In case one has a professional activity, which is carried out in several countries, the question arises for many tax payers on how to determine the deductible amounts for professional expenses (in case one does not elect for the standard cost deduction).

Recent Belgian case law (Ghent, 3 Januari 2012) sheds some more light on the issue.

The discussion concerned a partner, who was working in the Belgian office of an international law firm. He received a share of the world wide profits of the law firm. The profits partly related to the Belgian operations and partly to non Belgian operations of the firm.

The Belgian profits constitute regular Belgian taxable income, but the foreign profits are exempt from tax in Belgium to the extent in which they have an origin in a country, with which Belgium has signed a tax treaty. This means that the total income is partly taxable in Belgium and partly treaty-exempt.

In his Belgian tax return, the partner also deducted business expenses from the amount of taxable income. He split up the expenses between those items that in his view related to his world wide earnings and those items, which specifically related to the Belgian operations.

The expenses relating to world wide earnings were mainly allocated to foreign income, which was treaty exempt, and therefore had only limited impact on the Belgian tax calculation. An example of these expenses were interest payments on a loan, which was taken in order to buy shares to enter the international partnership. The expenses, which related to the Belgian income, however, were fully deducted from Belgium taxable income. This substantially reduced his overall Belgian tax bill. An example of typical Belgian expenses were car expenses, relating to commuting between his home and the Belgian office.

The tax inspector amended the tax return and allocated all expenses against the world wide earnings. In this way, he reduced the Belgian deductible portion of expenses, which resulted in an additional tax assessment, which he sent to the lawyer.

The lawyer filed a claim against the tax assessment and following a negative decision by the tax authorities, brought the case before court. Initially, the court of Ghent followed the point of view of the tax authorities and the lawyer decided to file an appeal.

The Court of Appeal of Ghent has followed the opinion of the tax payer relating to the splitting up of deductible expenses between a world wide deduction and a deduction from Belgian revenues. The Court indicates that the fact that the partner shares in the world wide profit of the law firm does not automatically imply that the partner is active in each of the foreign jurisdictions. In the case at hand, the day to day activities were mostly carried out in Belgium and the related expenses could therefore be deducted from Belgian taxable income.