T H E S P E C I A L T A X S T A T U S F O R F O R E I G N E X E C U T I V E S A N D S P E C I A L I S T S W O R K I N G I N B E L G I U M A V E N U E D U D I R I G E A B L E - L U C H T S C H I P L A A N 8 B - 1 1 7 0 B R U X E L L E S / B R U S S E L T E L : + 3 2-2 - 6 7 5 5 0 0 5 F A X : + 3 2-2 - 6 7 5 3 8 8 8
Contents Page 1. Introduction 3 2. Conditions in order to qualify 3 3. Consequences of the special tax regime 4 3.1 Change of tax residency 4 3.2 Determination of the taxable income 5 3.2.1 Tax-free allowances 5 3.2.2 Travel exclusion 7 3.3 Consequence on the withholding taxes 8 3.4 Impact on the social security 9 3.5 Non-completion of the resident income tax return 9 3.6 Example 10 4. How to apply for the special tax regime? 11 5. Filing of an annual income tax return 12 6. How can we assist you? 12 7. NV Tax Consult SA Contact details 12
1. Introduction In a view to attract investment in Belgium, the authorities have introduced a special tax regime (the Regime ) applicable to foreign executives and/or specialists working in Belgium. The purpose of the Regime is to reduce employment costs. It is sourced in a circular which is not a law but a unilateral interpretation of the legislation by the Belgian authorities (Administrative Circular Ci. RH 624/325.294 of August 8, 1983). 2. Qualifying requirements In order to qualify for the special tax regime, some conditions should be met: 1. Condition to be met by the Belgian entity employing the expatriate: The expatriate should work in an entity based in Belgium and such entity should be part of an international group of companies. As such, it may be a branch or a subsidiary of a foreign company, or a Belgian company having branches/susidiaries outside Belgium. The special tax status is designed for profit making groups so that non profit organizations should in principle be excluded. Some research & development centres can qualify even if they do not belong to an international group and/or are not set up as profit making organization. 2. Conditions regarding the employment in Belgium: a. The employment in Belgium must have a temporary character. However, the Administrative Circular does not define the notion of temporary. b. The employee must be assigned or transferred to the Belgian entity from a foreign enterprise or must be hired directly from abroad by the Belgian entity. The special tax regime is in pronciple not applicable for individuals who were already in Belgium at the time of recruitment. 3. Conditions regarding the expatriate: a. The expatriate must be a foreign national. The special tax regime is not applicable for Belgian nationals or individuals with dual nationality (one being Belgian). b. The expatriates must be an executive or a specialist: 1. Executive means that the expatriates should have a certain level of knowledge and/or responsabilities. In practice, it covers executives and managers. It is left to the appreciation of the Belgian authorities who, so far, have shown certain flexibility. 2. Members of the Board of directors involved in the daily management of Belgian companies normally qualify. 3. Specialists means that the expatriate, even if not considered as a manager or an executive, can qualify as long as his./her expertise is unique in the sense that such profile can not be easily found on the Belgian labor market. 4. Scientific researchers working in R&D centres normally qualify. NV TAXCONSULT SA 3
c. The expatriate must keep the centre of his personal and economic interests outside Belgium. The following items are considered important by the Belgian tax authorities: 1. the residency of the close family abroad; 2. the availability of a dwelling outside Belgium; 3. the fact that the children go to school abroad or attend an international school in Belgium; 4. the ownership of real estate abroad; 5. the existence of foreign bank accounts, (life) insurance contracts, pension saving plans, mortgage loans etc.; 6. the fact that the expatriate remains covered by a foreign social security scheme; 7. the existence of a fixed term of employment in the employment contract or the assignment letter; 8. the fact that the temporary employment is linked to the formation of restructuring of a company; 9. the fact that the Belgian rental agreement has a clause which allows the expatriate to terminate the lease immediately in case he has to leave Belgium for professional reasons ( Diplomatic clause ). 10. 3. Consequences of the special tax regime 3.1 Change of tax residency On the basis of the Belgian internal legislation, an individual becomes a tax resident of Belgium in case: He/she is registered at the Belgian commune where he lives (revocable presumption); His/her family (spouse and resident children) is living in Belgium (irrevocable presumption). Notwithstanding the above, expatriates who qualify for the special tax regime are (fictitiously?) considered as Belgian non-residents for income tax purposes. This results in the following consequences: the expatriate is not taxable on his/her world-wide income. He/she only reports the salary earned in the Group and also other Belgian sourced income. Passive income (like interests, dividends, real estate income, ) sourced outside Belgium is not taxable in Belgium. due to the fact that married couples file a joint tax return in Belgium, the spouse of the expatriate who benefits from the special tax regime is also normally considered as a Belgian non-resident tax payer; the expatriate can not benefit, as another Belgian tax resident would, from the benefits of the tax treaties concluded between Belgium and other countries for the avoidance of double taxation. Nevertheless, the expatriate can be considered as resident of the country that is part of the Double Tax Treaty in case he/she remains NV TAXCONSULT SA 4
