Taxation of employment income derived by non-residents for activities exercised abroad unconstitutional

On 26 April 2018, the Constitutional Court rendered decision No. 48/2018 on a preliminary ruling request by the lower court of Namur. The request concerned the question whether the provision which allows Belgium to tax employment income paid by a Belgian employer to a non-resident employee for employment exercised abroad violates the constitutional principle of equal treatment and non-discrimination.

(a) Facts. During the years 2004 to 2007, a Belgian employee was seconded to Kenya. He worked in Nairobi in the permanent establishment of his Belgian employer.

The Belgian tax authorities taxed the employee in the non-resident income tax on the basis of article 230, 3°, a of the Belgian Income Tax Code 1992 (BITC), having established that the Belgian employer did not take the remuneration of the employee into account while determining the result of the permanent establishment. In addition, Belgium and Kenya did not conclude an income tax and Capital tax to avoid double taxation under which the remuneration would not be subject to tax in Belgium.

The taxpayer disagreed and pleaded before the lower court of Namur that a difference in tax treatment based on the discretionary powers of the employer (i.e. to take the employment income into account in determining the taxable result of the establishment)  violates the constitutional principle of equal treatment and non-discrimination.

The lower court decided to refer the case to the Constitutional Court for a preliminary ruling.

(b) Legal background. Since 1989, employment income paid by Belgian resident private employers to non-resident is, under national law (art. 230, 3°, a of the BITC), only exempt from non-resident income tax if:

  1. the income remunerates activities exercised abroad, and
  2. the income is (as a deductible expense) allocated to the revenue of a foreign establishment.

(c) Decision. The Court acknowledged that an employee who resides in a foreign country in which he exercises his professional activity may be subject to double taxation on his income if the country in which he resides and exercises his professional activity has not concluded an agreement with Belgium to avoid double taxation.

Thus, the financial situation of the employee can significantly be affected by whether or not the allocation condition is fulfilled, whereas this decision solely depends on a financial choice made by the Belgian employer.

The Court finds that there are no justifiable reasons for such an allocation condition and that, therefore, the provision violates the constitution.

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