In the tax treaties that Belgium concluded with its border states, in the same way as provided by Article 15 of the OECD’s Model Tax Convention, in principle taxation of employment income can only occur in the work state if the employee is physically performing activities in that state (some exceptions apply).
With the Covid-19 restrictions, homeworking has been extended in an unexpected manner. A worker may work from home, for working days that under normal circumstances would have been (fully or partially) spent in another state where the professional activity is usually exercised. As a result, the income will in principle become subject to home state income taxes and no longer taxed in the state where the employment should have been carried out, resulting in unforeseen tax implications for companies and employees both from an administrative and an economic perspective.
Belgium and the border states have therefore agreed on several arrangements, in which the principle of force majeure has been accepted. This means that, provided that a series of conditions are met, salaried cross-border workers who have been working from home since March 11, 2020 (March 14, 2020 for France) as a result of the Covid-19 restrictions, may (but must not) be taxed in the state in which they normally work rather than in the state of residence (where they exercised their professional activity due to force majeure).
The following cumulative conditions have to be met:
- the worker is an employee (exclusion of self-employees and directors);
- the worker is in a cross-border situation (living in a contracting state and supposed to carry out, at least partially, professional activities abroad);
- counterpart states are limited to the Netherlands, France, Germany and Luxembourg (for other states, the ordinary rules remain applicable, so any homeworking in Belgium will remain taxable in Belgium);
- homeworking days already planned prior to the implementation of the Covid-19 restrictions, either in an employment contract or in an agreement with the employer, are not covered by this force majeure exception;
- the force majeure exception has to be applied consistently in both states, the worker accepting that the remuneration be taxed in the state where the work would have normally been carried out;
- the worker is required to keep the necessary data (e.g. a written confirmation from the employer indicating which part of the home working days was carried out exclusively because of the measures restricting the spread of the Covid-19 pandemic).
Additionally, this force majeure exception is of a temporary nature. The arrangements between Belgium and its border states were applicable until August 31, 2020, and have very recently been (again) extended until December 31, 2020 (with additional potential extension to be reciprocally confirmed by the competent authorities).
The Belgian tax authorities have also published an administrative circular 2020/C/81 (dated June 17, 2020) including FAQ Frequently Asked Questions that provides official comments on these arrangements. The Belgian tax authorities indicate that the employee must keep at the disposal of the Belgian administration the following documents:
- a certificate from the employer indicating the days of homeworking linked to the Covid-19 measures (such certificate does not seem to be compulsory in the agreements entered by Belgium with the Netherlands and with Luxembourg, having a broader wording and making the employer’s certificate only an example. It is thus unclear to what extent such certificate is compulsory, and if so to what extent this request from the Belgian tax authorities is compliant with these agreements);
- proof of the effective taxation of remuneration linked to homeworking by the state where the activity would have been carried out in the absence of the measures restricting the spread of the Covid-19 pandemic.
The employer’s certificate must be individualized. The Belgian tax authorities specify that it must include the following elements:
- the information necessary for the complete identification of the worker (surname, first name, address and date of birth);
- the nature of the position held by the worker;
- a record of the days worked at home for the sole purpose of the measures restricting the spread of the Covid-19 pandemic;
- if applicable, the record of days of work at home provided for in the employment contract;
- the record of any days of illness, leave and/or recovery;
- a sworn declaration that the certificate drawn up is true and genuine;
- the date and signature of the employer, as well as the countersignature of the employee.
Belgium–Luxembourg Arrangement—Impact on the “24-day Rule”
The tax treaty agreed between Belgium and Luxembourg has an additional specific regime of the “24 days” (which is not transposable to other states), that may be combined with the above-mentioned force majeure exception.
This specific rule stipulates that employment income received by a commuting frontier worker who is resident in Belgium and who is physically working in Luxembourg for a Luxembourg employer is fully exempted from taxation in Belgium, to the extent that the employee works a maximum of 24 working days in Belgium per calendar year. However, as soon as the limit of 24 days is exceeded, the Belgian exemption is no longer applicable for the first 24 days either.
Accordingly, the remuneration of a Belgian resident who, under normal circumstances, works in Luxembourg and whose employment contract provides for homeworking at the rate of two days per month is taxed as follows:
- if the homeworking days provided for in the employment contract have no connection with the restrictions of Covid-19, the remuneration received for these two days/month will in principle be taxed in Belgium. However, insofar as the number of working days during which the employee was already allowed to work from home prior to Covid-19 does not exceed 24 days during the calendar year, Luxembourg remains entitled, on the basis of the double tax treaty, to tax the income relating to these days;
- the remuneration received for the homeworking days between March 11, 2020 and the last day of the period agreed in the arrangement (currently December 31, 2020, subject to potential extension) are taxable in Luxembourg if the conditions mentioned above are met.
