only impact one country at a time. The consequence thereof is that not all countries have the same treaty situation. Indeed, some old treaties continue to exist and even in new treaties, there is no consistency in the way, in which this topic has been addressed.

In a number of cases, the treaty exemption is subject to taxation of the income in the country of employment. Some treaties use the concept “income is taxable” (in the country of source), while others use the concept “income, subject to actual taxation”. This small difference in the text can have a big impact. In addition, even if the condition of actual taxation has been written in the treaty, one can note many different reasons why income would not be taxed in the country of employment.

During recent years, the Belgian tax authorities are now closely reviewing the tax situation in the employment country in order to decide whether or not treaty exemption in Belgium will be accepted. This unavoidably results in tax disputes, some of which come before Belgian courts of justice.

It is interesting to have a look at the decision of the court of Mons of 11 September 2013, which related to an employee, who was living in Belgium, and who had been working in Latvia. This court decided that the words “have been taxed” as written in the tax treaty with Latvia have to be understood within the overall context of the tax treaty (autonomous treaty interpretation) and not on the basis of internal Belgian tax law.

In the case at hand, there was no actual taxation in Latvia.This was not the result of the application of the normal Latvian tax legislation, but was the result of an agreement, which has been concluded between Latvia and the European Union.

The discussion further took place on the scope of the so-callled “exemption vaut impôt” principle, which can be found in internal Belgian tax legislation. Under this principle, income is deemed to have been taxed if it has been subject to the normal tax regime, which is applicable on such income in the country of source of the income. This theory finds it’s origin in case law of the Belgian supreme court (“Sidro case” of 1970).

The court of Mons did not agree with the application of the Sidro principles in this case, and refused to accept the treaty exemption. The court went for a strict interpretation of the treaty by requiring that there should have been an effective taxation in Latvia in order to claim the treaty exemption in Belgium. The Sidro doctrine is an element of internal Belgian tax law, and the court decided not to consider this element, which is proper to Belgian tax law, in the context of the treaty.

The court thereby also paid attention to the intention of the treaty countries when the treaty was signed. According to the court, the treaty countries specifically used the words “effective taxation” in order to avoid a situation where both countries would grant exemption, resulting in the lack of effective taxation on the income. In the absence of such effective taxation in Latvia, the treaty exemption in Belgium was refused.

In addition, the court decided that even in case the Sidro theory would be applied, exemption would still not need to be granted in Belgium. In the case at hand, the income was not exempt in Latvia on the basis of internal Latvian tax law. Instead, the exemption was based on an international agreement, signed between Latvia and the EU.

This implies that the income has not been subject to the usual tax treatment in Latvia and that therefore there can never have been an “effective taxation” in that country in the way, as defined under the Sidro doctrine. This principle can also be found in the Belgian tax circular on this topic AFZ nr. 4/2010 of 6 April 2010 (item 14).

The discussion is quite complex and it appears that case law is not consistent in this area. Recent decisions of the Court of Appeal of Brussels (Brussels 7 December 2011 and of 14 March 2012) accepted the treaty exemption in Belgium. One needs, however, to review the situation on a case by case basis and it is difficult to come to a general rule.

From these cases, one learns that one always has to carefully look at the tax situation in the other country when applying the treaty exemption in Belgium. If there is no taxation in that country on the income, there is always the possibility that the Belgian tax authorities will challenge the exemption and that in the end Belgian taxes will still be imposed.