taxed as a resident in that country. In that case, he/she would still be able to apply a tax treaty on his/her personal situation. 3.2 Determination of the taxable income The expatriate is not taxed on the expatriate allowances and the salary relating to the work performed outside Belgium. 3.2.1 Tax-free allowances The payment by the employer of allowances ( expatriate allowances ) designed to compensate additional costs incurred by the expatriate as a result of his/her assignment to Belgium, is not regarded as taxable. According to the Administrative Circular, following expenses can be considered as expatriate allowances: Main non-repetitive expenses: moving costs to Belgium (arrival) or from Belgium (departure); costs of setting up a household in Belgium; Main repetitive expenses: difference in the cost of living between Belgium and the country of origin; difference in the cost of housing between Belgium and the country of origin; difference in taxes between Belgium and the country of origin ( tax equalization ); Home leave : the cost of an annual trip to the country of origin for the executive and close family. Concerning airplane trips, only the cost of economy class is covered; School fees (cost of attending an international school in Belgium for children in primary or secondary schools, including transportation); Some specific costs can be reimbursed in very special circumstances: difference in foreign exchange rates; losses incurred by an executive's inability to rent his/her home in the country of origin, or to rent it at a normal market rental value; The tax-free allowances are limited annually to EUR 11.250. For some expatriates working in a R&D centre or a coordination centre, the ceiling can be fixed at EUR 29.750. The non-repetitive expenses and the school fees are not to be included in the ceilings. In case the expatriate has an employment contract or assignment letter in which the taxfree allowances are determined by an external advisor and according to the group s expatriate policy (based on reasonable criteria), the amounts of tax-free allowances can be reported as such. NV TAXCONSULT SA 5
For expatriates being compensated on the basis of a global gross/net salary (i.e. without indication of base salary and allowances), the Administrative Circular indicates that the tax-free allowances must be computed according to the guidelines issued each year by the tax authorities (the so-called technical note ). According to the technical note, the base salary and tax-free allowances are computed as follows: A. The notion of base salary as a reference salary The base salary in the country of origin is deemed to represent the salary that the expatriate would have earned if he/she would have stayed in his/her home country. It determined by the application, on the gross salary in Belgium, of an index (specific to that country) and divided by the expatriation premium (in principle 1.10, but 1.15 for overseas countries). The index is defined per country by the tax authorities and subject to changes. B. Cost of living allowance The cost of living allowance amounts to 5 % of the base salary with a maximum of EUR 2.500. C. The housing differential The housing differential is the difference between: 1) a) either the rent actually paid in Belgium (including common charges but excluding utilities); b) or in the case the expatriate owns his/her own home in Belgium: if the non indexed Cadastral Income is lower or equal to 745: 100/60 of the indexed Cadastral Income *1,25; if the non indexed Cadastral Income is more than 745: 100/60 of the Cadastral Income *2; c) or when the home has been put at the expatriate s disposal for free, the costs of housing are calculated in the same way as the resulting benefit in kind. 2) The normal housing costs in the country of origin estimated at 12% of the base salary in the country of origin. NV TAXCONSULT SA 6
D. Tax equalization The tax equalisation is the difference between: 1) the Belgian tax calculated on the base salary (but not taking into account the coefficient for foreign assignment premium) reduced by personal social security contributions, the exclusion for activity performed abroad and the standard deductions; 2) the hypothetical foreign tax calculated on the base salary of the country of origin, (using standard deductions also) 3.2.2 Travel exclusion One of the main advantages of the special status for foreign executives is that the part of the salary corresponding to the professional activity performed outside of Belgium is not taxable. In general, the employer makes no difference between the part of the salary compensating the work performed in Belgium and the part compensating the work performed outside Belgium. For such cases, the Belgian authorities have issued a specific regulation to make the difference. IKt is referred as the travel exclusion which corresponds to a percentage computed by comparing the number of days spent outside of Belgium for professional reasons (numerator) over the actual number of total working days in the taxable period (denominator). For the computation of the actual working days