INTRODUCTION. The Regions may levy surtaxes, grant tax reductions or operate general fiscal reductions and increases.

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2 The unity (of Belgian history) arises not from a community of race as in Germany, not from a centralizing action, as in England or France, but from the unity of social life. Henri Pirenne Histoire de Belgique Foreword 1900 INTRODUCTION Belgian Tax Structure 1. Taxes must be enacted by Statute 1. They must be renewed yearly 2. Equality must be respected between taxpayers 3 and the Constitutional Court will sanction laws contrary to this provision. Constitutional equality and fundamental rights of free movement guaranteed by the EU treaties apply simultaneously. When the violation of both is asserted, the law gives priority to the Constitution : a question must be asked to the Constitutional Court first. Belgium is a federal country. Most taxes are federal but the proceeds are shared with the Communities 4 (Dutch, French and German-speaking) 5 and the Regions (Flanders, Wallonia, Brussels) 6. The Regions may levy surtaxes, grant tax reductions or operate general fiscal reductions and increases. Some taxes are regional taxes : - Inheritance duties of residents and transfer duties upon death of non-residents ; - Real property withholding tax ; - Stamp duties on transfers subject to payment of real property located in Belgium, except for transfers upon contribution to a company by an individual of a dwelling ; - Stamp duties on gifts of personal property or real property ; - Radio and television fees ; - Traffic tax on car vehicles ; - Circulation tax ; - Euro road tax. 1 Constitution, Art. 170, 1. 2 Const., Art Const., Art Special law of 16 January 1984 concerning the financing of the Communities and the Regions. 5 Shared taxes : VAT, personal income tax. 6 Joined taxes : personal income tax.

3 Income Tax 2. From 1919 to 1963, Belgium did not levy a uniform tax on total income. The income of individuals and corporations was taxed according to a schedular method based on its source. A Law of fiscal reform of November 20, 1962 replaced the schedular tax system by a system similar in principle to the U.S. income tax and to the tax systems of other EU countries. All income is subject to a single tax. However, withholding taxes ( précomptes voorheffingen ) are due on income depending on its source. They are creditable against the final tax due, within certain limits, with the exception, however, of the real property tax 7 which is improperly called real estate withholding tax ( précompte immobilier onroerende voorheffing ). Within this system of a single income tax, a distinction is made between : (a) Resident individuals, who are taxed on their global income, under the Individual Income Tax regime ; (b) Resident corporations, which are taxed on their global income under the Corporate Income Tax regime; (c) Non-residents, both individuals and corporations, which are taxed on their income from Belgian sources under the Non-resident Income Tax regime ; (d) Non-profit making organizations and government agencies, which are taxed on certain categories of income under the Legal Persons Income Tax regime, which mainly consists of withholding taxes at source. The Belgian income tax legislation was first coordinated into an Income Tax Code, by a Royal Decree (R.D.) of February 26, The main regulations implementing the provisions of this Code were embodied in the Royal Decree of March 4, A Royal Decree of April 10, 1992, coordinated the income tax legislation into an Income Tax Code 1992, hereinafter abbreviated CIT1992 or, generally, CIT. The main regulations implementing the provisions of this Code are embodied in the Royal Decree of execution of the 1992 Code of August 27, 1993, hereinafter abbreviated RD-CIT 1992 or RD-CIT. 7 By real property we mean property which is immovable according to the Civil Code (land, buildings ) and by personal property we mean property which is movable according to the same Code, being all other property, whether tangible such as chattel, machinery, etc. or intangible ( incorporal ) such as securities, claims, intellectual property rights. 2

4 TITLE I BELGIAN INDIVIDUAL AND CORPORATE TAX LAW 3. The tax administration has issued : - the Administrative Commentary of the Code of Income Taxes (Com.CIT), regularly updated on the Internet; - the Administrative Commentary of Double Taxation Conventions (Com.DTT). Belgium is a member of the OECD and follows the OECD Model in the drafting of its treaties. It has developed a model Belgian treaty draft 2010 (replacing a 2007 version) 8. Chapter I Taxation of individuals Section I Taxation of resident individuals A. Taxable persons 4. The Belgian personal income tax is applicable to individuals who are considered to be residents of Belgium for tax purposes. B. Residence 1. Domestic Law 5. Individuals are considered residents for income tax purposes if they keep their permanent domicile or customary residence in Belgium or if the centre of administration of their wealth (Centre of economic interests) is established in Belgium 9. The notion of domicile is characterized by the place where a person effectively lives or resides, while the centre of administration of wealth is the place where a person effectively manages her wealth. Temporary absence is not considered a change of domicile. A person registered in the National Register of inhabitants is deemed to be resident unless proven otherwise. The fiscal residence of married persons is located at the place where their household is established. The same presumption applies to people who have established a legal cohabitation. 8 De Broe, L., Belgium Tax Treaty Policy and the Draft Belgian Model Convention, Bull. Int. Taxation, 2008, p. 322 ; Schoonvliet, E., Unilateral and Treaty Measures in Belgium for the Avoidance of Double Taxation, Bull. Int. Taxation, 2008, p CIT, Art. 2, 9, 1 ; Jorion, G., Le non-résident ou la société étrangère face à l impôt belge, Bruxelles, Larcier, 2006, p

