The taxman, a sore loser

When the taxpayer and the taxman do not agree on the interpretation of the tax law, they often end up in court. When the taxpayer wins, the taxman generally – usually – appeals as a matter of principle. When the court of appeal confirms the first decision, the taxman can submit the second decision to the Supreme Court, the Cour de Cassation. He often does that as well.

When the Supreme Court decides that the decision of the court of appeal did not infringe or misinterpret the tax law, and that the taxpayer was right all along, you would expect that the taxman admits defeat and gives instructions to read the law as the Supreme Court has explained.

This is not how it works in Belgium. The tax authorities keep insisting that they are right, obliging innocent taxpayers to take their cases to court resulting in years of litigation.

This is what has been happening for the last twenty years with the tax regime of overseas occupational pensions.

These are pensions that were built up when the taxpayer was living and working abroad for an overseas employer. It was only later that the taxpayer came to live in Belgium, e.g. to be closer to children who live in Belgium.  In other words, the pension was built up when the employee was not living in Belgium, but it was drawn down after he came to live in Belgium.

The rules

The general principle – since the Act on Supplementary Pensions – is that pensions are deferred income: they are taxable income now because the contributions to the pension plan were tax exempt or tax deductible when the pension was built up.

Before 2004, if the employer had given the employee some money, that money would have been taxed. The employee was then free to use the money, that is money after tax, as he liked, e.g. by investing in an individual retirement plan.   Likewise, if the employee had set up an individual pension plan in the form of an individual life insurance policy, and his employer had paid money into that policy, that would have been liable to tax and the retirement plan would be the employee’s money, after tax.

This is the ‘non bis in idem’ principle in pension taxation in Belgium.  If the contributions to the pension plan were taxable income, the pension is not deferred income but the taxpayer’s after-tax money and that cannot be taxed again.

This principle is not written down in the law, but it is generally accepted, and it was acknowledged by the tax administration over fifty years ago in its practice note Ci.RH.241/240.483 of 31 March 1969.

Now, it must be said that the employer probably took a tax deduction in the other country, or the employee may have gotten a tax benefit there … but not in Belgium.

That does not mean that no tax is due. 

If the taxpayer can draw down the full pension, no tax is due. However, if he takes an annuity, that is mostly tax exempt, except for the interest part included in the annuity. That interest part is calculated as 3% of the underlying value of the pension rights when the annuity is being taking up.

This principle does not work anymore for employer’s contributions paid since 2004, when the law confirmed that employer’s contributions are tax deductible.

Nevertheless, the past remains what it was, of course, it cannot be reversed. Contributions made before 2004 were therefore taxable earned income, even for those who worked abroad at the time and did not pay Belgian taxes there.

The case law

The tax authorities have been fighting this since then, but the courts have decided that pensions are liable to tax because they are deferred earnings. However, when the employers’ contributions were paid definitively and for the individual benefit of the employee, these contributions were earned income for the employee at the time of the contribution. The pension scheme must then be analysed as individual life insurance policy (see above) even if it is a collective pension scheme.

In 2002, the Supreme Court decided that: 

“Where, at the time of payment, the employer’s contributions to a life insurance policy are to be regarded as remuneration for the employee, the constitution of the pension being definitive and for the sole benefit of the employee, the subsequent allowances are not taxed as deferred professional income pursuant to Article 34, § 1, 2°, of the Income Tax Code.” (Cass., 11 April 2002, F.00.0078.N) 

The Belgian tax authorities persevered, but seven years later, the Supreme Court confirmed: 

The constitution of an individual and definitively acquired pension means in particular that the employer’s contributions paid into a pension fund are irrevocably removed from the employer’s assets and that they give rise to fixed pension rights for the employee that are definitively acquired at the time the contributions are paid.” (Cass., 12 November 2009, F.08.0019.N)  

This means that for pensions constituted by employer’s contributions, one must check whether the benefits granted were directly and definitively acquired by the employee. If so, the contributions paid must be considered under Belgian tax law as earned income received by the employee and not deferred, so that they do not constitute pension income.

The same principle applies to contributions paid to foreign pension funds to constitute a pension for the benefit of a taxpayer.  When contributions paid abroad another country to build up a pension for a taxpayer have given him immediate and individual rights, the Belgian tax administration can no longer tax the resulting extra-legal pension benefits as deferred professional income.

The taxman keeps up the fight

Almost twenty years after this clear case law of the Supreme Court, the Belgian tax authorities refuse to accept the consequences. Taxpayers still need to have this principle confirmed in court at the expense of years of court proceedings. 

Even when the local tax man or woman understands that they do not have a leg to stand on, they are told by the Central Tax Administration in Brussels to keep fighting. They receive some case law and are told to find new arguments that often make no sense.  

In 2020, the taxman tried to convince the Ghent Court of Appeal of Ghent that the law infringed the Constitution so that the Court would refer to the Constitutional Court to get this confirmed. The court refused, of course.   They were planning to present the same argument to the Court in Antwerp.

Late last year, it was rumoured that the Minister of Finance was going to present an interpretative bill of law to Parliament that would confirm how the law should have been read all along.

Instead, surreptitiously, he presented an amendment to another bill of law to do just that. Due to protracted discussions in Parliament, the bill with the amendment was only adopted in 2022.

In parliament, the Minister called the case law a loophole, and he tried to close it by focusing on the case law that recharacterizes these overseas pensions as annuities that result from an individual life insurance policy concluded in favour of the taxpayer. And such pensions, annuities or capitals are exempt.

They sneaked in the condition that the individual life insurance policy must not have been set up as part of a (Belgian or overseas) pension scheme, irrespective of whether the taxpayer joined the scheme individually and irrespective of whether the scheme gave him permanent and exclusive pension rights. And a pension scheme is defined as a pension plan set up by an employer for at least two employees. In other words, by adding these conditions, the taxman excludes all pensions from the rule for overseas pensions.

Conclusion

Whether this will prove effective depends on how strong the justification is for this change of the law. That hinges on whether the case law really depends on the recharacterization of overseas pensions in annuities from an individual life insurance policy. It is not because a pension must be taxed as an annuity from an individual life insurance policy that it makes it an annuity from an individual life insurance policy.

The taxman went one step further and when he was not able to introduce the change of law, he made the new rule effective for tax year 2022, i.e. for pensions or pension capital received in 2021.  He must be itching for a fight, and it is likely that he is starting to look for taxpayers who receive such pensions. However, a tax law may not be introduced retroactively, the Constitutional Court has confirmed that this violates the principle of legal certainty.

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