The Tax Deduction of Maintenance Paid
The Court of Justice of the European Union has rendered a decision that will give more non-residents a personal allowance, an allowance for dependent children and the right to deduct the alimony or maintenance they pay.
Belgian residents can deduct 80% of the alimony or maintenance payments they made during the year (Article 104 ITC 1992 if they meet the following conditions :
- they must be paid periodically, i.e. at regular intervals (monthly / quarterly / annually);
- to a person who is not a member of the payer’s household;
- in execution of an obligation resulting from the (Belgian) Civil Code or Judicial Code or from a similar legal obligation in a foreign legislation;
- and they must be able to prove that the payments were made.
This is not only the case for maintenance that is paid on a monthly or quarterly basis, but also for a lump sum payment that is made in lieu of regular payments.
Some Belgian residents are considered – for tax purposes – to be non-resident under the so-called expatriate tax regime. This is a special tax regime introduced in 1983 to attract non-Belgian workers to come and work in Belgium. One of the benefits is that they are taxed as if they were not resident in Belgium. And, of course, they are not resident anywhere else. This special tax regime is being phased out in 2022 and 2023, it is replaced by the new inpatriate tax regime where the expatriates will be Belgian residents.
Non-residents who pay alimony / maintenance can deduct 80% of the payments but only if the taxable earnings they obtain or receive in Belgium are at least 75% of their worldwide professional income earnings.
The reason why non-residents who pay alimony / maintenance can only take a deduction if they earn at least 75% of their worldwide professional income earnings in Belgium is the case law of the Court of Justice of the European Union in the 1990ies.
The European Court of Justice ruled against tax rules that denied non-residents certain tax deductions even if they earned a substantial part of their income in the State, e.g. Schumacker (C-279/93) and Kieback (C-9/14) in 1995 and more recently de Groot (C-385/00) in 2002.
In 1993, the Commission had already issued a recommendation that the threshold should be 75%.
Based on that recommendation, Belgium amended the tax code to require a 75% threshold for non-residents to be entitled to the benefit of the personal (tax-free) allowance, an allowance for dependent children and other allowances (Article 243 ITC 1992).
Less than 75%
In recent years, the European Commission has, however, taken the position that Belgium’s refusal to allow the deduction of alimony payments from the taxable income of non-residents who earn less than 75% of their worldwide income in Belgium penalises non-resident taxpayers.
Considering that the 75% rule is contrary to Article 45 TFEU (free movement of workers), the Commission referred Belgium to the European Court of Justice.
In recent years, the European Commission took the position that Belgium’s refusal to allow the deduction of alimony payments from the taxable income of non-residents who earn less than 75% of their worldwide income in Belgium penalises non-resident taxpayers. Considering that the 75% rule is contrary to Article 45 TFEU (free movement of workers), the Commission referred Belgium to the European Court of Justice.
The decision of the European Court of Justice
On 10 March 2022, the European Court of Justice has decided that the 75% rule does indeed infringe the free movement of workers when this rule denies non-residents the right to deduct maintenance when they receive less than 75 % of their professional income in Belgium and when they cannot benefit from the same deduction at home because they have little taxable income there.
The decision in European Commission v. Kingdom of Belgium (nr C-60/21) is currently only available in French, but the decision translates as follows:
by refusing the deduction of maintenance annuities or capital sums in lieu of such annuities and supplementary annuities from taxable income to debenture holders who are not resident in Belgium and who receive less than 75% of their professional income there and who cannot benefit from the same deduction in their Member State of residence on the basis of the small amount of their taxable income in that State, the Kingdom of Belgium has failed to fulfil its obligations under Article 45 TFEU and Article 28 of the Agreement on the European Economic Area of 2 May 1992.
One can imagine the embarrassment of the Belgian tax authorities, they thought they were doing the right thing by using the 75% threshold recommended by the European Commission and now the European Commission was using that 75% rules against them.
Belgium had tried to argue that such a situation was rare and purely theoretical but that failed to convince the European Court. The Court read in this argument that Belgium recognises that the 75% rule may infringe the principle of freedom of movement for workers.
Belgium even undertook to change its legislation. However, the extent or the frequency of the situations complained of does not change the fact that there is an infringement.
What does this mean?
The 75% rule infringes the free movement of workers if two conditions are met. The taxpayer receives the major part of his remuneration in Belgium (as per the case law from the 1990ies) and he must not be entitled to a tax deduction in his state of residence.
In the case of an “expat” (under the special tax regime), these conditions are met. He does not have a state of residence where he could deduct the alimony he pays and he receives the major part of his remuneration from Belgium; Most expatriates spend about 20 to 40% outside Belgium, they would derive between 60 and 80% of their income from Belgium.
Belgium will have to adapt the law just as it has done so when it introduced the 75% rule. And Belgium has promised the court it would do so.
It is going to be a fine line to determine when a non-resident has sufficient income in Belgium to justify a tax deduction because they cannot deduct it at home, and in particular, what percentage they can deduct.
We guess they submitted that argument to the Court, but the Court declined to give advice on how Belgium should comply. The Court is only there to decide when a Member State infringes the European rules.
In any event, the question will become more theoretical in 2024 when the expatriate tax regime will come to an end and when all these expats who are deemed non-resident will become fully liable to income tax as Belgian residents.
This decision has direct and retroactive effect
The Belgian tax authorities accept that decisions of the European Court of Justice like this one entitle the taxpayer to a retroactive reimbursement of undue taxes.
In principle, a taxpayer must appeal his tax bill within 6 months.
Nevertheless, there is a special procedure called “dégrèvement d'office” that allows a taxpayer to request that the tax administration gives him “ex officio” (of its own motion) relief for excess tax. The tax authorities only have to do this when the tax bill is manifestly unreasonable and only under certain conditions: the excess tax is due to a clerical error, to double taxation or it comes to light because of new elements, such as new documents or new facts that the taxpayer could not provide before (Article 376 ITC 1992).
In respect of new elements, the tax code states clearly that a new legal remedy or a change in the case law of the tax administration or of the courts is not a new element.
However, the decision of the European Court of Justice is a new element.
The Belgian Constitutional Court has confirmed that a decision of the Constitutional Court that declares an Act unconstitutional is a new element that is valid erga omnes (Const. Court, 8 November 2006, case 160/2006) and that entitles the taxpayer to introduce a demand for a “dégrèvement d'office”.
The Belgian tax authorities have confirmed that the same effect is to be given to the decisions of the Court of Justice of the European Union (Practice Notes Ci.RH.421/597.150, 23 June 2009, pt 14 and Ci.RH. 331/607.620, 19 October 2010, pt 10) and that they will give a “dégrèvement d'office” when the Court declares that a tax rule is contrary to European Law.
Expats who have not been able to deduct the maintenance they paid to their spouse or children have five years to claim back the excess tax.