In a small country like Belgium, it is not unusual for an individual to have interests outside the country. He may work abroad and receive foreign earnings. He may inherit from a non-resident or his children may live abroad. And he may buy property abroad.
Some tax rules have effect across borders. Belgian income tax is due on all earnings and income, including foreign source income. Inheritance tax is due when the deceased was domiciled in Belgium even on the property he has abroad. And that his heirs are living abroad does not change anything to that.
And when the other country also levels tax on the same income, or upon the death of a Belgian resident, there is double taxation. And there is a conflict between the Belgian and the foreign tax rules.
Belgium has its own rules (domestic rules) to prevent double taxation, but it has also signed double tax treaties with 88 states to prevent the double taxation of income, and it has signed a convention for the prevention of double taxation with France for inheritance tax and registration tax and Sweden for inheritance tax.
Domestic rules to prevent double taxation
For income originating in a country which has not signed a double tax treaty, Belgium grants unilateral relief for double taxation as follows :
- the tax on earnings (salaries, profits, pensions) is reduced by half if the earnings have been taxed abroad.
- the tax on overseas real property income is also reduced by half, irrespective of whether the income was taxed abroad.
A similar reduction is granted for the following “miscellaneous income”:
- irregular profits earned and taxed abroad;
- subsidies received from a foreign entity; and
- maintenance payments received from a foreign payer.
For interest and royalties connected with a business and taxed abroad, a credit is granted.
- For royalties, the credit is equal to 15/85 of the amount received (i.e. after deduction of foreign taxes).
- For interest, in order to determine the credit, a calculation must be done, …
The credit must be added to gross income and is not refundable. However, this credit does not normally apply as dividends, interest and royalties are usually taxed at a flat rate with no credit for foreign taxes.
Foreign taxes paid are also deductible as expenses.
Double Tax Treaties
Belgium has a network of treaties for the prevention of double taxation with 88 countries. The text of the treaties can be found here in Dutch or in French. (you will have to register first). If there is an English or German text, these can be found on the page in English or German.
Each of the countries has a network of double tax treaties of its own, where these treaties are available, click on Albania, Algeria, Argentina, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Belarus, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Gabon, Georgia, Germany, Ghana, Greece, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Ivory Coast, Japan, Luxembourg, Macedonia, Malaysia, Malta, Mauritius, Mexico, Moldova, Mongolia, Morocco, the Netherlands, Nigeria, New Zealand, Norway, Pakistan, the Philippines, Poland, Portugal, Romania, Russia, Rwanda, San Marino, Senegal, Serbia and Montenegro, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, the United Arab Emirates, the United Kingdom, the United States, Uzbekistan, Venezuela, Vietnam.
Belgium has signed new treaties or protocols with Azerbaijan, Australia, Austria, Bahrain, Brazil, China, Congo, Czech Republic, Denmark, Finland, France, Germany, Greece, Iceland, Isle of Man, Italy, Japan, Luxembourg, Macau, Macedonia, Malaysia, Malta, Moldova, New Zealand, Netherlands, Norway, Oman, Qatar, Rwanda, San Marino, Seychelles, Singapore, Spain, Tadzhikistan, Uganda and the United Kingdom.
Negotiations are under way with a number of other countries. The calendar of negotiations can be found here.
Belgium generally uses the exemption-with-progression method for avoiding double taxation in its treaties.
For passive income (investment income), a fixed 15/85 credit is granted. However, most treaties provide that this credit is only granted subject to the Belgian internal rules. A fixed credit is therefore no longer generally granted for interest, dividends and royalties received if these income streams are not professionally invested.
Exemption with progression method
In the double tax treaties, Belgium generally uses the exemption-with-progression method to prevent double taxation.
That means that Belgium will not tax the overseas income. However, the taxpayer must declare it in his tax return. The tax authorities first calculate the tax on all the (taxable and exempt) income, determine the average tax rate on the (taxable and exempt) income, before applying that average tax rate on the taxable income only. In the tax return, he usually gives a deduction equal to the average tax rate over the exempt income.
Other countries apply the tax credit method. All income is liable to tax, but the taxpayer is entitled to a tax credit for the tax paid abroad. That means he can deduct the tax paid abroad from the tax due at home. However, the tax credit is limited to the domestic tax rate. If he has paid 50 % tax abroad while the domestic tax rate is only 40 %, his deduction will be limited to 40 %.
The exemption-with-progression method allows taxpayers to enjoy a lower tax rate and reduce the average tax rate on his worldwide income (see salary split). In countries which use the tax credit method, they always pay at least the domestic tax.