Context

It is common practice for multinational expatriation policies to provide for a “tax-equalization” system. Under this system, the home country employer indemnifies its executives posted abroad for the excess, if any, of the foreign tax liability over the hypothetical home country one (i.e. the tax the executive would have incurred if he would have continued to work in his home country).

With respect to foreign executives assigned to Belgium, their Belgian tax bill is sent in the first or second year following the income year. The executive may then have left Belgium for months when the “tax-equalization” indemnity is paid. However, the Belgian tax authorities consider that this indemnity is taxable Belgian-source pay even when it is paid by the foreign employer and is not recharged to any group entity in Belgium.

The tax authorities ground their practice in article 228 §2 7° of the ITC, which states that Belgian-source pay includes that borne by a non-resident taxpayer if it relates to duties carried out in Belgium by a recipient sojourning there for more than 183 days in one income year. According to the tax authorities, it is irrelevant that the recipient has not been present at all in Belgium in the year during which the “tax equalization” indemnity is paid; what matters is that the payment relates to an income year during which the recipient has been present in Belgium for more than 183 days.

News

For the 4th time the Court of First Instance of Namur considers the interpretation of the Belgian tax authorities as inappropriate. According to the Court, the “183-days test” should be operated for the income year during which the “tax equalization” indemnity is paid, irrespective of the fact that this payment would have been derived by a Belgian activity carried out in a previous income year during which the taxpayer was sojourning in Belgium for more than 183 days.

Appeals have been lodged by the tax authorities. The first appeal is expected for the very beginning of 2006 (unless the debates would be postponed).

It should be noted that the above is not relevant when the indemnity is paid and/or borne by a Belgian entity.