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Taxation - Personal
What are the principles of personal income taxation?
An international employee taking up employment in Belgium will generally become liable for income tax under Belgian law. Other taxes that may apply are property tax and gift and succession duty. In Belgium there is no wealth tax, as such. Capital gains taxes are only levied on private individuals in certain circumstances such as transactions which go beyond the normal management of a private estate, certain sales of property and sales to a company resident outside the European Economic Area of substantial holdings in a Belgian company.
Belgian residents are subject to personal income tax on their total income from all sources. Taxation on a sliding scale is applied to successive portions of net taxable income. Rates in 2007 vary between 25% and 50%. Residents also pay additional municipal taxes at rates that vary between 0% and 9% of the total income tax payable.
Non-residents are subject to personal income tax on Belgian source income only, notably on Belgian source professional income, on property income located in Belgium and on Belgian source investment income (i.e. interest and dividends paid by a Belgian company). Non-residents have to pay additional taxes at a rate of 7% of the total income tax payable.
Certain expatriates who satisfy conditions outlined below are considered fiscally as "non-resident" and come under a special taxation regime.
The Belgian tax year runs from January 1 to December 31. Where an individual is taxable in Belgium for only part of a calendar year, his/her income in that period is treated as if it were income relating to a full calendar year. There is no pro-rata restriction of allowances or grossing up of income on an annual basis.
How is personal income tax calculated?
Personal income tax is calculated by determining the taxable base and by assessing the tax due on that base.
In determining the taxable base, compulsory social security contributions paid either in Belgium or abroad are fully tax deductible. Professional expenses can be claimed either on an actual basis (through the production of supporting documentation) or on a lump sum basis where currently the maximum deductible amount is 3,290.00 EUR on a gross taxable salary of 54,297 EUR [accounts for the 2007 tax year (2008 tax return)]. Personal income tax is calculated on the taxable base after allowing for part of that base to be exempt from tax by applying a number of reductions related to marital status, number of dependent family members and other matters. Some tax reductions might also apply. However, no personal tax exemptions or notional transfer of earnings to spouses will be granted to non-resident taxpayers (see below), unless they either earn at least 75% of their worldwide professional income in Belgium or retain an abode in Belgium for the entire taxable period. According to the authorities, a married taxpayer's abode is held to be where the taxpayer lives with his or her spouse. However, there are some exceptions to this rule.
Taxation on the husband's and wife's earnings is calculated separately. Subject to certain conditions being fulfilled, part of the professional income earned by one spouse may be transferred to the other spouse, either because the latter assisted the former in earning income or because the latter's income is substantially lower. Although couples are taxed separately on earnings, assessments continue to be issued in joint names. However, a married non-resident will be assessed as a single person if his spouse is not subject to Belgian income tax and earns exempt or foreign professional income exceeding 8,720.00 EUR.
How is personal income tax calculated?
Local property tax (précompte immobilier or onroerende voorheffing) is assessed on "cadastral income" (i.e. on the deemed rental value attributed by the authorities to the property). Some allowances are made for occupancy. Property tax is levied at a rate that varies according to the municipality and to the location of the property. Rates generally vary between 20% and 50% of "cadastral income".
How does Belgian tax law treat stock options?
On March 26 1999 the Belgian Parliament adopted a new tax law with regard to stock options. Under this new law, Belgium aimed to stimulate the granting of stock options as an "employee benefit" and remove any doubts about the taxable basis and moment of assessment.
Stock options attributed as of January 1 1999 are taxable on the 60th day following the offer of the options (i.e. the date of attribution). In principle, no further tax is due on the spread at exercise or later when the shares are subsequently sold.
The law of March 26 1999 has been amended by the law of December 24 2002. Prior to the amendment, stock options were taxable on the 60th day following the date of offer notification, unless the beneficiary had refused the option offer in writing to the grantor by that 60th day. Since the amendment, stock options that are offered as from January 10 2003 are taxable on the 60th day following the written and dated offer notification, provided that the beneficiary has accepted the option offer in writing by that 60th day at the latest. If the beneficiary has not accepted the offer in writing by the above-mentioned 60th day, he will be deemed to have refused the stock option offer from a Belgian tax viewpoint.
For publicly traded options, the taxable amount is determined on the basis of the last closing stock option quote on the stock exchange prior to the offer date, reduced with the acquisition price, if any, paid by the beneficiary.
For non-publicly traded options, the taxable benefit is the sum of the taxable time value and of the discount at grant, if any. This taxable benefit is reduced with the acquisition price, if any, paid by the beneficiary.
The taxable time value is calculated on a lump-sum basis by applying a percentage to the fair market value of the underlying shares at the time of the offer. The standard percentage is 15% for an option with a fiveyear lifetime. For options with a life of more than five years, the value will be increased by 1% for each year or part of a year in addition to the five years. E.g. for a stock option with a ten year lifetime the taxable time value of the option is determined to be 20% of the value of the underlying stock at offer date.
