When an assignee leaves Belgium, as well as memories of time spent in this outward-looking country, they will almost certainly leave tax bills in their wake. A specialist reports on the tax treatment of Belgian income taxes paid on behalf of expatriates after the end of their assignment in Belgium.

An employee in the United States is assigned by his US employer to a group company in Belgium. He or she benefits from the Belgian special taxation regime for foreign executives (under the Belgian tax circular of 8 August 1983) during his assignment.

The assignee works and resides in Belgium between May 2001 and April 2003 while remaining on a US payroll and being remunerated on a net basis. In 2004, the assignee's Belgian 2002 income tax assessment has to be paid. As they are remunerated on a net basis, the company pays the Belgian tax bill.

The question we need to answer is, 'Does the tax paid by the company after the expatriate left Belgium represent a taxable benefit for the executive in Belgium?'

There is no particular regime set out in Belgian legislation. Under domestic Belgian legislation and international law, income taxes paid by the employer are to be considered professional income of the individual. According to Belgian domestic tax law professional income is taxable on a cash basis; for instance, at moment it is paid or considered to be paid.

A distinction should be made depending on whether the payment of tax is made and/or borne by the Belgian entity or paid and borne by the foreign company without any recharge to the Belgian entity.

Payment of taxes borne by a Belgian entity

If the Belgian income tax is paid and/or borne by - or its cost is recharged to - the Belgian entity, the amount is taxable income for the individual in Belgium, according to domestic and international tax law.

Thus from a Belgian domestic tax point of view, the settlement of income taxes paid by or cross-charged to a Belgian company or a Belgian establishment will be taxable in Belgium. Nevertheless, an executive resident in a country with which Belgium has concluded a double taxation treaty, such as the US, can use the treaty to avoid the tax settlement being taxed twice. Typically, a double taxation treaty will allow a tax exemption or a tax credit in such situations.

The Belgian tax authorities will allow the calculation of a tax free tax differential on the income tax payment. The tax free differential – foreseen in the special taxation regime – is capped at EUR 11,250 for operational entities or EUR 29,750 for control and coordination offices or research centres.

The taxable income to be reported in the individual's tax return is thus the tax paid minus the tax differential. (The Belgian special taxation regime also permits travel exclusion for expatriates based in Belgium, but the travel exclusion will not be applicable in this situation.)

Tax is calculated at normal progressive rates. Although the individual has no abode in Belgium at the moment of tax payment, the Belgian tax authorities apply the personal deductions (such as marital tax credit, personal deductions), provided the individual was allowed such deductions prior to their departure. No legal basis exists for this practice by the authorities.

In theory, the payment of tax is also considered as income, which should lead to a new tax liability. However, the tax authorities wish to avoid a 'snowball' effect where companies continue to pay tax on the income generated by payment of prior tax bills.

Thus, the tax authorities currently accept that the payment of the new tax bill will not be considered taxable income, even though such a conclusion is contrary to Belgian domestic tax law. The payment will constitute a non-deductible expense for Belgian corporate income tax purposes.

Looking back to our sample facts, the outcome would be:

• Expatriate returns to the US in 2003.
• Tax regarding income year 2002 is borne by the Belgian company in 2004: EUR 1,000
• To report in Belgian 2004 income tax return: EUR 1,000 minus tax differential.
• Belgian tax on the income reported in the 2004 income tax return would be EUR 300, payable in 2006. The EUR 300 does not need to be reported as taxable income for the individual, but will be treated as a non-deductible expense for Belgian corporate income tax purposes.

Normal rules for salary reporting and wage withholding apply to the tax payments treated as income.

Payment of tax borne by a foreign company

What happens if the foreign company pays a Belgian income tax assessment notice on the expatriate's behalf after his departure, but the payment is not cross-charged to Belgium?

Under Belgian tax law, remuneration borne by a non-resident for an activity exercised in Belgium by a beneficiary who stayed in Belgium for more than 183 days in a taxable period is taxable.

Therefore, according to the tax authorities, the payment will be taxable in Belgium even in the absence of any recharge of costs to Belgium. The authorities currently apply the 183-day benchmark to the income year to which the payment relates (see our example for 2002 above).

In our opinion this position of the tax authorities can be challenged. Double taxation treaties usually entitle the residence state to levy tax, unless the executive stayed more than 183 days in Belgium in the year that the payment was made.

In our example the employee did not perform activities in Belgium in the year the taxes were paid. Consequently, according to double taxation treaties, the right to levy taxes is attributed to the residence state.

Furthermore, although Belgian domestic legislation refers to a taxable period, the administrative commentary sets out that ‘the beneficiary of the remuneration must stay more than 183 days in Belgium during the taxable period’.

According to the above cash principle, the taxable moment is the year in which the tax is paid, such as 2004. Our expatriate, who returned to the US in 2003, and on behalf of whom taxes are paid in 2004, did not spend more than 183 days in Belgium during the taxable period 2004. Thus, the logical conclusion of our argument is that a payment by a non-resident company on their behalf should not be considered as taxable in Belgium.

We can conclude that, if the income tax relating to an activity previously performed in Belgium is borne in Belgium, tax will be due in Belgium as professional income.

If the tax is not borne in Belgium and the executive does not stay more than 183 days in Belgium in the year the tax is paid, there is an argument that the payments are not taxable in Belgium. Currently, the tax authorities do not agree, and will seek to tax the payments based upon (their interpretation of) Belgian domestic tax law.

December 2004

Ilse De Troyer, Senior Manager, International Assignment Services, is based at the Diegem office of Deloitte in Belgium. She can be reached by telephone at +32 (0)2 600 6863, or by email at idetroyer@deloitte.com.