5 Domicile The definition, developed by case-law and doctrine, of the main home or domicile 10 for income tax purposes emphasizes its factual nature: it is a specific and actual dwelling, that can be different from civil domicile or nationality, which is constituted, confirmed and consolidated by a whole sum of facts and circumstances and which is characterized by a certain permanence or continuity. 11 The main home is the centre of one s vital interests 12 (family related, professional, cultural, economical and other). As such it must not be deemed to change easily. The intention to return to the country of origin has no impact on the issue. Residence necessarily implies an element of permanence or continuity. The duration of a stay in a country is sometimes a sufficient criterion to determine whether a person is a resident, but the assessment of the stability in dwelling goes mostly beyond the mere temporal element. In their Commentary on income taxes the tax authorities admit that this stability cannot be the sole criterion without taking into account the situation of the family. 13 Other elements can influence the determination of the main dwelling and reduce the importance of the duration of the stay in Belgium. Did the person leave all his possessions behind when coming to Belgium? 14 What is the nature of his employment in Belgium? 15 What is the reason of an (early) return abroad? 16 Is the foreign employment continuously exercised on the same location or is one living out of a suitcase? 17 Is one s home connected to the Belgian telephone network 18 and, if so, how high were the costs and where were the invoices sent to 19 (the same applies to the use of water and electricity)? Is someone owning or renting a house? 20 Where are a person and/or his property insured? 21 Does the contract of employment stipulate a return to the country? 22 Which address do official documents 23, letters and name cards mention? The words domicile and residence are used here as synonyms, and not in their English civil law meaning. 11 See for instance Cass., November 15, 1990, Pas. (1991), I, at P. Hinnekens, Belasting der niet-inwoners (Kalmthout: Biblo, 1994), n Com. IT 3/10 and 3/ Compare with: Antwerp, December 18, 1984, A.F.T. 1985, 140: a person moved furniture and appliances weighing 1020 kg to Tunisia together with his car. He was also accompanied by his wife. As such he can be considered a non-resident from then on. 15 Compare with: Liege, May 2, 1972, Bull. Bel. 511 (1973), at 2075: a person sent by his employer to the USA for ten months for training purposes did not reside their on a permanent basis. 16 Compare with: Brussels, September 25, 1990, R.G.F. (1991), at 216: a deputy program administrator whose contract obligated him to work at least 41 months in Arabia, but who had to return to Belgium because of failure of his employer, can still be considered a non-resident, because the return was not motivated by the intention of the employee. 17 Compare with: Liege, March 13, 1985, F.J.F., 85/130: person employed on different locations in different countries not considered to have become a Belgian non-resident. 18 See Cass., February 7, 1979, Bull. Bel. 611 (1979), at 2713; Liege, April 24, 1996, Fisc. Koer. (1996), at Liege, April 14, 1988, F.J.F. (1988), n 209; also regarding other types of invoices: Cass., October 28, 1982, F.J.F. (1983), n Antwerp, March 5, 1984, A.F.T. (1984), at 87; Antwerp, June 29, 1999, T.F.R. (2000), at 21, observation of Marc Delboo; Brussels, October 21, 1976, J.D.F. 1977, at 260; Brussels, May 4, 1982, F.J.F. (1982), n 112; Brussels, September 17, 1998, Fisc. Koer. 1998, at Antwerp, February 18, 1982, F.J.F. (1982), n 71; Liege, January 18, 1995, F.J.F. (1995), n Liege, January 18, 1995, F.J.F. (1995), n Trib. Nivelles, November 4, 2003, Rec. gén. Enr. Not. 1 (2004), at Antwerp, February 18, 1982, F.J.F. (1982), n 71. 4

6 A practical question often heard is how long a stay in Belgium has to last before there can be a shift in residence at all. First of all, it is clear that for income tax purposes a stay of 183 days or even during the whole taxable period is normally insufficient to become a resident in Belgium, because the law itself contains special arrangements within the tax on non-residents for employees who live here for more than 183 days 25 or who are keeping a (temporary) abode here during the whole taxable period. 26 Secondly, we find a vast amount of case law 27 vis à vis the required duration of the stay. So, for example, ten months were not long enough for an engineer, sent to the United States by his employer for training purposes, to lose his Belgian residency. 28 For a pilot of Sabena on a mission of technical support to Air Congo thirty months in Zaire was also insufficient to become a non-resident of Belgium. 29 Also, three years were considered insufficient for a person teaching at the faculty of law in Ouagadougou (Burkina Fasso) to lose her status as Belgian resident for tax purposes. 30 But for a professor working in Canada eight years was a long enough period for a change of fiscal residence. 31 In two of the so-called Eurosystem cases (with regard to persons working in Arabia) a continuous stay abroad of respectively six and seven years sufficed. 32 Remarkably, since 1990, a shortening of the required permanence in staying abroad, needed to free oneself from Belgian resident taxation, can be noticed. 33 In the third Eurosystem case forty-one months sufficed in order to lose Belgian tax residency (even a shorter period because the forty-one months of employment stipulated in the contract were not all performed because of failure of the employer). 34 The same was held for two years of detachment to China. 35 The Court of Appeal of Antwerp found that periods of sixteen and fifteen months were already long enough for an employee of the Anhyp Bank in Luxemburg to change his residency for tax purposes to Luxemburg, even if he returned to Belgium when he was not supposed to work. 36 Centre of administration of wealth The second legal criterion to determine residence is the centre of one s economic interests ( siège de la fortune ). This concept does not relate to the material location of one s assets, but to the place from which the elements of one s estate are managed 37, i.e. where the important decisions regarding the estate are taken. This place is inevitably characterized by a certain unity. 38 It will, except in rare cases, coincide with the main dwelling Article I.T.C. 26 Article and art I.T.C.; see Luc Hinnekens, Het (niet-)rijksinwonerschap van de gedetacheerde werknemer volgens de laatste stand van wetgeving en rechtspraak, A.F.T. (1995), at The following examples are taken from Luc Hinnekens, Nieuwe krachtlijnen in de rechtspraak over het rijksinwonerschap, A.F.T. (1991), at Liege, May 2, 1972, Bull. Bel. 511 (1973), at Trib. Brussels, February 20, 1979, Rec. Gen. Enr. Not. (1980), at Brussels, March 21, 1989, F.J.F. (1989), n 167, confirmed by Cass., November 15, 1990, R.G.F. (1991), at Brussels, January 9, 1979, J.D.F. (1980), at Brussels, May 15, 1990, R.G.F. (1991), at 218; Brussels, September 25, 1990, R.G.F. (1991), at Hinnekens, L., Het (niet-)rijksinwonerschap van de gedetacheerde werknemer volgens de laatste stand van wetgeving en rechtspraak, A.F.T. (1995), at Brussels (Court of Appeal), March 13, 1990, R.G.F. (1991), at Mons, April 10, 1992, A.F.T. (1993), at 27, observations Luc Hinnekens. 36 Antwerp, June 29, 1999, T.F.R. 2000, at 21, with disapproving observations of Marc Delboo. 37 Cass., February 7, 1979, Bull. Bel. 611 (1979), at 2713; Cass., October 28, 1982, F.J.F. (1983), n 41; Cass., June 30, 1983, F.J.F. (1983), n Liege, June 18, 1986, F.J.F. (1987), n Malherbe, J., Droit fiscal international (Brussels : Larcier, 1994), at 28. 5

