Belgian residents are taxed on their worldwide income. In case they earn a salary abroad, tax treaties can be applied by the tax payers in order to exempt such foreign employment income from Belgian taxes.
This exemption is based on article 15 of the OECD model treaty (general employment article) or on articles 16 or 17 for directors of companies and sportsmen and artists. Although at first look, the treaty principles appear to be quite simple, the interpretation of tax treaties offers many challenges and surprises for tax payers. An important question is whether or not the tax situation in the country, where the income is earned, is relevant in order to determine the entitlement to tax exemption in Belgium.
In the past, one did usually not look at all at the tax situation in the country of activity in order to claim treaty exemption in the country of residence (Belgium). Therefore, it did not matter which tax treatment took place in that country and whether the income, for which exemption was claimed in Belgium, was actually subject to any tax or not in the country of source of the income.
This could lead to a scenario where exemption could be obtained in Belgium, even if no or little tax was due or paid in the country of employment or activity.
In more recent years, the Belgian tax authorities have tried to increase the scope of the Belgian tax system in an indirect way, by signing tax treaties, in which the exemption in Belgium is in some way connected to the tax situation in the other state.
In some treaties, the treaty exemption is linked to a so-called “subject-to-tax clause”. Under such clause, treaty exemption would be subject to the condition of taxation of the income in the country of employment or activity. There are several types of subject to tax clauses. Some treaties use the concept “income is taxable” (in the country of source), while others use the concept “income, subject to actual taxation”. Small differences in the treaty text can have a big impact. In addition, even if the condition of actual taxation has been written in the treaty, one observe different reasons why income would not be taxed in the country of employment.
During recent years, the Belgian tax authorities started to closely review the tax situation of tax payers with foreign source income. In this respect, they started to monitor the tax situation in the employment country in order to decide whether or not treaty exemption in Belgium should be accepted. This unavoidably resulted in tax disputes, some of which came before Belgian courts of justice.
The Belgian tax authorities have issued several instructions, in which their view on typical tax treaty clauses are explained. Important interpretations can be found in the tax circular of 25 May 2005 (Circular nr. AFZ 2005/0652) and in the tax circular of 06.04.2010 (Circular AFZ nr. 4/2010).
The interpretation of the tax treaties by the Belgian tax authorities has been rejected by the Belgian supreme court on 25 January 2018.
The case was brought to court by a professional cyclist. In the years 2007-2009 he was active in Belgium and abroad, where he performed training activities and also participated in cycling competitions.
The athlete claimed exemption from tax in Belgium for certain activities, carried out in The Netherlands, based on article 17 of the tax treaty between both countries. This exemption was challenged by the tax authorities. Part of the discussion related to the calculation of the pro rata part of the total working days, which qualified for treaty exemption over the total number of work days of the year. Discussion further arose on the question whether or not taxation was required in The Netherlands as a condition for tax treaty exemption in Belgium.
In article 17 of the treaty it is clearly mentioned that The Netherlands are entitled to tax income of a sportsman for activities, carried out on Dutch territory. This implies that the country of residence, Belgium is not entitled to tax such income.
In the tax treaty, one also finds a specific article (article 23), which describes the method, to be used by the country of residence (Belgium) in order to avoid international double taxation on income, which is taxable in The Netherlands. In this article of the treaty, a “subject to tax clause” can be found.
The Belgian tax authorities were of the opinion that Belgium should not grant any tax treaty exemption at all if the income for professional activities on Dutch territory has not effectively been taxed in The Netherlands. In this way, they indirectly cancel the effect of article 17 and claim back the right to impose the income in Belgium.
The Belgian supreme court now clearly ruled that article 23 does not allow Belgium to do this and can not overrule the base principle of article 17. Therefore Belgium needs to accept the tax treaty exemption, irrespective of the fact whether or not the income has actually been taxed in The Netherlands.
This supreme court decision is of great importance for the interpretation of the tax treaties. It cancels the recent efforts of Belgium to limit the exemption clauses in tax treaties (to obtain more tax for Belgium) and reduces the scope of many subject to tax clauses in tax treaties. Belgian tax payers may now more easily claim exemption from Belgian tax on income from foreign sources.