Belgian–French Arrangement: Special Regime for Frontier Workers
The Belgium–France tax treaty provides for a specific “frontier workers regime.” This regime, which is applicable only to historic cases (not open any more to new frontier workers as from 2012), stipulates that a French resident, living in the border area with Belgium and physically working in the border area of Belgium, is able to benefit from the frontier regime, thus fully taxable in France, to the extent that the French resident works a maximum of 30 working days outside the Belgian border area.
Due to Covid-19, French frontier workers work from home (i.e. outside of the Belgian border area), exceeding the 30-day limit. Therefore the Belgian and French government decided that Covid-19 is a case of force majeure, and constitutes a situation for which any day of homeworking will be excluded from the calculation of the 30-day threshold, from March 14, 2020 until December 31, 2020 (subject to potential additional extension).
Belgium has a special tax regime for foreign executives and specialists temporarily employed in Belgium. Under this special tax regime, expatriates who meet certain conditions can benefit from specific rules (i.e. travel exclusion) generating a decrease of their income subject to tax in Belgium (together with a decrease of the social security contributions on part of the paid amount, qualified as reimbursement of employer’s costs).
Because expatriates residing in Belgium benefiting from the special tax regime for foreign executives cannot claim the benefit of tax treaties from a Belgian perspective, they are not covered by the Covid-19 arrangements either. Therefore, remuneration derived from homeworking days in Belgium remains taxable in Belgium, even in case of canceled business trips due to Covid-19. This means that workers benefiting from the expat status that travel less than usual this year will see a decrease in their travel exclusion, resulting in an increase of their Belgian tax.
Covid-19 raises questions around permanent establishments:
- Home office: Employees or representatives of companies working from home in another state raises the question of whether such situations would create a permanent establishment issue due to the activity. As stated by the OECD with its guidance dated April 3, 2020, in so far as homeworking does not become the new norm over time, it is unlikely that Covid-19 homeworking generates a material or personal permanent establishment. After the crisis, it is likely that homeworking will continue and that business trips remain limited, so that what was temporary and not habitual yesterday may become the new standards tomorrow. But in case of new standards over time, the question remains: the elapsing time could translate (i) a form of permanence of business activities performed from home (material permanent establishment); or (ii) an habitual nature for workers playing a central role in the conclusion of contracts in relation to the core business activities (personal permanent establishment). A ruling request can be addressed to the Belgian tax authorities to obtain a clear view on any case that is not clearly temporary. Additionally, in case of pre-existing ruling addressing any permanent establishment question, a review of the facts should be conducted in order to determine if the deviations do not jeopardize the validity of the obtained ruling.
- Construction permanent establishment: The Belgian commentaries are aligned with the French version of the OECD guidelines, stating that Covid-19 interruption should not be taken into account in determining the time of the site or project (while the English version states the opposite...).
Place of Effective Management
Even with the changes introduced by the new Belgian Code on Companies and Associations making the criterion of place of effective management irrelevant, such place of effective management remains the key criterion for Belgian corporate income tax purposes to qualify, or not, a company as a Belgian resident.
Legal flexibility to organize distance board and shareholders’ meetings (by way of written resolutions, conference and video calls) was enhanced with the Covid-19 crisis. Such flexibility may raise dual residency issues resulting from the presence of key management people in another state resulting from the Covid-19 restrictions. The Belgian tax authorities have not expressed any formal position on this topic, even if the exceptional and temporary travel restrictions would not jeopardize by itself the place of effective management.
The application of the arrangements concluded between Belgium and its border states is optional. The consequence to opt or not may result in significant changes with respect to the tax burden: workers should pay attention to opt or not depending on their specific situation. But some specific workers will not have any choice, which could result in a significant increase of tax burden, such as for workers with expatriate status locked up in Belgium: such workers have to realize the consequences of the restrictions (with potential backfire for the employer).
Finally, the specific application adopted by companies during Covid-19 should be monitored in order to avoid new norms that maybe problematic in terms of permanent establishment and place of effective management.
Laurent Donnay de Casteau is a Partner and Nawel Benaisa is an Associate at Advisius, Brussels. Advisius is a law firm specializing in tax.
The authors may be contacted at: firstname.lastname@example.org; email@example.com.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.