7 Different elements are used in Belgian case law to locate a person s centre of economic interests. Again, these elements have to be pondered bearing in mind their relative importance. A first element can be the country where a person holds immovable assets. 40 In the Eurosystem-cases it was held, however, that an individual does not lose his status of non-resident when he remains the owner of a building in Belgium which is managed by his wife. This is also true when she does so by a general mandate in execution of decisions taken by her husband abroad 41, or by a mandate in the general council of the Belgian association of which the spouses hold the shares and which is the owner of the dwelling of the spouses. 42 The same judgment also underlined the importance of the place where the spouses receive their main professional income (the husband in Arabia, the wife in Belgium) 43. Other criteria which can influence the position of the centre of economic interests are a (bank) account 44 and the relative importance of the money deposited on such account as compared to the total estate, as well as other (movable) assets. In an interesting case, the Court of Appeal in Brussels put forward a new and peculiar criterion: the place from which an individual builds his career. 45 A man of British nationality had built a career in Belgium by calling upon the Belgian employment market and by working for Belgian employers (with an international calling, but this was deemed irrelevant by the Court). Even when he was unemployed for a considerable time, he did not apply for a job outside Belgium. The court submitted that: without elements to the contrary, which were not accounted for in this case, it is allowed to consider that his working capital comprises the main component of the fortune of a homo economicus, and that it is managed from the place where he constructs his career (our translation). Relationship between the two criteria Knowing the importance of the centre of economic interests, the question arises as to the nature of its relation to the main dwelling-criterion. The law itself uses the word or to connect both notions. This would suggest that both criteria are used alternatively. This is also the view of the Cour de Cassation. In 1965, in the Derks-case 46, the Court ruled, after having reminded that Mr. Derks had his domicile in Monte-Carlo where he also actually resided, that he could still be considered a Belgian resident since he owned immovable assets and shares of the NV Entreprises Derks and Bureau d Etudes Derks in Belgium. In doing so, the Court pointed out that the legislator has used both criteria as alternatives. This opinion is now unanimously followed by all Belgian courts. As a result, the notion of centre of economic interests can be used as a sufficient criterion when it is not located in the same country as the main dwelling Cass., September 7, 1965, Pas. (1966), I, at Brussels, May 15, 1990, R.G.F. (1991), at Brussels, March 13, 1990, R.G.F. 1991, at See also: Brussels, September 17, 1998, Fisc. Koer. (1998), at For example Brussels, October 21, 1976, J.D.F. (1977), at Brussels, October 14, 1993, F.J.F. (1994), n Cass., September 7, 1965, Pas. (1966), I, at Com. IT 3/4. This view has been frequently criticized (See for example Zondervan, R., Les impôts sur les revenus et l extranéité : étude théorique et pratique du régime fiscal belge en matière de revenus d'origine étrangère ou attribués à des "étrangers", (Brussels : Pauwels, 1967), at 87 and E. Schreuder, «L habitant du Royaume», Ann. Not. Enr. (1967), at 6-33). One of the most ardent critics is surely Hinnekens, L. This author refers to the history of the law (investigated by DONNAYm-, M., L habitant du royaume, Rec. Gén. Enr. Not. (1975), n 21936, at 233) to submit that it does not support an alternative use of the concepts. The definition of Article 37 of the Coordinated Laws has his predecessor in art. 2 of the law of December 27, 1817 (now Article 1 of the Code of Succession). The project of that law contained an article stating that was liable to tax he who was an inhabitant of the Kingdom of the Netherlands. Fearing that this would lead to taxation of persons recently arrived in the kingdom, another definition was sought. It was found in an executive decree to the law concerning the 6

