The Belgian Parliament's recent adoption of the Generation Pact has significant consequences for certain employees. A report from Deloitte's tax experts in Belgium.

Government newspaper advertisements helped inform the public

On 16 December 2005, the Belgian Parliament approved the Bill in execution of the Generation Pact (Bill). The Bill contains various tax measures aimed at stimulating innovation, employing more young people and discouraging early retirement.

Stimulating innovation: added incentives

The Bill incorporates existing incentives for the employment of researchers into the Belgian Income Tax Code (ITC). Belgian universities, high schools and scientific institutions are able retain part of the taxes they withhold on salaries paid to their scientific personnel as a type of subsidy.

This incentive was also extended, as of 1 October 2005, to private enterprises employing individuals who work on research projects in partnerships with universities, high schools and scientific institutions.

The Bill provides for two additional exemptions from the payment of wage withholding tax. From 1 January 2006, up to 25 percent for, inter alia, civil engineers working on research and development projects, and from 1 July 2006, up to 50 percent for so-called 'Young Innovative Companies'.

Employment of young individuals

To stimulate employers to create traineeships within their companies, since 1 January 2006, the Bill has provided for a tax incentive consisting of a tax deduction of 120 percent of salary costs related to traineeships.

Disincentives for early retirement

The Generation Pact contains tax disincentives to discourage early retirement and incentives to work until the legal retirement age of 65.

Favourable tax treatment of pension capital payments

Pension capital payments to employees who effectively work until legal retirement age will be taxed at a rate of 10 percent.

The pact was a key federal policy document

Since 1 January 2006, the 10 percent rate, which has already been applicable to the part of the capital built up through employee contributions, now also applies to the part of the pension built up through employer contributions and previously taxed at 16.5 percent.

A comparable benefit has been introduced for self-employed persons who effectively exercise their activities until age 65. From 1 January 2006, the taxable base of the pension capital payment has been reduced by 20 percent.

Tax treatment of Canada Dry allowances

A Canada Dry arrangement is a form of early retirement pension in which unemployment benefits are paid with a top-up from the employer. It is mainly government financed.

Under certain circumstances, additional payments made by an employer to a former employee in execution of a Canada Dry arrangement will not be considered as replacement income and, hence, will no longer benefit from the related tax credit.

Under a Canada Dry arrangement, a dismissed employee who does not qualify for an early retirement scheme receives additional allowances.

As of 1 January 2006, these allowances will only benefit from the favourable tax treatment if paid to an employee of at least 50, and if the employer continues to pay such allowances when the employee is hired by another employer or if the employee starts his/her own business.

The text of the Generation Pact as approved by the Parliamentary Commissions is posted on the website of the Chamber of Representatives.

March 2006

For more information contact the authors at Deloitte's offices in Belgium. Joël Lebersorg:  Email: jlebersorg@deloitte.com, telephone: +32 (02) 600 6842. Renaat Van den Eeckhaut: Email: rvandeneeckhaut@deloitte.com, telephone: + 32 (02) 600 6568.

[Copyright Expatica 2006]

Subject: Tax in Belgium, Belgium's Generation Pact