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20/07/2005How the EC savings directive affects your expats in Belgium

A new EC savings directive regulating tax on interest payments entered into force this month. We examine its impact on expats in Belgium.

The EC Savings Directive formally entered into force on 1 July 2005.

The 'residency state levy' gives expats some 'grace'.

The ultimate aim of the directive is to ensure savings income in the form of interest payments made by a financial institution of one EU member state to a beneficiary living in another state is subject to taxation in that other state.

This is generally achieved via a basic mechanism known as the 'automatic exchange of information': the financial institution must report to its local tax authority any payments of interest to investors.

Tax authorities then pass on the information to the country of residence of the individual.

However, privacy concerns mean a withholding tax is applicable in some countries instead of the automatic exchange of information for a transitional period, but the investor still has the option to allow the information exchange.

This mechanism is known as the 'residency state levy' (prélèvement pour l'Etat de residence or woonstaatheffing) and is applicable in Belgium.

The levy amounts to 15 percent of the gross interest received during the first three years of the transitional period.

This rises to 20 percent for the three subsequent years (1 January 2008) and 35 percent thereafter (1 January 2011).

A total of 75 percent of the levy must be transferred to the residence state.

The EC savings directive only applies to cross-border transactions and determining the correct state of residence of an investor is an important step in deciding if a transaction is cross-border and if it falls within the scope of the directive.

The general rule is that the residence of the investor is said to be in the country where he or she has a permanent address.

Transfer into Belgian domestic legislation

EU member states must comply with the directive, but it only comes into effect when that country has enacted its own domestic law.

The latest Belgian legislation implementing the directive states that the residence of the individual investor is said to be in the country where he or she has a permanent address.

This address is supposed to be the one mentioned on his or her passport or on his or her official identity card.

However, Belgian law makes an exception for an investor qualified as a 'Belgian non-resident investor' and the criterion of the permanent address is not applicable.

Instead, a 'Belgian non-resident investor' must prove he or she has a residence outside of Belgium, even if the permanent address is in Belgium.

Impact on expatriates in Belgium

Foreign executives who benefit from the special expatriate tax regime in Belgium are taxed as non-residents in Belgium.

They are fictitiously treated as Belgian non-resident taxpayers for Belgian domestic tax even if they have a permanent address in Belgium.

An expatriate who opens a private bank account in Belgium as a non-resident taxpayer will also be considered as a 'Belgian non-resident investor'.

The combination of being a non-resident taxpayer and having a permanent address in Belgium leads to difficulties in regards Belgian and foreign-source interest income.

On the one hand, the other countries affected by the EC savings directive will generally consider the investor is a Belgian resident because the expat's permanent address is in Belgium. 

However, Belgium will consider the investor to be a resident of another EU member state.

Belgian-source interest income

A Belgian bank is required to withhold the residency state levy on interest paid to an expat because the investor is deemed to be a resident of another member state.

The Belgian bank must give the full amount of the levy to the Belgian tax authorities in order for Belgium to transfer 75 percent of the amount to the investor's country.

The question then arises as to which country the Belgian authorities will transfer the tax to if the individual has no permanent address outside of Belgium.

It is also unclear which procedure must be followed to recover the tax when it is transmitted to a country where the expat is also regarded as a non-resident taxpayer.

Expats will also have difficulties opting for the automatic exchange of information instead of the withholding tax because, in most cases, it will be impossible to provide the Belgian financial institution with proof of residence elsewhere.

Foreign-source interest income

The situation is more favorable concerning an expat who receives interest income from another EU member state which allows the automatic exchange of information. The information will be supplied to Belgian tax authorities.

However, since only Belgian-source income must be reported, no actual tax will be payable in Belgium on the interest income.

The situation is different when an expatriate receives interest income from a country which applies the exceptional withholding tax system (like Belgium does).

This tax will be imposed in the source state, with 75 percent of the amount withheld transferred to Belgium.

The individual should be entitled to a tax credit in Belgium equal to the amount withheld in the source country.

Because an expatriate in Belgium is not required to report foreign-source investment income, it is not yet clear how (or if) this amount could be credited and/or reimbursed.

The expat could avoid the withholding tax by requesting an exchange of information from the paying agent.

It will be crucial for the individual to be aware of the formalities in the source state to request the exchange of information.

But for an expat who benefits from the special tax regime and wants to request the information exchange, it will be impossible to obtain a formal certificate of tax residence in Belgium from the Belgian tax authorities because of their non-resident tax status.

July 2005

Joël Lebersorg (jlebersorg@deloitte.com) is a partner and Frédéricq Jacquet (frjacquet@deloitte.com) is a senior consultant at  Deloitte's Belgian offices. 

 [Copyright Expatica 2005]

Subject: Expat tax, EC savings directive, Belgian taxation


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