8 Therefore, if individuals wish not to be subject to Belgian personal income tax and inheritance tax (both with worldwide tax liability) neither their main home ( domicile ), nor the centre of their economic interest should be located in Belgium. 2. Treaty Law 6. Pursuant to Article 4-2 of the OECD model treaty, the criteria of residence are the following: - permanent home; - centre of vital interests; - habitual abode; - nationality. These general OECD model criteria are used in Belgian tax treaties. The Model Belgian tax treaty (2010) uses them also. 3. Income from Real Property a. Cadastral Income 6bis. Cadastral income 48 (revenu cadastral / kadastraal inkomen) is attributed to all pieces of real property, whether or not built on, located in Belgium. It corresponds to the deemed net annual rental income, as determined by the tax authorities. Plant or equipment used for the exploitation of the real property concerned and belonging to the owner of the real property will also be considered real property and will be attributed cadastral income if they are permanently and materially attached to the property or if, in view of their size or other characteristics, they are intended to remain in place. Cadastral income with respect to buildings is based upon their normal net rental value on January 1 of the year preceding a general revision (péréquation / perekwatie) of all cadastral income. The net rental value is the gross rental value decreased by a lump-sum deduction for maintenance and repairs of 40% (buildings) or 10% (land). The gross rental value of buildings is determined by a comparison with rentals of similar buildings or with the cadastral income in respect of similar buildings that have been assessed, when the assessment has become final. In cases in which such comparison is not possible, the cadastral income is equal to the market value of the property multiplied by 5.3%. The cadastral income with respect to plant and equipment is calculated by multiplying their value for purposes of use, as established on January 1, 1975, by 5.3%. The value for purposes of use is deemed to be equal to 30% of the investment value, increased by transformation costs (if any). The last general revision of cadastral income was based upon market prices on January militia. But in this decree the conjunction used was and instead of or. Without any obvious reason it was changed to if. It would not be the first time that a legislator made such a mistake out of sloppiness. (Hinnekens, L., Nieuwe krachtlijnen in de rechtspraak over het rijksinwonerschap, A.F.T. (1991), at 24). Hinnekens also points out that before the Derks-case jurisprudence always opted for a conjunctive interpretation of the definition (for example Trib. Brussels, November 30, 1895, Rec. Gén. Enr.Not., n 12522). To him, main dwelling and centre of economic interests are merely different facets of one single residency concept (Hinnekens, L., Rijksinwonerschap. De complexe feitenbalans van de hoedanigheid van (niet-) verblijfhouder, A.F.T. (1985), at 125). 48 CIT, Arts. 471 to

9 1, 1975 and came into effect on January 1, The next general revision has been delayed. In the meantime, the cadastral income is adjusted annually on the basis of the retail price index. A new cadastral income is assessed for new or improved real property. Interim revisions may be made in areas where significant changes in the value of real property occur. The cadastral income with respect to newly constructed buildings must be established by the tax authorities at the latest for the year that follows the year of first occupancy and the taxpayer must be notified accordingly by registered mail. A taxpayer is entitled to lodge a claim against the cadastral income proposed by the tax authorities. b. Taxable Income 7. The determination of taxable income derived by resident taxpayers from real property is dependent upon: (i) the use made of the property; and (ii) the location of the property, i.e., in Belgium or abroad. The following four kinds of property may be distinguished: (i) Privately used real property located in Belgium; (ii) Real property used for professional purposes located in Belgium; (iii) Rented real property located in Belgium; and (iv) Real property located abroad. Real property privately used 8. If the real property is occupied by the owner for private dwelling purposes, the taxable income is the cadastral income with respect to the property (revenu cadastral/ kadastraal inkomen). Taxable income from second residences that are not rented is equal to the cadastral income increased by 40 %. Real property used professionally 9. If a building is used by its owner for the exercise of a professional activity, the cadastral income is deemed to be professional income and, thus, needs not be reported as real property income. If the real property is used for both private and professional purposes, the cadastral income is apportioned to determine the income portion that is taxable as real property income. Rented real property 10. If the real property is rented to an individual who uses the property exclusively for private habitation purposes, the taxable income is the cadastral income increased by 40%. If the lessee is a legal entity, such as a corporation or a nonprofit association, an entity without legal personality, or an individual who uses the property in whole or in part for business purposes, the taxable income derived from the rented real property will be equal to the cadastral income increased by that portion of the net rent received in excess of the cadastral income. The net rent corresponds to 90% (for land) or 60% (for buildings) of the gross rent received, the deductions inherent in these percentages representing maintenance and repair costs. However, the 40% lump-sum deduction for maintenance and repairs 8

10 applicable to buildings may not exceed two-thirds of the cadastral income, as revalued annually by a coefficient defined by Royal Decree. If the lessee is an individual who uses the real property for both private and professional purposes, and provided the rent has been apportioned in the rental agreement to reflect the double use, the taxable income will be the sum of: (i) the cadastral income increased by 40% for the portion of the rent relating to the private use; and (ii) the total net rent received for the portion of the rent relating to the professional use. Foreign real property 11. Taxable income derived from real property located outside Belgium is determined on the basis of the rental value if the property is not rented, and on the basis of the actual rent and rental charges received if the property is rented. The gross amount of the rental value or of the actual rent and rental charges received is reduced by the foreign taxes directly related to the property and an additional 40% (for buildings) or 10% (for land) to cover maintenance and repair expenses. Belgium's tax treaties provide that income derived by Belgian residents from real property located in the other Contracting State is taxable only in that State. Hence, such income is exempted in Belgium. The income will nonetheless be included in the taxpayer's global taxable income, but only for purposes of determining the tax rate applicable to the total income from which the foreign real property income will have been deducted, under an "exemption with progression" (réserve de progressivité / progressievoorbehoud). If Belgium has no double taxation agreement with the country in which the real property is situated, Belgium grants unilateral tax relief by reducing by 50% the amount of Belgian income tax on the foreign real property income 49. Long-term leases 12. Real property income also includes amounts obtained upon the granting or assigning of a right to a long-term lease (emphytéose/erfpacht or superficie/opstal) or similar rights that are in the nature of property rights. 50 Such amounts are taxable when received whether they cover the whole or only part of the duration of the long-term lease. The following are not considered to be such lease-related income: rents allowing the recovery of either the capital invested by the owner of a new building or the market value of an existing building plus interest or other charges, where at the end of the contract the right to the property is automatically transferred to the user, or where the contract provides for a purchase option in favor of the user. 51 In that case, the interest component is income from capital 52. c. Exemptions, Reductions and Deductions Exemption for charitable purpose 49 CIT, Art. 156, CIT, Art. 10, CIT, Art. 10, CIT, Art. 19, 1, 2. 9