However, the taxable time value is reduced to half (i.e. will be calculated at 7.5% + 0.5% per year) instead of 15% (+ 1% per year) of the market value of the underlying shares on the offer date, provided the following conditions are fulfilled:
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The exercise price is definitively set at the offer date;
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The option contains the following regulations or the beneficiary commits himself to the following:
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The option may not be exercised before the end of the third calendar year following the year during which the offer was made, nor may it be exercised after the end of the 10th year following the year during which the offer was made;
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The option may not be transferred (except by reason of death);
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The downside risk of the option (capital loss on the shares) may not be hedged, directly or indirectly, by the person offering the option, nor by a person with whom a relationship of mutual (inter)dependence exists;
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The option relates to shares of the company for whom the beneficiary works or the option relates to shares of a group company that from a Belgian accounting law perspective has a direct or indirect holding in the company for whom the beneficiary works.
The participant will be taxed on an additional benefit in kind in cases where he does not abide by his personal commitment. The additional taxable benefit is measured as the difference between the standard 15% (1%) taxable percentage and the 7.5% (0.5%) on which the employee has already paid tax. There are no penalties or late interest applicable.
According to the Belgian tax authorities, this additional benefit in kind is taxable in the income year during which the beneficiary does not abide by his personal commitment.
If the option is "in the money" (i.e. when the exercise price of the option is lower than the fair market value of the underlying stock at the offer date), this discount at grant will be added to the amount determined on the basis of the forfeitary formula to arrive at the full taxable benefit. The discount at grant equals the positive difference between the fair market value of the stock at offer date and the exercise price (after
deducting some Belgian employee social security contributions which may apply - see below).
In addition, any certain guaranteed benefit represents additional taxable income for the year during which it has become certain and for the amount exceeding the taxable time value taxed on the 60th day following the offer.
An example of a certain guaranteed benefit would be an option with an exercise price that is a percentage of the value of the underlying share at the time of exercise of the option.
What is the social security regime for stock options?
For stock options attributed from January 1 1999 social security contributions for salaried persons are in principle assessed on:
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The positive difference, if any, between the fair market value of the stock and the exercise price of the option ("discount");
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Any certain guaranteed benefit under the option agreement, if any.
An employee's potential 13.07% social security charge is deductible for income tax purposes. Appropriate advice should be sought to identify whether all conditions for assessing discounts on social security contributions or any certain guaranteed benefit are met.
There is no social security contribution due on the "taxable time value" of the option or upon the subsequent exercise of the option or sale of the shares other than if a certain guaranteed benefit would then be granted.
What is the special tax regime for foreign executives working in Belgium?
Under certain conditions, foreign executives who are temporarily assigned to work in Belgium within an international group of companies or who have been recruited directly abroad by a Belgian company belonging to such an international group in order to render services in Belgium temporarily, can benefit from special tax status. In this case, they are treated for tax purposes as non-residents of Belgium and taxed on their Belgian-source income only.
When is an employee considered an expatriate?
In order to qualify for special tax status, executives must be foreign nationals and carry out exclusive duties that require them to have special knowledge and responsibilities. Foreign researchers and other specialist foreign staff (i.e. persons who do not necessarily have managerial responsibilities but who are so highly specialized that recruiting such staff in Belgium would be extremely difficult, if not impossible), will generally qualify for special tax status as well.
In order to be considered for special tax status, the expatriate also has to comply with the following conditions:
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Employment in Belgium must be within a qualifying company (i.e. a local place of business of a foreign company, a Belgian entity belonging to an international group of companies, a control or coordination office for those companies that render services within the international group or a scientific laboratory or research centre belonging to an international group of companies);
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Employment in Belgium must be of a temporary nature;
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Expatriates must qualify as non-residents of Belgium (i.e. their residence or the focus of their economic and personal interests must not be situated in Belgium).
What are the tax benefits of expatriate status?
Apart from the fact that foreign executives benefiting from special tax status are treated for tax purposes as non-residents of Belgium and therefore only taxed on their Belgian-source income, special expatriate tax status (the rules of which are laid down in an Administrative Practice Note of August 8 1983) also offers two important tax advantages to foreign executives:
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Reimbursements made by the employer to cover the additional expenses incurred as a direct result of the assignment or employment in Belgium are treated as costs proper to the employer which are, within certain limits, non-taxable for the expatriate ("tax-free expatriation allowances");
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The executive benefits from an exemption on the part of his/her compensation that relates to business duties carried out abroad ("travel exclusion").
How is the expatriate tax base calculated?
General principle
As we have already mentioned, having special expatriate tax status means that expatriates are treated as non-resident in Belgium for income tax purposes. As non-residents for tax purposes, they are taxed on:
o Professional income: as a general rule, non-resident executives are taxed on their Belgian-source employment income only. They benefit from special tax reliefs and abatements;
o Real estate: tax is only levied on property located in Belgium;
o Investment income: generally, non-resident executives are not taxed on investment income, unless the income involves dividends or interest paid by a Belgian company. Dividends are generally subject to a tax rate of 25%, interest to a tax rate of 15%.
