It is official now. The UK is not part of the EU anymore. Many people struggle with the new rules that govern how the UK and EU will live, work and trade together.
Brexit will also affect many Brits living and working in Belguim, including EU officials, British EU officials living and working in the EU, (non-British) EU officials living and working in the UK, retired British EU officials moving back to the United Kingdom, spouses of EU officials, children of EU officials, …
Let us start with the beginning.
The tax status of an EU official is governed by the articles 12 and 13 of the Protocol (No 7) on the Privileges and Immunities of the European Union.
Article 12 states that the remuneration they receive from the European Institutions is exempt from national taxes in the Member States. The exemption of the remuneration paid by the international institutions is a standard provision in the Seat Agreements Belgium has signed with all international organisations that have a seat in Belgium.
Article 13 determines where EU officials have their tax residence. The deemed tax residence is specific for the European Union and it is often misunderstood.
When the first EU officials moved to work for the institutions, they realised that they had to give up their tax residence. They would become resident in the country where they lived. One of the basic principles of international tax law is that you are a resident in the country where you live and have the centre of your vital interests (we used to say that you had your residence where you have your dog, your slippers and your newspaper. In that country you are liable to income tax, capital gains tax and inheritance tax on your worldwide assets.
To cause the least disruption for EU officials, article 13 introduces the principle of the deemed residence.
Deemed tax residence
If an EU official takes up residence in another EU Member State, he keeps his tax domicile in the Member State from which he was recruited, that is the Member State where he had his domicile when he came to Belgium to enter the service of the Union.
That rule is binding for the Member State where he actually lives and for the Member State of his original domicile. And that can lead to some surprising situations.
- A Greek EU official who is hired in Greece to come and work in Belgium keeps his Greek tax domicile for income tax, wealth tax and inheritance tax. Greece is his “place of origin” in EU Institutions speak.
- If he was hired from a job in Paris, he would have French domicile.
- An Italian national who was working for a bank in Luxembourg, who was hired there to work for the European Parliament, will have Luxembourg as his place of origin. And when he comes to work for the European Parliament in Brussels, he will continue to have his tax residence in Luxembourg. He has to pay tax on investment income in Luxembourg and if he has rental income from his holiday home in Spain, he has to pay tax in Spain (because that is where the property is).
- An Austrian national who went to work in the UK, and entered the service of the European Medicines Agency or the European Banking Authority, would have been automatically given the UK as his place of origin.
The EU official has no choice in the matter. However, if he had recently arrived in the state of recruitment, he may be able to convince the European Institutions that he did not actually have his tax domicile in the UK yet. If he has sufficient ties with Austria, he could claim Austria as his place of origin.
Effects of this deemed residence
Under article 13, the EU official keeps the tax domicile he had at the time he was recruited, and that applies to income tax, wealth tax and death duties and in the application of double tax treaties between EU Member States.
Both the Member State where he has taken up residence and the Member State of his deemed domicile must comply with that rule.
The state where the EU official lives and works must treat him as a non-resident; the taxman can only tax income that comes from that state.
And the other state must treat him as a resident, so that it can tax him on any income other than his remuneration he refuses from the European Institutions.
- The Greek EU official who was hired in Greece to come and work in Belgium keeps his Greek tax domicile. If he has any income such as interest on bank accounts or dividends from shares, he has to report that in an income tax return in the state of his deemed domicile.
- If he was hired from a job in Paris, he would have French domicile and he would be liable to the French wealth tax, the impôt sur la fortune immobilière if he owns houses and apartments, in France and elsewhere, worth more than €1,3 million.
- The Italian national who was hired from Luxembourg, has to pay tax on investment income in Luxembourg and if he has rental income from his holiday home in Spain, he has to pay tax in Spain (because that is where the property is).
For the application of the double tax treaties, both countries must acknowledge that residence as well, and in particular, the country of your tax residence must give you the benefit of the double tax treaties it has concluded. This means that Luxembourg cannot tax the rental income from the property in Spain.
- And if he dies in service, in Belgium, his heirs must file an inheritance tax return in Luxembourg for his estate and pay inheritance tax there. Inheritance tax will also be due in Belgium on his apartment in Ixelles and on his holiday home in Spain.
The same rule applies to spouses but only if they are not “separately engaged in a gainful occupation”, i.e. if they are not working. Working spouses take up residence in the country where they live.
The same rule applies to dependent children who would have any income.
And after Brexit?
Following Brexit, the UK is not bound anymore by the Protocol on the Privileges and Immunities anymore. That would mean that the British tax authorities, HMRC, could tax the remuneration or pensions of EU officials living in the UK, that they would not have to give them an exemption for other income, …
Moreover, an EU official can only have his deemed domicile in another EU Member State. What about the Austrian national who went to work in the UK, and entered the service of the European Medicines Agency or the European Banking Authority and has the UK as his place of origin. Officials working for the EMA were relocated to Amsterdam and European Banking Authority went to Paris. He could not have his domicile in the UK anymore.
The UK and the EU have come to a solution in the Withdrawal Agreement.
Under Article 111, UK undertakes to exempt the remuneration and pensions of EU officials and retired EU officials, but only if the remuneration and pensions are taxed by the EU Institutions. EU officials who entered the service of the Union after the end of the transition period do not have the benefit of Article 111.
Article 112 deals with the deemed domicile of EU officials, but only for EU officials who entered the service of the EU institutions before the end of the transition period. This is for UK residents who had set up their residence in an EU Member State and residents of an EU Member State who had established their residence in the United Kingdom solely to work for the Union.
What does this mean?
- EU officials who are still working in the UK must be exempted and the UK must treat them as resident in their domicile of origin, which could be the UK if they were hired from the UK.
- EU officials, British or not, who retire in the UK must not pay tax on their pension in the United Kingdom. As they are not in the service of the Union anymore, they take up residence in the UK.
- EU officials hired from the UK, irrespective of their nationality, must be deemed to have kept their residence in the United Kingdom.
The Austrian official working for the EMA who has UK domicile and works in the Netherlands now, will continue to be liable to income tax in the UK.