11 13. The cadastral income is tax-exempt if the real property is used for a charitable or nonprofit purpose, as a church, a school, a hospital, etc. 53 Reductions 14. The cadastral income and, hence, the real property withholding tax is reduced on the grounds of "non productivity" when an unfurnished building is unoccupied and does not generate any income for at least 90 days in a taxable year. 54 The amount of the reduction depends on the duration and the degree of the non productivity of the property. The non productivity of the property must be "involuntary," i.e., it may not be attributable to the owner. Thus, for example, no reduction is granted if the non productivity of the property is caused by reconstruction works or when it results from the fact that the owner puts the building up for sale without putting it up for rent at the same time. A reduction will also apply if the property or a part of it representing at least 25 % of the cadastral income is destroyed 55. Similar reductions apply to the cadastral income of plant and equipment. Exemption for residential use 15. The cadastral income is tax-exempt with respect to the house owned and occupied by the taxpayer, except as far as the real property withholding tax (see nr. 17) is concerned 56. This exemption is available only with respect to one house, designated by the taxpayer, where the taxpayer occupies more than one house. The exemption is not available for any part of a house that is used for professional purposes or is occupied by persons who are not part of the taxpayer s household. Deduction of interest on debts 16. Interest paid on debts incurred for the sole purpose of acquiring or maintaining real property is deductible from real property income. Such interest may be deducted from total real property income, even if the loan on which the interest is paid was entered into for the purpose of acquiring or constructing only one of the houses owned by the taxpayer. Any interest exceeding total real property income may not, however, be deducted from other sources of income (for example, from income from capital or professional income), nor can it be carried over to previous or subsequent tax years. 57 An additional interest deduction is granted to an individual taxpayer for interest paid and reimbursement of capital on a mortgage loan taken out to acquire or construct a new house located in Belgium. The additional interest deduction, which is a deduction from global taxable income rather than a deduction from real property income, only applies in respect of a single building acquired or constructed by the taxpayer CIT, Art CIT, Art. 15, 1, CIT, Art. 15, 1, CIT, Art. 12, CIT, Art. 14, CIT, Art. 104, 9, 115 and

12 d. Real Property Withholding Tax 17. Individual taxpayers are subject to a prepayment in the case of real property located in Belgium, i.e., the real property withholding tax (précompte immobilier / onroerende voorheffing). 59 The real property withholding tax is levied on the value of the cadastral income with respect to the real property concerned. An assessment for real property withholding tax purposes is made in the calendar year during which the real property income is obtained. The tax is a regional tax. The basic rate of the prepayment is: 1.25% of the cadastral income in the Walloon or Brussels Region and 2.50% of the cadastral income in the Flemish Region. Provinces and municipalities levy additional taxes on the real property withholding tax. The prepayment is in principle paid by the individual who owns the building on January 1 of the taxable period, even where the property changes ownership between January 1 and the date on which the prepayment has to be made. Purchase deeds for real property located in Belgium will, therefore, generally contain a clause pursuant to which the purchaser is under the obligation to reimburse the seller that part of the prepayment that corresponds to the portion of the year after the date of the sale. Landlords typically shift the burden of the real property withholding tax to their tenants if this is not expressly prohibited by law, as in the case of residential loans. This convention, while legally valid as between the parties (provided the rented property is used for professional purposes), cannot be upheld against the tax authorities. Thus, a landlord is not entitled to invoke the nonpayment of the prepayment by his tenant vis-àvis the State. Exemptions 18. Exemptions from the real property withholding tax are available for: (i) real property income that is exempted from income tax (for example, income from real property used for charitable purposes); (ii) the cadastral income with respect to real property falling within the "public domain," provided and to the extent that such property does not produce any income and is used for a public service or a service of general interest (both these conditions must be satisfied); and (iii) income from real property that benefits from special or temporary exemptions. Reductions 19. Reductions in the real property withholding tax may be granted at the request of the taxpayer. Most of these reductions take account of the taxpayer's situation (for example, the number of the taxpayer's dependents, the disability of the taxpayer). Other reductions are made available under social housing programs or on the basis of factual situations (for example, in the case of unfurnished buildings unoccupied for at least 90 days in a taxable year). The real property withholding tax pertaining to a taxpayer's principal private dwelling is not creditable against his final individual income tax liability 60. There is therefore a certain double taxation of real property income. 59 CIT, Art CIT, Art. 271, abolished by Law of December 27, However, this provision will remain applicable if certain conditions are fulfilled (e.g. the loan acquiring the house was entered into before January, 1, 2005). See CIT, Art