Determining taxable income from employment
Both the tax-free expatriate allowances and the portion of salary relating to business services rendered abroad are taken out of the expatriate's taxable income from employment. The net taxable employment income after this deduction is then taxed in the same way as the taxable income of a resident of Belgium (i.e. applying the same tax rates and exemptions) and is likewise added to other income from Belgian
sources.
Reimbursement of costs proper to the employer (or the company, in the case of directors)
Expenses qualify as expenses or charges proper to the employer if they are paid by the employer in a way that fully relieves the expatriate from the cost either directly (in the form of specific reimbursement) or in the form of lump-sum repayments to the extent that the reimbursements are intended to cover the additional cost resulting directly from the expatriate's employment or assignment in Belgium. The reimbursements represent neither salary nor a taxable fringe benefit for the expatriate. Qualifying as an "additional cost" in the above context are the excess charges and expenses expatriates have to sustain as a direct result of living in Belgium over and above the charges and expenses that they would have if they worked in their home country. It is for the employer to demonstrate that the reimbursements correspond to the actual amount of the additional cost and have served the purpose pursued, which is to provide compensation to the expatriate for any expenses and losses that do not unreasonably exceed the expatriate's needs.
These non-taxable allowances include once-only expenses such as expenses caused by the expatriate's move to Belgium, the expense of making a house in Belgium fit to live in and expenses caused by the expatriate's move from Belgium to another country. They also include regularly recurring expenses such as the difference in the cost of housing and cost of living between Belgium and the expatriate's home country, expenses relating to education for children at primary or secondary school levels, the cost of one annual home leave for the expatriate and his/her family members (flight expenses are reimbursed assuming that travel is in economy class), any losses incurred as a result of not finding any tenants for the house in the home country or having to let it at a price below the normal rental value, any travel expenses caused by exceptional circumstances (such as the death or serious illness of close relatives of the expatriate or his/her spouse), exchange rate differences, the tax equalization allowance, travel expenses of children studying abroad (limited to two trips a year to visit their parents).
The costs proper to the employer (i.e. the tax-free expatriate allowances) will be calculated differently, depending on whether the expatriate receives his/her pay plus a number of separate, clearly identifiable, expense repayments or a gross pay package in which the expense allowance is already included. The first category comprises expatriates who receive a defined amount of net pay, those who receive a base salary net of hypo tax ("hypothetical tax") in their home country ("tax equalized") and those who benefit from protection against excess tax compared to their home country tax ("tax protected"). With regard to expatriates who receive a gross pay package without distinction between the part intended as compensation for the employment activity and the part intended to cover the additional cost directly resulting from the expatriate's employment or assignment in Belgium, the employer may calculate the additional cost in accordance with guidelines issued by the Tax Office (i.e. the "technical note"). Separate from education fees and the aforementioned once-only expenses (for which proper justification must be given and which must appear reasonable), the other expenses (to be properly justified as well) are considered reasonable only to the extent that they do not exceed:
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EUR 11,200.00 for executives of operating companies;
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EUR 29,747.22 for executives of control and coordination offices, scientific research centers and laboratories.
Income relating to business duties performed abroad ("travel exclusion")
After taking out the allowances that qualify as a repayment of costs proper to the employer, the total compensation must be divided into one part relating to duties carried out in Belgium and another part relating to duties carried out abroad.
The part that relates to duties carried out abroad is left out of the executive's taxable compensation and is thus exempted from Belgian tax.
In the absence of further information, the authorities assume that the executive is compensated in the same way for duties carried out abroad as for duties carried out in Belgium. This means that taxable income is calculated by multiplying total annual compensation by a fraction whose numerator is the number of days of the year worked in Belgium and whose denominator is the total number of days worked in Belgium and abroad in the same year or in the relevant period of the year.
The executive must prove the number of days worked abroad. In the absence of any documented evidence, the travel exclusion may be reduced proportionately to the number of days for which the executive cannot produce any supporting documentation.
In this respect, the executive must provide double proof by means of a set of evidence and documents that are reliable and sufficiently convincing for the Tax Office that:
What are the formalities in applying for expatriate tax status?
The formalities to be gone through in order to benefit from special expatriate tax status are largely the responsibility of the expatriate's employer, who has to file a once-only application with the Tax Director at the "Foreign Entities" service. This application must be filed within six months starting from the first day of the month following that in which the employment or assignment in Belgium begins.
The tax office will not consider applications it receives after that period unless there are very special and exceptional circumstances that justify it doing so. Under certain conditions, the tax office may still grant applications received after the six-month period for which there are no special justifying circumstances, but it will do so only for the year following that in which the late application was filed.
The application must comprise one or more documents, one for each expatriate wishing to benefit from special tax status including their personal formal request for special tax status. Sufficient information must be given to enable tax officers to verify that all conditions for applying special tax status have been met and whether the costs proper to the employer (that the applicants would wish to be reimbursed free from tax) have been justified.
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