A Belgian employee working abroad for a foreign employer qualifies for a fiscally beneficial salary split. The foreign income is taxed separately in the country of employment. In Belgium, this professional income is exempt with maintenance of progressivity, providing factual proof can be provided of the time spent abroad for professional purposes.
When is an employee’s income taxable abroad?
An employee who is a Belgian resident for tax purposes, but who works abroad and receives a professional income from an employer who for tax purposes is a resident in the relevant country, shall in principle be taxed in their country of residence (in this case, Belgium) in accordance with the progressive personal income tax rates.
Under a double taxation agreement, the country of employment can also tax the income if one of the following conditions is met:
- The employee spends at least 183 days in the country of employment for professional purposes.
- The employee's salary is paid by an employer based in the country of employment.
This mainly concerns 'secondments', whereby a Belgian employer temporarily posts an employee to a foreign group company to work during this period on behalf of and on account of the group company. The Belgian company remains the individual’s 'legal employer' and the foreign company becomes the 'economic employer'. In such cases the Belgian employer shall charge the employee's wages for this period to the foreign company.
- The employee's salary is paid by a permanent subsidiary of the Belgian employer in the country of employment.
If a Belgian company conducts its core business abroad in the same way as it does in Belgium, there is a very good chance that the company will also be taxed abroad. If a Belgian company has a 'permanent subsidiary' abroad, then the wages of the employees whose activity actually gave rise to the existence of that permanent subsidiary are attributed, for tax purposes, to the foreign results of that permanent subsidiary. There is, therefore, a very real risk that these employees will be subject to non-resident income tax abroad.
Exemption with maintenance of progressivity in Belgium
Obviously, it is not the intention to tax the income of the person in question twice, i.e. in the country of employment and in the country of residence. In order to avoid this kind of double taxation, Belgium employs the principle of exemption with maintenance of progressivity. The foreign income is not taxed in Belgium. However, it is taken into account to determine the personal income tax rate of any income that is taxable in Belgium.
- The exemption applies if foreign professional income originates in a country with which Belgium has concluded a double taxation agreement.
- Community tax is also calculated on the exempted foreign income.
Only if the foreign income is 100% exempt and the community tax is 0% will a complete exemption apply to Belgian tax on foreign income.
In order to benefit from this Belgian exemption with maintenance of progressivity, the professional income must be 'taxable' abroad. The applicable double taxation agreement will have to determine on a case-by-case basis whether it concerns an effective or a theoretical tax.
How can an employee provide proof of time spent on professional activities abroad?
In order to avoid taxation in Belgium, an employee must provide actual proof that their day-to-day professional activities were actually conducted abroad. Recent case law has shed more light on the practical aspects of providing authentication.
First case – Liège Court, 19 March 2018
The fact that the individual in question was indeed providing services abroad, in this case in France, even though they were regularly on business trips to third countries, was substantiated by various facts: their diary, refuelling stops, use of public transport, credit card statements, toll receipts, time records at the offices of the foreign employer, etc. The judge in Liège consequently ruled that this part of the salary was taxable in France and would qualify for an exemption with maintenance of progressivity in Belgium. However, the time spent in third countries (not being Belgium or France) did not give rise to an exemption in Belgium for the corresponding part of their salary.
Second case - Brussels, 15 May 2019
The Belgian tax authorities initially adopted a particularly strict approach to exempt foreign professional income in Belgium. People in question had to prove on a day to day basis that they were working abroad, in this case in Germany. They also had to provide proof of physical presence. In the absence of such proof, the salary would be taxable in full in Belgium.
The Court of Appeal in Brussels substantiated this strict interpretation as follows:
- Continuous and permanent presence is not required in order to prove 'time spent for professional purposes in the country of employment'.
- There is no need to keep a log of whereabouts on a day to day basis.
- Occasional business trips outside the country of employment can be considered as time spent for professional purposes in the country of employment. However, there has to be a link with the employment contract concluded with the employer based in the country of employment.
- An employment contract specifically stipulating a place of work in a particular country is a strong indicator of the time spent for professional purposes at this location.
Conclusion: be prepared for tax audits in Belgium
A salary split is a fiscally attractive concept.
- The net salary of the employee in question will be higher than if they were taxed solely in Belgium.
- The employer's overall wage costs are reduced because they can grant a lower wage increase in order to offer a competitive net wage.
- However, there is also a flip side to the coin.
- A salary split must never be a goal in itself for the sake of tax optimisation, i.e. be prepared for tax audits in Belgium.
- Tax settlements must always be the result of a structural and sound business case. The facts must demonstrate that on the whole the day-to-day activities of the employee in question are necessarily and effectively conducted abroad.
Would you like to find out more about international employment? If so, this article may also be of interest.
Do you have further questions or would you like advice? If so, please do not hesitate to contact our tax experts, who will be happy to help you.