13 C. Determination of Gross Income Overview 20. The taxable income of a resident individual includes real property income, income from capital and personal property, professional income and certain miscellaneous income 61. Each class of income is subject to particular rules. Tax is assessed in principle at progressive rates on global income from domestic and foreign sources. Certain classes of income (such as income from capital, taxable capital gains, back pay, miscellaneous income) are taxed separately at flat rates if such taxation is more favorable to the taxpayer 62. Income that is exempt by virtue of a tax treaty is taken into account with other taxable income in order to determine the tax rate on income taxable in Belgium 63. Application 20bis. A couple, before receiving a pension capital, rents a house in Bray-Dunes, a beach resort in France close to Belgium and grants a lease on their house in Veurne (Belgium 10 miles from there) to a company which they control. They pay for that house a municipal tax on a second residence. The Court applies the tie-breaker. They have a lasting residence in both countries but their closest links are with Belgium. The husband was director of a Belgian company which had no personnel. The couple had bank accounts in Belgium and could not prove expenses in France Income from Capital and Personal Property a. Introduction 21. Income from capital and personal property includes dividend income, interest income, royalties and rentals with respect to personal property, as well as annuity income other than pension income granted by legal entities or enterprises 65. A important distinction is made between income derived from capital or personal property that a taxpayer must include in his annual return because no withholding tax on such income has been collected, and income subject to a withholding tax, which need not be reported. In the latter case, the payment of the withholding tax discharges the taxpayer from paying any additional tax. Although income from capital or personal property not subject to withholding tax must be included in the annual tax return, it will be taxed at a separate flat rate identical to the withholding tax rate. A taxpayer may nevertheless elect to include the income subject to a withholding tax in his tax return and, hence, globalize it with other income items instead of the income being 61 CIT, Art CIT, Art CIT, Art Ghent, June, 24, 2008, Fisc. Koer., 2008, p CIT, Art

14 taxed at a flat rate 66. This will be useful only if he has little or no income. In the latter case, indeed, the taxpayer may even receive a refund of the withholding tax levied. Income derived from capital or personal property used in the taxpayer s profession is included in his professional income 67. It will, therefore, be taxable at ordinary rates on its full amount net of eventual expenses. This qualification does not, however, exclude the application of the withholding tax on such income. The withholding will be creditable and, if it exceeds the tax due, refundable. b. Income to Be Included in the Taxpayer s Return 22. Income items that have to be included in the annual tax return, but will be taxable at a flat income tax rate equal to the withholding tax, are as follows 68 : income from a foreign source, collected outside Belgium; income from loans secured by a mortgage on real estate located in Belgium; all items of income which were not subject to a withholding tax, such as: - income from life annuities: if paid by a business or a legal entity, they are deemed to amount to 3% of the capital 69 ; - income from temporary annuities; - royalties and rentals : a standard deduction of 15% of royalties or rentals derived from personal property which is not invested in a business is allowed, but this amount may be increased if it is justified 70. A deduction is allowed up to 85% for rentals of films and up to 50% for rentals of furniture in furnished dwellings (40% of the rent received on a furnished dwelling is considered to be rent for furniture) 71. c. Income Not to Be Included in the Taxpayer s Return 23. Income derived from personal property subject to a withholding tax when collected in Belgium essentially includes investment income, i.e. dividend and interest income. (1) Dividends 24. Dividends include all benefits attributed to shares by a company, whatever their denomination or form. A reimbursement of capital is considered a dividend if it occurs without a legitimate decision of the general meeting of shareholders or, even when legally decided, to the extent that it exceeds effectively paid-up capital (including issuance premiums) 72. Thin capitalization Interest income paid or attributed on loans granted to a company by a director (whether individual or corporate) or by an individual partner or shareholder is assimilated to dividends insofar as either the interest income exceeds interest income calculated at a 66 CIT, Art CIT, Art CIT, Art. 171, 2 bis and 3 bis ; Art. 519; Art CIT, Art R.D.-CIT, Art. 3, conversely, 60 % of the rent is income from real property. 71 R.D.-CIT, Art CIT, Art. 18, 1. 13

15 normal rate (the market rate) taking into account the particular risk involved in the operation, or if the total amount of the loans exceeds the paid-up capital as of the end of the tax year plus the taxed reserves as of the start of the tax year 73. This provision is not applicable where loans have been granted by corporate directors if the corporation is a Belgian resident. The ECJ found this limitation to Belgian companies contrary to the freedom of establishment : the foreign company which was a director of the Belgian company and a lender was indeed its parent. The Belgian provision, however, applied irrespectively of a relationship of participation between the two companies : a directorship is enough. Such a provision could be justified only to counter an abuse, in the case of a wholly artificial scheme. The existence of a ratio of 1 to 1 between debt and equity is no evidence of an abuse 74. The restriction to the freedom of establishment is therefore disproportionate. The Court had taken the same decision in respect of a 3 to 1 ratio applicable in Germany 75. Dividends of corporations are subject to withholding tax at the rate of 25% (see infra at nr. 76) as is the excess of the repurchase price over investment value in the case of a corporation repurchasing its own shares 76 and liquidation distributions. However, the withholding is reduced to 15 % on shares issued by small companies on new capital contributed in cash after July 1, 2013, when dividends are distributed after the third accounting year following the contribution. If the contribution is made after the second accounting year following the contribution, the withholding will be 20 % 77. The shares must remain in possession of the contributor. (2) Interest 25. Interest income is any income derived from fixed or variable income securities, loans, and deposits 78. Interest derived from fixed income securities (i.e., bonds, loans and other similar securities, including securities with capitalized interest or securities which do not give rise to a periodic payment of interest and which have been issued with a discount equal to the interest capitalized until the maturity date) includes every payment that exceeds the principal amount, whether or not the payment is made on the agreed maturity date of the securities 79. Interest is in principle subject to withholding tax at the rate of 25%. Interest awarded by a judgment or otherwise for late payment of a debt is not treated as income from capital. 73 CIT, Art. 18, 4, and Art ECJ, January, 17, 2008, Case C-105/07, SA Lammers & Van Cleeff v Belgian State. 75 ECJ, December, 12, 2002, Case C-324/00, Lankhorst-Hohorst. 76 CIT, Art CIT, Art. 269, CIT, Art. 19, 1, CIT, Art. 19, 2. 14

