Belgium: Tax treatment of immigrating taxpayers

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1 Belgium: Tax treatment of immigrating taxpayers IFA Congres Madrid 30 May 2014 Marc Vandendijk Tax Lawyer VANDENDIJK & PARTNERS Rue Edith Cavellstraat Brussels Tel.: + 32 (0) Fax: + 32 (0) Website: 1

2 Income Tax 1) General introduction: immigration and fiscal residency. 2) Principles of taxation of individuals in Belgium. 3) Belgian residents: special topics. 4) Interests, dividends, royalties and capital gains. 5) Life insurance and investment funds. 6) Expat regime. 2

3 1. General introduction: immigration and fiscal residency Distinction between resident and non-resident individuals. A resident individual of Belgium has his main home or his centre of economic interests in Belgium. - Taxation on worldwide income A non-resident has his main home or his centre of economic interests outside of Belgium - Taxation on Belgian-source income Nationality does not determine fiscal residency. 3

4 1. General introduction: immigration and fiscal residency Presumption of fiscal residency in Belgium when (not cumulative) a) registered in the civil register (refutable presumption); b) married persons have their household in Belgium (irrefutable presumption). When resident in state of emigration and immigration: OECD Tie breaker rules apply (only if treaty exists): 1. Resident only of the state in which a permanent home is available. 2. If permanent home in two states: state with which the personal and economic relations are closer (centre of vital interests). 3. If it cannot be determined in which state lies the centre of vital interests: state in which you have an habitual abode. 4. If habitual abode in two states: state of which you are a national. 5. If national in both or none of both states: settlement by mutual agreem. 4

5 2. Principles of taxation of individuals Belgian residents are subject to individual income tax on their worldwide income. Taxable income = gross income less expenses (net result) of the following categories: a) Employment, business, professional and pension income; b) Income from immovable property; c) Income from movable property (interests, dividends, royalties); d) Miscellaneous income. (-) Deductions (e.g. 80% of alimony paid). (-) Allowances (e.g. Basic tax free allowance of 7.270,00 EUR). (-) Credits (e.g. Long-term pension savings, life insurance schemes) 5

6 2. Principles of taxation of individuals Taxation of taxable (net) income at progressive rates. Taxable income (EUR) Rate up to % % % % over % Income tax to be increased with municipal surcharge (average 7-7,5%) Employee wages and directors remunerations are subject to withholding tax at source by the employer/company (WHT is advance payment on final tax liability/excess is refundable). 6

7 2. Principles of taxation of individuals Flat rates for certain income unless aggregation leads to lower tax rate than flat rate. 33% on speculative or occasional profits not resulting from business or employment; 25% in general on income from movable property (interests/dividends); 16,5% e.g. on awards granted to scientists; 15% e.g. on income from subletting of immovable property; Para-fiscal: Social security contributions (tax deductible). 7

8 3. Special topics A) Equity based compensation: stock options Taxable moment: 60 th day following the offer. Taxable base: Options quoted on stock Exchange: last closing of the stock option prior to offer date; Non quoted options: 18% of the value of the shares. Taxable rate of 18% applies to options with exercise period < 5 years (increased by 1% for each year in excess of 5 year term.) Rate of 18% and 1% can be decreased by half under certain conditions. In principle not subject to social security. 8

9 3. Special topics B) Pension income and pension savings 1. Pensions: 3 pillar structure 1 ste pillar: pensions funded by social security contributions. 2 nd pillar: occupational pensions: contributions paid by the employer and/or the employee (e.g. group insurance contracts). 3 rd pillar: contributions paid by the individual (e.g. long-term pension savings) 9

10 3. Special topics B) Pension income and pension savings 2. Taxation of pension income (first pillar) Periodic payments of pension income: taxed at normal progressive tax rates (a tax credit applies). 3. Exception: taxation of pension savings (second and third pillar) 10%: lump-sum pension payments (received at retirement age of 65 provided that a full career was built up by the age of retirement). 16,5%: idem but for payments made between age 62 and %: idem but for payments made at age %: idem but for payments made at age %: idem but for payments made before age

11 3. Special topics B) Pension income and pension savings 4. Special case: Tax regime in Belgium of pensions built up outside Belgium Principle: progressive rates / separate rates for lump sum payments (cf. supra) Exception: vested rights during build up period. Lump sum: tax free; Periodic payments: 3% of the surrendered value taxable at 25% (interest income tax rate). 11

12 3. Special topics C) Immovable property income In principle subject to income tax and immovable withholding tax (property tax). Taxable base for income tax and property tax is the cadastral income (deemed rental income) The cadastral income is determined by the tax authorities and subject to indexation. Low taxable base as deemed rental income was determined in the 70 s and never adjusted. Mortgage interest deduction from taxable base for income tax can be claimed (conditional). Redemption of capital on mortgage loans can be credited (conditional). 12

13 3. Special topics C) Immovable property income Property used as main dwelling: not subject to income tax, only immovable withholding tax. Other dwellings in Belgium not for professional occupation: taxable base is cadastral income increased with 40% ( x 1,4). Other dwellings in Belgium for professional occupation (e.g. offices): taxable base is actually received rent less 40% lumpsum expenses (10% for land). Immovable withholding tax (WHT but actually levied by assessment): effective tax rate between 25% and 60% on the cadastral income (depending on region and municipality). 13

