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Belgian tax authorities take a highly questionable position regarding the taxation of foreign movable income

  • Belgium
  • Other

25-06-2020

The Belgian tax authorities have recently issued their annual guidelines for the reporting of foreign income by Belgian individual residents in their 2020 income tax return (income of 2019) (“Guidelines”). The careful reader will notice a subtle difference with last year’s version on the matter of foreign movable income (dividends and interest), which may in certain cases result in a heavier taxation for the Belgian resident individual who receives such income on a foreign bank account.

Context

Let us take the example of a Belgian taxpayer receiving a dividend of 100 from a Swiss company. The double taxation treaty provides that such dividend may be taxed at source by Switzerland at a rate of maximum 15%. In practice however, the distributing Swiss company will apply a withholding tax at the full national rate (35%), before paying out the balance (65) to the Belgian shareholder. The latter may recover the difference of 20 (85-65) from the Swiss tax authorities by means of a specific local administrative procedure. Many countries apply such administrative practice of withholding the full national rate and subsequently allowing the recovery of the difference upon substantiated request by the taxpayer. The problem is that such recovery process may be burdensome and costly, which is why taxpayers sometimes do not bother in practice to recover the difference they are entitled to.

On the Belgian side, the Swiss-sourced dividend will be subject to Belgian income tax at a rate of 30%. If the dividend is paid out to a Belgian bank account, the bank will in principle withhold that 30% tax on the received dividend of 65, leaving the Belgian taxpayer with a net dividend of 45,5. The Belgian taxpayer would consequently not have to report his Swiss income in his Belgian income tax return.

If the Belgian taxpayer receives his Swiss-sourced dividend on a foreign bank account, he will have to declare that dividend income in his Belgian income tax return. The income would be subject to income tax at a rate of 30%.

The new position taken by the Belgian tax authorities pertains to the latter case, and more specifically to the amount of dividend income the Belgian taxpayer must report in his Belgian tax return.

Income collected or received

The Belgian income tax code clearly enunciates that a Belgian taxpayer should declare the income he collects or receives. This position is since long confirmed by the tax authorities in their administrative commentary, where they also explicitly state that foreign withheld tax is deductible. That position was also reflected in last year’s Guidelines.

Based on that long-established approach, our Belgian taxpayer who receives his Swiss net dividend of 65 on a foreign bank account, should declare an income of 65 in his Belgian tax return. Hence, the location of the bank account on which the dividend income is collected or received, would not affect the amount of the reportable income.

In this year’s Guidelines, the tax authorities state that the Belgian taxpayer should in such case declare the gross dividend minus the treaty rate (and not minus the effectively withheld rate in the source state). Going back to our example, that position would result in the Belgian taxpayer having to report an income of 85 (the Belgian-Swiss treaty rate is 15%) whilst he effectively only receives an income of 65. Hence, if he were to not undertake the (sometimes cumbersome and costly) steps to claim his right to the treaty rate, he would finally pay 60,5 in tax on his dividend of 100 (i.e. 35 in Switzerland and 25,5 in Belgium). This also means that the taxation of that same dividend would be lower (54,5% overall - 35% in Switzerland and 19,5 in Belgium) if the dividend is received on a Belgian bank account.

Comment

It is very difficult to conceive how this new position taken by the Belgian tax authorities could withstand judicial scrutiny. The Belgian income tax code is abundantly clear when it states that the income collected or received (65 in our example) is taxable. The delta of 20 in fictitious income that should be added (according to the tax authorities) to the effectively received income of 65, is simply not taxable in Belgium as long as the taxpayer doesn’t collect or receive that income.

This new position comes down to the tax authorities automatically and unjustly claiming a benefit by virtue of the double taxation treaty. Indeed, the dividend article in double taxation treaties typically provides that both the residence and source states are entitled to tax cross-border dividend income, with an obligation for the source state (Switzerland in our example) to cap the said tax to a certain rate (15% in our example). Such provision may not be translated into a right for the residence state (Belgium) to tax more income than allowed under Belgian tax law.

It must also be noted that this new position only affects movable income received by a Belgian taxpayer on a foreign bank account. It consequently introduces a difference with cases where such income is received on a Belgian bank account, which is arguably unlawful.

Given the source in which the new position is adopted and the timing of its publication, one could reasonably assume that it should only apply to movable income realized in 2019 (assessment year 2020). The tax authorities have however reportedly already taken that position in recent audits related to earlier income years, which is quite remarkable.

It is recommended for taxpayers who collect movable income abroad, to strictly limit the reporting of that income to the amount effectively collected or received. Income that could be recovered from the source state if the taxpayer were to solicit the application of the treaty rate, should not be declared unless (and until) that income is collected or received. There are in our view very strong arguments that could be invoked by taxpayers, should they be confronted with the tax administration’s new position.