16 d. Tax Rules 26. It is the gross amount of the income derived from personal property that is taxable, i.e., the amount collected without deduction of expenses incurred plus the amount of the withholding tax. Conservation and collection expenses relating to that income are deductible only where the income is globalized with all other income items and is thus not taxed separately 80. Interest paid on loans entered into for the acquisition or conservation of income derived from personal property is not tax deductible. An exemption is, however, made for interest paid by remunerated directors of companies on loans contracted for the acquisition of shares in the company but it is deductible from professional income (see infra nr. 27) 81, not from personal property income. 3. Professional Income Introduction 27. Any enrichment directly or indirectly derived from the taxpayer s professional activity 82 is considered professional income 83 whether or not the activity carried on is legal. Professional income is divided into five income categories 84 : business profits 85 ; profits derived from independent professions or independently performed services; profits derived from a professional activity previously exercised; wages and salaries derived from employment contracts, including severance payments and remuneration of directorships and leading independent functions in companies; pensions, rents and periodic payments indemnifying a permanent loss of profits or wages. Some types of professional income are tax exempt (family allowances, some social advantages which cannot be individualized in an enterprise, ). 86 Only the net amount of a taxpayer s professional income is subject to tax. This net amount is obtained by deducting the following items from the gross amount : professional expenses within the limits of the Code; losses generated by the same or other professional activities during the tax year or losses resulting from previous tax years; and 80 CIT, Art. 22, 1, CIT, Art. 52, For an interpretation of the notion of professional activity see Cass., September 2, 1969, Pas., 1970, I, CIT, Art. 23, 1st line. 84 CIT, Art Willoqué, K. and Cassaer, E., Belgium, in Maisto, G., ed., The Meaning of «Entreprise», «Business» and «Business Profits» under Tax Treaties and EU Tax Law, IBFD, 2011 at CIT, Art

17 certain private expenses encouraged under the legislation. Copyright income, up to 37,500, is treated as income from capital Miscellaneous Income 28. This category includes income items, other than professional, which are either globalized with the other income items and taxed at progressive rates, or taxed separately at a flat tax rate. a. Globalized with Other Income and Taxed at Progressive Rates 29. Under certain conditions, 80% of the alimony paid during a tax year and received from a grantor who is bound by a legal obligation 88 to support the taxpayer-beneficiary, when the latter is not part of the grantor s household 89, will be taxable to the beneficiary and deductible from the grantor s taxable income. b. Taxed Separately at a Flat Rate (1) Profits derived from Occasional or Speculative Activities This category includes profits derived from occasional or speculative activities or operations, not including profits derived from the normal administration of one s private assets consisting of real property, securities, and tangible movable assets. Gains made upon the disposal of all other types of assets, even of a private nature, are taxable (know how, e.g.). These profits are taxed at a flat rate of 33% after deduction of expenses. The distinction between a taxable and a nontaxable private transaction is a difficult one to draw. The importance and frequency of such operations, the short time between acquisitions and sales evidencing the intent to realize quick and large profits, the sophistication of the means used in the transactions such as borrowing the necessary funds and the relationship with the taxpayer s profession, are all elements which could make the transaction a taxable one. Purely private management activities, including sales and purchases of securities to improve the quality of a family portfolio, do not generate taxable income. The classification of income as miscellaneous income or as professional income is not always easy to operate, for example when the income is derived from an occasional activity that is related to the main professional activity of the taxpayer. Thus, the income derived by a lawyer from book copyrights and fees earned as an arbitrator was held to be derived from occasional activities, notwithstanding the fact that the activities were related to the lawyer s principal activity. Consequently, the income was taxable as miscellaneous income 91. Tax base 87 CIT, Art. 17 1, Between parents and descendants : Civil Code, Arts. 203, 205, 206 and 207; between spouses: Civil Code, Arts. 213, 221 and CIT, Art. 90, CIT, Art. 90, 1, Art. 97, Art. 103 and Art. 171, 10, a). 91 Trib. Brussels, November 2, 2000, Courr. Fisc. 2001,

