The Belgian tax authorities are emphasising that it has nothing to do with Brexit, but this year, they have suddenly decided to tax Belgian state pensions paid to British retirees living in the UK.
The problem is the double tax treaty between Belgium and the United Kingdom and the transitional rule for older retirees.
What is it all about?
If you live in one country and receive income from another, like a pension, you risk being taxed in both countries, by your own tax administration at home and by the tax administration of the country that pays out the pension. At home they want to tax your worldwide income (that is any income irrespective of where it comes from) and over there they want to tax the income that is paid out.
This means that pensions can be taxed twice, a double tax treaty is important. A Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital determines which country can tax the income and what the other must do to avoid double taxation (refrain from taxing it, or give a tax credit).
For pensions, most double tax treaties say that the tax is due only in the country where you live; the country that pays the pension must not tax it.
That used to be the general rule in the 1987 treaty between Belgium and the United Kingdom.
Belgium is one of the increasing number of countries that want to tax pensions when they have allowed tax relief on contributions from which the pensions are paid. There is a logic in that. The Belgian taxman lost money when the retiree was working here and built up pension rights with money after tax. And when the pension is paid out, it is taxed in the United Kingdom. That works both ways for pensions built up in the UK.
When the two governments signed a protocol in 2009 to change certain rules in the 1987 double tax treaty, they agreed to invert the rule. This is the rule in article 18 (a).
Subject to the provisions of Article 19,
(a) pensions and other similar remuneration arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in the first-mentioned State;
Nevertheless, this rule has an exception in Article 18 (b) :
(b) however, where pensions and other similar remuneration under a pension scheme were first credited or paid before 1 January in the calendar year next following that in which the first Protocol to this Convention entered into force, all payments under that scheme shall be taxable only in the other State.
The rule is taxation in the country where the pension is paid, the exception is that pensions paid before 1 January 2013 continue to be taxed in the state of the retirees’ residence. British pensioners pay British income tax on Belgian pensions, Belgian retirees pay Belgian income tax on UK pensions.
What is the reason for this exception?
That is obvious. The negotiators did not want to inconvenience older retirees for whom this new rule would be an upheaval.
They were used to the old rules :
- UK resident retirees declared their Belgian pensions in the UK only;
- Belgian resident retirees declared their UK pensions in Belgium only.
Under the new rules, retirees would have to take account of the tax rules in both countries ;
- for UK resident retirees, the Belgian Federal Pensions Office withholds tax at source on the state pension, but they have to file an income tax return in Belgian as a non-resident, and they may have to pay some more tax.
At home, they would have not have to report the pension. HMRC confirms that if there is a Double Tax Agreement (‘DTA’) and “If the DTA gives exclusive taxing rights to another country, no UK tax is payable and so no relief will be available.”
However, taxpayers “are encouraged to provide further details in the ‘any other information’ section of the SA100 (page TR 7).” I would suggest to write in box 19 (Please give any other information in this space) : “I receive a pension from the Belgian State, this is exempt in the UK in accordance with article 18 of the Double Tax Agreement between Belgium and the UK.”
- for Belgian resident retirees, DWP (the Department for Work and Pensions) does not deduct tax under PAYE when making payments of the state pension. If HMRC believe that there is tax payable then they should issue you with a Self Assessment tax return or, for the 2016/17 tax year onwards, they should issue a Simple Assessment of your tax bill.
At home, they would have to report their British state pension but they have to claim exemption in their tax return. Belgian gives treaty relief by way of “exemption with progression”. This means that Belgium exempts the overseas income but that the Belgian tax authorities will take account of this exempted income to determine the tax rate that applies to any income that is taxable in Belgium. In effect, this pushes the Belgian income in the higher tax brackets.
What is more, they would pay some communal tax (around 6-8%) on the theoretical income tax on their UK state pensions.
It is to avoid upsetting older retirees, in their 70ies, 80ies and 90ies that the Belgian and British negotiators introduced a transitory rule. This is the exception in Article 18 (b). Pensioners who had already been drawing their pension before the Protocol entered into force, that is 1 January 2013, will continue to be taxed at home only. They are not treated better or worse than before, and it is a transitional measure, every year there are less and less of them.
For State Pensions?
That this exception covered state pensions made sense because there are far more British retirees who receive state pensions than private pensions. State pensions are generally smaller than private pensions, in particular if they are paid out for a stint of a couple of years in Belgium. Private pensions paid from Belgium can be substantial after a long career in the low countries. Moreover, there are not that many Belgian private pensions that pay annuities, as pension schemes are geared to be redeemed upon retirement with a favourable tax regime of 10%.