in the taxable period, the following days are not taken into account: Week-end days (in general, 104); Vacation and compensation days (in general, 25); Illness days and other legal absences; Belgian legal/public holidays (in general, 10). In order to calculate the days related to the foreign business trips, the following guidelines must be taken into account: The departure day from Belgium is considered as a business day in Belgium; The day of return to Belgium is considered as a business day in the foreign country; In case of a one-day business trip, the business trip is considered as a day abroad. The following days are not considered as having been worked abroad, even if the expatriate was on a foreign business trip during these days: Week-end days; Vacation and compensation days; Illness days and other legal absences; Belgian legal/public holidays. NV TAXCONSULT SA 7
Please note that in case of a tax audit, the Belgian tax authorities require that the following double proof is provided in order to have the foreign business days accepted: the professional character of the foreign business days and; the physical presence of the expatriate in the concerning country. The following documents can evidence the stay abroad: transportation and other related documents, mentioning name and date (boardingpasses should be kept for plane tickets); invoices in connection with expenses incurred during the stay outside Belgium (hotel, car rental, etc.); credit card voucher relating to payment of lodging expenses; proof of presence in meetings (minutes, agenda, etc.); proof of presence in the foreign company visited by the executive (signature in the visitors book). Please note that in case of tax audit the tax inspector will ask to see the original expense reports evidencing that the expenses are reimbursed by the company and thus are business expenses. In that respect, each day worked outside of Belgium should be mentioned in an expense report with the indication of the country and the purpose of the travel. Every expense vouchers should be attached to an expense report. For each day worked outside of Belgium, the expatriate should have a document indicating the date, the place and his/her name (hotel bill, boarding pass, credit card statement, confirmation of a meeting, report on a visit, attendance list to a seminar etc. ). For one-day trips by car, an easy way to get the necessary evidence is to take some petrol in the visited country and to pay for it with a credit card. For business trips to the home country or to touristic destinations, the expatriate should be able to support the professional nature of the trip (report on the visit, summary of a meeting, meeting confirmation, attendance list, inscription to a seminar...). A tax audit may be performed until the end of the 3rd year following the concerned income year. We strongly advise at the moment of making the travel list, to check if an appropriate document is attached to the expense report for each travel day. By default, another document should be found (confirmation of meeting, report, attendance list, credit card statement) and kept for at least 3 year. 3.3 Consequence on the withholding taxes Normally, when Belgian withholding taxes need to be retained from an individual s salary, the amount of withholding tax is computed according to tables that are adjusted each year by the Belgian government. However, for individuals benefiting from the special tax status, the employer may choose, under his own responsibility, to take into account the benefits of the special tax regime, and thus to calculate the withholding taxes so that they match with the actual income tax that will be due by the expatriate. NV TAXCONSULT SA 8
In case insufficient withholding taxes have been retained, the Belgian tax authorities could pursue the company and assess withholding tax. 3.4 Impact on the social security contributions For expatriates who are subject to the Belgian social security scheme, the tax-free allowances may generally be exempted from both employer and employee social security contributions in case the tax-free allowances are clearly specified in the employment contract/assignment letter and in case the employer commits himself to pay these allowances during a limited period of time. In case the tax-free allowances are computed according to the technical note, only the tax-free allowances up to the applicable ceiling will be exempted from Belgian social security contributions. 3.5 Non-completion of the Belgian resident tax return When registered at a Belgian commune, expatriates often receive a Belgian resident income tax return although they have requested the special tax status. This resident income tax return is to be returned blank to the tax authorities and a non-resident return is to be requested. For more information regarding the non-resident income tax return, we refer to page 10. NV TAXCONSULT SA 9