18 A discussion arose as to the tax base in the event that the taxpayer had realized a capital gain on shares : the Supreme Court held that the provision did not tax the normal gain but only the portion which was due to actions going beyond private management, such as hiring an intermediary or using business connections 92. The law was then changed to make it clear that the whole gain was taxable as miscellaneous income 93. (2) Capital Gains Realized on Transfer of Land 94 The taxable income of a resident individual (other than a real estate professional) includes gains realized on the disposal of unimproved real estate located in Belgium, acquired for consideration and held for less than eight years, or acquired by gift and sold within three years following the gift and less than eight years after the donor s acquisition for consideration. The taxable amount corresponds to the difference between : (i) the consideration received, less the expenses incurred for the disposal of the property; and, (ii) the original acquisition price (or the donor s purchase price or the market value at the time of gift or inheritance if the property was not purchased). The cost basis of property is increased by actual acquisition expenses, or, in the absence of supporting documents, by a flat amount of 25% of the base amount. It is further increased by 5% for each full year during which the property was held. The tax is assessed at : 16.5% for gains on land transferred within eight years of acquisition, but held for more than five years; 33% if the holding period was shorter. (3) Capital Gains Realized on Transfer of Buildings 31. Capital gains on the transfer for consideration (e.g., on the sale or the contribution to the capital of a corporation) of a building other than the main residence of the taxpayer, are taxable if the building 95 : (i) is transferred within five years following the purchase; or (ii) was acquired by gift and is transferred within three years of the gift and five years after the purchase by the donor. The date of acquisition or transfer is the date of the relevant notarial deed. The tax also applies if a piece of land is acquired by purchase or gift and construction of a building starts within five years of acquisition for consideration by the taxpayer or the 92 Cass., November, 30, CIT, Art., 90, 9, first indent. 94 CIT, Art. 90, 8, Arts. 91 to 93, Art. 101 and Art. 171, 1, b) and 4, d). 95 CIT, Art. 90,

19 donor, and if the land and building are sold within five years after first occupancy or first letting of the property. The tax rate is 16.5%. In computing the gain, the purchase price is increased by 5% per year elapsed since the purchase. (4) Capital Gains Realized on a Transfer of a Substantial Interest in a Belgian Company This category includes capital gains realized on the transfer of shares in Belgian companies to a foreign company, when the transferor (or his predecessor if the shares were acquired by gift or inheritance) owned, at any time during the five years prior to the transfer, alone or with close family members, more than 25% of the shares or rights in the company. Closely related taxpayers, for this purpose, include the spouse, ancestors, descendants, and relatives up to the second degree of kinship to the taxpayer or his spouse. The transfer to a Belgian company is not taxable. This was found by the ECJ to be a discrimination within the European Union insofar as the purchaser was an EU company. It was contrary to the freedom of establishment if the seller s holding conferred on him an influence in management and contrary to the free movement of capital otherwise 97. The legislation was therefore changed to exclude sales to EEA companies. In the case of successive transfers during the 12 months preceding a taxable transfer, each transfer will be considered taxable if the required 25% holding existed at the time of the first transfer. The tax is levied at a 16.5% rate on the difference between the sales price and the acquisition price paid by the transferor s predecessor. Gains are not taxable as miscellaneous income if realized on the occasion of the distribution of a company s assets to its shareholders, the repurchase by a company of its own shares, or of a merger, division, or change in corporate form. Eventually, income from capital will be taxed In that case. But for the above exceptions, capital gains realized by individuals not engaged in business activities are, in principle, not taxable. 5. Treaty rules Treaties may change the tax regime of income under domestic law. Company Manager Under the Belgian Model Treaty, director s fees and income received in the capacity of member of a board of directors are taxed in the country of the company; remunerations received in respect of activity such as day-to-day functions, either as a manager or as a partner in a company other than a company with share capital, is taxed as employment income. 96 CIT, Art. 90, 9, Arts. 94 to 96, Art. 102 and Art. 171, 4, e). 97 ECJ, June, 8, 2004, Case C-268/03, De Baeck v Belgische Staat (Order). 18

20 Capital gains Most treaties grant the State of residence the right tax capital gains. Some treaties grant it to the State of source for important participations or participations in real property companies. The treaty between Belgium and the Netherlands (2001) 98 allows the Netherlands to tax the capital gain on an important participation (5 p.c.), if the seller has been resident in the Netherlands during the ten years preceding the granting of the benefit received and if a conservatory taxation took place upon the time of his emigration to Belgium. D. Tax rates 33. The applicable rates are the following : Taxable annual income Rates Below 8, % From 8,590 to 12, % From 12,220 to 20, % From 20,370 to 37, % Above 37,330 50% A series of tax exemptions, tax reductions and tax increases must be taken into account in order to determine the final tax liability of a resident individual for a given assessment year. As seen above, certain types of income, however, are generally not included in the global taxable income (e.g. dividend and interest income, certain types of miscellaneous income such as taxable capital gains) but are taxed separately at flat rates if such taxation is more favorable to the taxpayer. Income from personal property (dividends, interest, royalties) is not longer taxed globally with other income. Tax applied at the rate of 25% (dividends, liquidations surpluses, interest, royalties) satisfies the total tax liability on such income. If no tax has been withheld (for instance on income paid abroad), the taxpayer must report the income and will be taxed at the same rate as would apply under the withholding technique (see supra al. 22). A municipal surcharge applies to tax on all income reported in the return (not to withholdings) 99. Where the withholding tax is final in Belgium for both national and foreign dividends (and interest), the foreign dividend or interest that has not borne the withholding tax must be reported in the individual tax return and is charged with a tax at the same rate as the withholding tax, increased by local taxes. Such local taxes discriminate against foreign dividends and interest, said the ECJ in Dijkman 100. The surcharge applies to professional income exempted by treaty if the treaty so allows 101. It is then computed on the individual income tax which would be due in Belgium, but for the treaty. 98 Art CIT, Art ECJ, 1 July 2010, Case C-233/09, Gerhard Dijkman, Maria Dijkman-Lavaleije v Belgische Staat. 101 CIT, Art. 466 bis. 19