Remuneration and 'Physical Presence' in the Double Tax Treaties
When is an employment exercised in the other State within the meaning of article 15 § 1 of the OECD Model Tax Convention? The question is important because the Work State can then tax the worker’s remuneration and Belgium, where he lives, must exempt the remuneration. A recent decision of the Ghent Court of Appeal of 8 March 2022 clarified the issue in respect of the Belgian-Singapore double tax treaty.
In most double tax treaties, article 15 deals with "wages, salaries and other similar remuneration”. This article is based on article 15 of the OECD Model Tax Convention.
Remuneration for employment is taxable only in the worker’s State of residence unless the employment is exercised in the other Contracting State, the Work State.
If the employment is exercised in the Work State, the Work State may tax the remuneration when the three conditions in paragraph 2 are met. These are generally referred to, in short, as the '183-day rule'. In that case, only the Work State may tax, and the State of Residence must exempt or give a tax credit.
The case before the Ghent Court of Appeal dealt with the situation of a Belgian resident who worked as an employee (CEO) for a software company based in Singapore. He is also the director of a Belgian company that appears to be affiliated with the Singapore company. The remuneration he received in Singapore was taxed in full there. In his Belgian tax return, he reported the remuneration, but he claimed an exemption under the double tax treaty between Belgium and Singapore.
This exemption was partly refused by the tax authorities.
The Protocol attached to the Belgian-Singapore double taxation treaty of 6 November 2006 specifies, with regard to article 15 (1) of the convention, states that
It is understood that an employment is exercised in a Contracting State where the employee is physically present in that State when performing the activities for which the employment income is paid.
The tax authorities found that the taxpayer only stayed in Singapore for a limited number of days during the tax years in question. They only gave an exemption for a fraction (the number of days spent in Singapore over the total number of working days under Singapore law).
The Ghent Court of Appeal agreed with the tax authorities.
The employee must be physically present
in the Work State !
However, the Court takes a broader view and also rules on the meaning of the text of article 15 (1) of the Belgian-Singapore convention which follows the OECD Model Convention.
In order to consider the Singaporean remuneration in question as fully taxable in Singapore, it is not sufficient that any work is performed in Singapore in the execution of the non-independent employment. Article 15 (1) states:
1. Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
In other words, only the remuneration paid for the taxpayer’s services provided during his presence in Singapore for his Singaporean employer is taxable in Singapore and exempt (with progression) in Belgium. This decision follows the decision of the Supreme Court, 15 October 2015, F.13.0120.N)
And if the worker paid tax in the Work State?
The mere fact that the taxpayer paid tax in Singapore on the full remuneration is not a reason to grant exemption on that amount in Belgium. It remains to be seen whether the tax in Singapore has been correctly withheld, i.e. in accordance with the Belgian-Singapore double taxation treaty. For the part of the remuneration that was taxed in Singapore but should not have been taxed in Singapore, the taxpayer has to claim an adjustment in Singapore.
Who has the Burden of Proof?
As the taxpayer is claiming exemption from Belgian tax, he has the burden of proof of the amount of his remuneration that is to be exempted. This is not an easy task. The taxpayer has to prove the number of days he was actually physically present in the State of employment to receive his remuneration.
The taxpayer had produced as evidence: the payment of his salary and bonuses by the Singapore company and a statement that he is on the payroll, his Singapore work permit, the rental of a studio apartment which is a taxable fringe benefit in Singapore, the delivery note for furniture and appliances, the breakdown of the utility equipment, the airline tickets for his travels to and from Singapore, and a lease contract for the office for the Singapore company.
The Court is rather sceptical of these supporting documents: that the taxpayer travels to Singapore, that his employer rents a furnished studio for the CEO, that he pays tax on the fringe benefit for the studio, that the Singapore employer rents office space, do not in themselves constitute proof that he has provided his services in Singapore. It is perfectly possible to work remotely, especially in a software work environment, even for a CEO. That the Belgian tax authorities have accepted a certain number of days during which the taxpayer will have been physically present in Singapore and provided services for the Singapore company, is only a concession in this context.
The Court was not very sympathetic to the taxpayer’s appeal, it mentions a series of factual findings that make it unlikely that the CEO’s substantial remuneration paid by the Singapore company relates to work that was performed for a full year in Singapore.