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 to prevent double taxation, but it has also signed double tax treaties with 95 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
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
Income from overseas property, overseas earnings as an employee or a self-employed freelancer, pensions as well as income from investments abroad. It goes without saying that this can result in double taxation. To avoid this, Belgium has concluded double tax treaties with more than 100 different countries
Belgium has a network treaties for the prevention of double taxation with some 100 countries. The text of the treaties can be found here in Dutch or in French.
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, Bahrain, Bangladesh, Belarus, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, Chili, China, DR Congo, 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, Kazakhstan, Kosovo, Kuwait, Kyrgyzstan, Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mauritius, Mexico, Moldova, Mongolia, Montenegro, Morocco, the Netherlands, Nigeria, New Zealand, Norway, Pakistan, the Philippines, Poland, Portugal, Romania, Russia, Rwanda, San Marino, Senegal, Serbia, Seychelles, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Slovenia, Sri Lanka, Sweden, Switzerland, Taiwan, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, the United Arab Emirates, the United Kingdom, the United States, Uruguay, Uzbekistan, Venezuela, Vietnam.
Belgium has signed new treaties or protocols that have not entered into force yet.
Negotiations are under way with a number of other countries.
Exemption with progression
Income from foreign property, professional earnings, pensions as well as foreign investments. It goes without saying that this can potentially result in double taxation. To avoid this, Belgium has concluded double tax treaties with more than 100 different countries
Double tax conventions have two ways to avoid double taxation between two countries
- the credit method: the foreign-source income is liable to tax at home, in the country of residence, but the tax paid abroad is set of against the tax; this is usually called a ‘foreign tax credit’; and
- the exemption method: the foreign-source income is exempt from tax at home, but it is taken into account to determine the income tax rate that will only apply to the income that is liable to tax in Belgium.
In the double tax treaties, Belgium generally uses the exemption-with-progression method to prevent double taxation.
If the double tax treaty states that a type of income is taxable in the other country, Belgium will exempt it from taxation. 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 bill , they usually gives a deduction equal to the average tax rate over the exempt income.
A theoretical example:
In this example, the taxpayer pays €1,500 more in tax because of the overseas income.
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.
Municipal Taxes
In some double tax treaties, Belgium has reserved the right to calculate the local municipal tax due on top of the professional income as if that income was not exempt. For the list of the rates per municipality, see here). The income itself is exempt but the municipal tax is calculated on the tax that would theoretically be due.
This is the case for the double tax treaties that Belgium has signed with Bahrain, China, Congo, Germany (only for remuneration of employees and government remuneration or pensions), the Netherlands, Poland, Rwanda, San Marino, the Seychelles, Singapore, Switzerland and the United Kingdom. For the full list of double tax treaties see here.
That provision has also been included in Belgium’s standard model double tax treaty, that is the Belgium’s starting text when negotiating a new double tax treaty. This is why most new treaties that have been signed but that have not entered into force yet, have such a clause (Botswana, Isle of Man, Macao, Malaysia, Moldova, Russia, Qatar and Tadzhikistan).