3.6 Example Reminder: The purpose of the special tax regime is to lower the employment cost for the Belgian employer. Therefore, all benefits of the special tax status should be for the employer and not for the expatriate. In the below example, we have at first computed the net income assuming that the employee would be a Belgian resident. In scenario 1, we have taken into account the same gross salary, but we have applied the benefits of the special tax regime. In scenario 2, we have started from the net income calculated in the resident tax computation and we have computed the corresponding gross income under the assumption that the special tax status would be applicable. 3.6.1 Assumptions Family situation: married (spouse has professional income); 2 dependent children; Employee function; World-wide professional gross income: 100.000; Subject to the Belgian social security scheme; Specific data for the tax computation with application of the special tax regime: Annual amount of rent paid in Belgium: 12.000; Travel exclusion: 10%; Limit of tax-free allowances: 11.250; No social security on the tax-free allowances; Country of origin: France. 3.6.2 Determination of the annual net income Gross income (Less) Tax-free allowances (Less) Employee social security contributions Resident tax Application of the special tax regime computation Scenario 1 Scenario 2 100.000,00 100.000,00 75.954,25 0,00-11.250,00-11.250,00-13.004,27-11.541.29-8.414,32 Subtotal 86.995,73 77.208,71 56.289,93 (Less) Travel exclusion 10% 0,00-7.720.87-5.628,99 Taxable income (Less) Belgian income tax liability (Less) Special social security contribution Add: Tax-free allowances Add: Travel exclusion 86.995,73-37.190,39-731,29 0,00 0,00 69.487,84-27.823,66-731,29 11.250,00 7.720.87 50.660,94-17.902,15-563,73 11.250,00 5.628,99 Net income 49.074,05 59.903,76 49.074,05 NV TAXCONSULT SA 10
4. How to apply for the special tax regime? The Belgian company that employs the expatriate must file a request with the competent tax authorities within 6 months following the month of arrival of the expatriate in Belgium. In the case of a late filing, the expatriate will only be able under certain conditions - to benefit from the special tax status as of the year that follows the year in which the late request was filed. In the meantime, the expatriate is considered as a normal nonresident, without deduction of tax-free allowances and without travel exclusion. The request must provide the necessary information in order to allow the tax authorities to: verify whether all conditions are fulfilled in order to benefit from the special tax regime; determine the nature and the amount of the tax-free allowances. The following documents must be added to the request: a copy of the employment contract/assignment letter; a copy of the work permit (if applicable); a resume of the expatriate; a copy of the certificate of coverage/a1 (when applicable); a copy of the Belgian rental agreement; all documents that demonstrate that the expatriate has kept the centre of his/her personal and economical interests outside of Belgium (copies of bank statements with a foreign bank, proof of mortgage loans outside of Belgium, copy of life insurance contracts, proof of ownership of real estate outside of Belgium etc.); a certificate in which the expatriate confirms his/her approval to choose for the application of the special tax regime for foreign executives and specialists in Belgium; information regarding the Belgian entity and the international group (in case of a first time application by the Belgian entity). Once the request is filed, it does not have to be renewed each year. However, the employer is required to inform the tax authorities in case of significant changes in the personal situation or employment situation of the expatriate. Once the special tax regime is granted, it is supposed to be tacitly renewed every year till the departure of the expatriate. The special tax regime is in principle valid as long as the expatriate has not fixed his/her domicile or seat of wealth in Belgium. The answer by the tax authorities to approve or refuse the special tax status usually takes around 12 months. In the meantime, the benefits of the special tax status can already be applied under the employer s responsibility. In case the special tax status is refused afterwards, a correction of the filed tax returns will be required. NV TAXCONSULT SA 11
5. Filing of an annual income tax return In Belgium, an annual income tax return needs to be filed by all taxpayers. Expatriates benefiting from the application of the special tax regime need to file non-resident income tax returns. The following information is to be added to the tax return: A summary statement of the annual salary package. Please note that the world-wide remuneration needs to be reported in the tax return. The non-taxation related to foreign business days is excluded through the deduction of the travel exclusion; An attestation from the employer (on letterhead of the Belgian company) to confirm the amounts of the tax-free allowances; A detailed computation of the tax-free allowances; The computation of the travel exclusion; A copy of the salary form 281.10 or 281.20, if applicable. 6. How can we assist you? NV Tax Consult SA has a professional and experienced team offering you: to explain the special tax regime during a meeting; to draft and comment the request to be introduced; to calculate the tax-free allowances and travel exclusion when preparing a monthly payroll; to file the annual non-resident income tax return; to address any questions you may have related to the applicable tax and social; security regime in connection with the expatriation. 7. NV Tax Consult SA Contact details Address: S.A Tax Consult N.V. Avenue du Dirigeable Luchtschiplaan 8 1170 Bruxelles Brussel General telephone number: +32 2 675 50 05 Fax number: +32 2 675 38 88 Your main contact: Jean-François Golenvaux Luc Lamy JFG@taxconsult.be LL@taxconsult.be NV TAXCONSULT SA 12