14 3. Special topics D) Net wealth tax Not applicable 14

15 3. Special topics E) Double tax relief Belgium relies on a broad network of Double Tax Treaties. In order to avoid double taxation, Belgian tax system foresees in certain mechanisms: Exemption with progression reserve (affects the tax rate) on business/professional income and immovable property income. 50% reduction on earned income, immovable property income and certain miscellaneous income. Costs can be deducted from income (e.g. foreign taxes). For royalties: a credit equal to 15/85 of the net income before Belgian withholding tax. For interests: a tax credit up to 15/85 of the net income before Belgian withholding tax. 15

16 4. Interests, dividends, royalties and capital gains A. Introduction: domestic and foreign source investment income Dividends, interests and royalties from domestic source or paid through a Belgian agent: subject to withholding tax. Final tax system! No declaration of the income in personal income tax return (unless aggregation is more beneficial). Dividends, interests and royalties from foreign source not paid through a Belgian agent: subject to personal income tax at the rate of (in principle) 25%. No withholding tax. European withholding taxes (Austria, Luxembourg) can be compensated. Foreign source tax is deductible (nb. Tax base for Belgian WHT is gross income minus foreign source tax) but cannot be compensated. 16

17 4. Interests, dividends, royalties and capital gains B. Dividends The tax rate of 25% applies on dividends, liquidation boni and income from share buy-back. Foreign-source dividends not subject to municipal surcharge. Foreign source tax is deductible but cannot be compensated (cf. Kerckhaert-Morres, ECJ 14/11/2006, C-513/04; Damseaux, ECJ 16/07/2009, C-128/08; Levy, ECJ 19/09/2012, C-540/11). C. Interests The tax rate of 25% normally applies. Foreign-source interests not subject to municipal surcharge. Withholding tax and individual income tax exempt up to 1.900,00 EUR for interests from savings deposits in EEA. 17

18 4. Interests, dividends, royalties and capital gains C. Interests (Continued) Rate of 15% for interests from ordinary savings deposits in excess of 1.900,00 EUR. D. Royalties The tax rate of 25% normally applies. In some cases lump-sum cost deduction applies to determine the taxable basis. Copyright royalties (not exceeding ,00 EUR): 15% tax rate applies (excess subject to progressive tax) Lump-sum deduction of 50% on income up to ,00 and 25% on income between ,00 and ,00 EUR. Maximum lump-sum deduction is ,00 EUR. 18

19 4. Interests, dividends, royalties and capital gains E. Capital gains Capital gains realized by individuals resulting from privately held assets e.g. shares, property, art -> in principle NOT TAXABLE. Capital gains taxable at 16,50% (+municipal surcharge) (not business engaged) Sale of built immovable property sold within 5 years after acquisition; Sale of land sold within 8 years (but after 5 years) after acquisition; Capital gains from the cessation of a business (exercised as a private individual); (!) Capital gains from the sale of a + 25% participation in a BE resident company to a non EEA established legal entity. 19

20 4. Interests, dividends, royalties and capital gains E. Capital gains Capital gains taxable at 33% (+municipal surcharge) (not business engaged) Sale of patents, copyrights and other intangible fixed assets; Sale of land sold within 5 years after acquisition; (!) Capital gains from speculative transactions. (!) Art. 13 ES-BE DTT: Gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other state. 20

21 5. Life insurance and investment funds A) Sicav (Société d Investissement à Capital Variable) Most sicav s do not distribute dividends. Capital gains exempt from tax. 25% WHT on return (considered interests) when contract < 8 years and interest rate (or amount to reimburse) determined. Impact Savings Directive: Belgian residents endure 35% WHT in Luxemburg on Luxemburg Sicav. Savings Directive applies to: Mixed funds of the distribution type if >15% invested in fixed interest products. Mixed funds of the capitalization type if >25% invested in fixed interest products. Capital gains of this latter type are taxable. 21

22 5. Life insurance and investment funds B) Life insurance 1. Branch 21 Life insurance policy with a guaranteed return. Taxed on notional return of 4,75% at expiry date. 25% WHT in principle applies on expiration date unless: Either policyholder is sole beneficiary, advantages stipulated inter vivos for himself and contract provides capital of at least 130% of premiums; Either contract is concluded for a term of > 8 years (no payments within term). European Savings Directive is applicable to Branch 21 life insurances concluded as from 1 July Premium tax: 2%. 22

23 5. Life insurance and investment funds B) Life insurance 1. Branch 23 (Unit linked life insurance) Life insurance policy with no guaranteed return. Return in principle tax free. 25% WHT on return when interest rate (or amount to reimburse) are determined in contract. 25% WHT in principle applies on expiration date unless: Either policyholder is sole beneficiary, advantages stipulated inter vivos for himself and contract provides capital of at least 130% of premiums; Either contract is concluded for a term of > 8 years (no payments within term). European Savings Directive is applicable as from 1 July 2014 when > 40% (25% from 2016) linked to interest generating investments. Premium tax: 2%. 23

24 6. Expat status Beneficial taxation of foreign executives and researchers temporarily employed in Belgium. Employed in Belgium in a subsidiary or a Belgian permanent establishment of a non-resident company part of an international group. Expatriates are considered non-residents for income tax (i.e. a fiction as they are actually residents). Consequently, their foreign-source income is exempt from tax in Belgium (e.g. travel exclusion). 24

25 6. Expat status Certain expenses borne by the employer are considered expenses proper to the employer. Tax deductible by the employer within limits: ,00 EUR for executives working in productive entreprises; ,00 EUR for executives working in coordination centres or research centers. Exempt from tax for the employee. E.g. moving costs, housing allowance, costs of a yearly trip to the home country, cost of living allowances, tax equalisation. 25

26 Belgium: Tax treatment of immigrating taxpayers Conclusion: Belgium is attractive for high net worth individuals. Questions? 26

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