In Belgium, the government explained that this was the case for state pensions and private pensions paid in respect of previous employment. It was not the case, however, for pensions paid to public servants, for pensions that were not paid in respect of previous employment (e.g. pensions for self-employed pensions) or for life annuities built up directly from capital accumulated outside an employment-related pension scheme.
The treaty was explained in the same way in the Legislation Committee in the Commons.
Both countries have consequently applied this rule. The Belgian Federal Pension Office did not withhold social security or tax on Belgian pre 2013 state pensions and the taxman merrily collected the tax on British pre-2013 state pensions. HMRC did the same; they taxed Belgian pre-2013 state pensions received by British residents and they did not tax British pre 2013 state pensions paid to Belgians at source.
Unfortunately, the officials who negotiated the Protocol in 2009 have retired and their successors have no memory of this agreement.
A new interpretation in Brussels
Then came 2020, when an official on the Belgian side, suddenly wondered if they had not read the text of Article 18 (b) wrong from the start.
They had always read “pensions and other similar remuneration under a pension scheme” as meaning (1) “pensions” as in state pensions and (2) “other similar remuneration under a pension scheme” as in private pensions for employees.
Now, if they read the text of Article 18(b) quickly and lobbed the two together as “pensions and other similar remuneration under a pension scheme”, only private pensions would benefit from the transitory rule, be they (i) “pensions under a pension scheme” or (ii) “other similar remuneration under a pension scheme”.Thatwould mean that state pensions should always have been liable to tax in the state that paid the state pension.
The Federal Pensions Office was alerted and told that they had to deduct tax at source from state pensions paid to British retirees. Instructions were given to tax officials dealing with British retirees. These retirees had already wondered why they suddenly received tax returns. At the same time the Pensions Office told them wrongly that they would have to start paying Belgian social security on their state pensions.
Panic and confusion all over.
The tax office went after retirees who had not filed tax returns for their Belgian state pensions and when asked if their pensions were liable to tax in Belgium, they initially even told them that pre-2013 state pensions were not liable to tax in Belgium. However, when the new instructions trickled down, they had to change their tune and request payment of the tax.
The UK retirees could not understand what triggered the change of the rule and they expressed their discontent on HMRC’s community forum where HMRC told them that pre-2013 pensions were liable to tax in the UK only.
The Belgian tax authorities maintained their position and sent out letters to distressed retirees telling them that they would be receiving a tax bill and that they would have to pay the Belgian tax. Apart from that, there was no problem, HMRC would just pay back the taxes they paid in the United Kingdom. All they had to do was start the Mutual Agreement Procedure of Article 25 of the double tax treaty.
Unfortunately, the answer is not that straightforward.
There is indeed a Mutual Agreement Procedure in Article 25 : when a taxpayer finds that he will pay tax that he should not pay under the double tax treaty, he may present his case the to competent authority of his own state of residence. British retirees must contact the department in HMRC that deals with MAP procedures (within three years).
HMRC will then contact the international department of the Belgian tax authorities and they will “endeavour to resolve the case by mutual agreement” “with a view to the avoidance of the taxation that is not in accordance with the Convention”. If they reach an agreement, both tax administrations will implement it “notwithstanding any time limits in the domestic law of the Contracting States”.
In other words, they have to find an agreement as to which tax administration can tax, and the other will have to reimburse the taxes.
That sounds fair, but as long as there is no agreement, the Belgian tax authorities will continue to send out tax bills. They have no alternative. If they don’t send out the tax bills in time, the tax is not due, and retirees may end up paying tax in neither country. And the MAP procedure can take years.
What are your options?
You can pay the Belgian tax, and wait for HMRC to pay the UK tax back, but it is unlikely that that will happen at the same time.
The best course of action is :
- Tell the Belgian tax authorities that you do not agree with them, that tax is due in the UK only, and that you start the MAP procedure with HMRC.
- Contact HMRC to start the Mutual Agreement Procedure egging HMRC to talk to the Belgian tax administration.
- Wait for the tax bill and appeal it (file a “reclamation” (i.e. an internal appeal with the Belgian tax authorities). That will be explained on the tax bill : you have six months. It is important that you ask the Conseiller Général to instruct the tax collection office not to collect the tax. If you have not agreed with the tax authorities, the entire tax is contested, and the tax cannot be collected.
If you file an income tax return or if you agree with their figures, the tax or part of the tax is not contested and it can be collected, e.g. by withholding it from your Belgian State pension.
- Repeat every year.
In the best outcome, you will not pay tax in Belgium but in the United Kingdom, no harm done. In the worst case, tax will be due in Belgium and you can pay that off with the tax HMRC will pay you back.
You just have to keep in mind that Belgium charges 4% interest per year for late payment, even upon appeal. If you have the money to pay the tax, you will receive interest at a paltry 2%. One rule for the taxman, another for the taxpayer …